The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Deputy Prime Minister last night pledged the Government’s commitment to a “balanced Budget by 2020”, and expressed optimism that current account imbalances will be “comfortably” dealt with.

K P Turnquest, responding to Tribune Business questions on the IMF’s latest Bahamas report (see article Page 1B), said he was confident that the foreign direct investment (FDI) pipeline will generate sufficient capital inflows to rein in a current account deficit equal to 16.4 per cent of gross domestic product (GDP). He was speaking after the International Monetary Fund (IMF), following a two-week visit to the Bahamas in early March for the annual Article IV consultation, warned that the Bahamas’ “external sector position is weaker than suggested by fundamentals and desirable policy settings”.

“The current account deficit is estimated to have widened to 16.4 per cent of GDP in 2017, from 7.7 per cent of GDP in 2016, due mainly to a surge in imports related to the completion of Baha Mar,” the Fund said. 

“The cyclically-adjusted current account deficit, after deducting FDI-financed imports, is above the level consistent with fundamentals and desirable policy settings.”

Mr Turnquest, in response, told this newspaper that while “mindful” of these deficits the Bahamas has traditionally “ably funded” them through tourism spending and “a steady pipeline of FDI projects”. “If one looks at the current projects under active development, and those planned to come on stream in the near to medium term, we will have the capital account inflows to address that imbalance comfortably,” he said.

The current account only measures trade in physical goods, which the Bahamas has traditionally run multi-billion dollar deficits in, due to the fact it imports virtually all it consumes and exports relatively little. This has instead been covered, and balanced out, by tourism and FDI-related foreign currency inflows on the capital account.

Mr Turnquest said that while the IMF’s assessment of the Bahamian economy having “turned the corner” was likely based on a combination of Baha Mar’s full opening; improved tourism activity; an enhanced US economic outlook; better local confidence and future FDI projects, there was little room for complacency on the Government’s part.

“While we have a long way to go, and we remain vulnerable to external and climate shock, we share optimism that we are moving in the right direction,” the Deputy Prime Minister told Tribune Business.

The IMF estimated that Bahamian real GDP expanded by 1.3 per cent last year, aided in part by post-Hurricane Matthew reconstruction, with the economy’s growth rate projected to almost-double in 2018 to 2.5 per cent. While that momentum is expected to carry over into 2019, with GDP expanding by 2.2 per cent, the Fund warned that this would stall unless structural impediments to Bahamian economic growth are addressed.

“Medium-term growth is projected to remain at 1.5 per cent, reflecting significant structural impediments,” the IMF said. “The main external risks to this outlook stem from a weaker or stronger-than-expected performance of the US economy, Baha Mar and FDI.

“Natural disasters and the intensification of pressures on correspondent banking relationships are additional near and medium-term risks. On the domestic side, failure to implement fiscal consolidation or structural reforms could undermine investor confidence and reduce investment.”

Reaffirming the Minnis administration’s commitment to fiscal prudence, Mr Turnquest said: “We must bring our fiscal house in order and keep it that way.

“That is why the planned introduction of Fiscal Responsibility legislation and debt management legislation remain high on the Government’s list of priorities. In the near term, the Government is committed to getting to a balanced Budget by 2020 as promised.

“This will require us to make very deliberate and necessary adjustments to our spending and to our policies regarding revenue generation. These adjustments will take time,” he added.

“We are targeting a balanced Budget, but we recognise the balancing exercise needed to ensure that we do not stall the economy as structural changes are made.” It is unclear whether the ‘balanced Budget’ refers to eliminating the primary deficit or the full GFS deficit.

Mr Turnquest said the Government was examining “a range of options”, including a savings fund, increased reinsurance or disaster bonds, to buffer its finances - and the Bahamian economy - against the impact of major hurricanes or other natural disasters.

Warning that it was “not a matter of if the country will be hit by a hurricane again, but when”, the Deputy Prime Minister said it was “incumbent upon us to increase our readiness for the inevitable hurricane or, God forbid, another calamity”.

Mr Turnquest was responding after the IMF called for the Bahamas to build up a ‘disaster savings’ fund, equal to 2-4 per cent of GDP, or between $214 million to $428 million, through the Government setting aside around $50 million from its annual Budget in disaster free years.

The Government is currently setting up a $100 million ‘contingent’ loan facility to provide it with liquid funding in storm-related emergencies, and the Deputy Prime Minister said: “A disaster relief fund as proposed by the IMF would be created, or could be created, to facilitate the payment into the savings arrangements, the increased insurance facilities or bond instruments that are created to permit us to be able to respond quickly to any disaster that may befall the nation.”

The IMF identified the energy sector (Bahamas Power & Light); Credit Bureau’s creation; expanding vocational and apprenticeship programmes; and improving the ‘ease of doing business’ as key reform priorities for the Government.

No mention was made of the Bahamas’ recent ‘blacklisting’ by the European Union (EU), but the Fund said compliance with all international regulatory initiatives would protect the financial services industry’s integrity and reduce the risk of losing correspondent banking relationships.

It also called for the creation of “real estate price indices” to assist in determining “fair value” when dealing with non-performing mortgage loans.