IMF’s bitter pill - find extra $240m

IMF Headquarters 1 in Washington, DC.

As of Monday, May 14, 2018

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas needs a further $240m “adjustment” to hit its Fiscal Responsibility targets, the IMF warned yesterday, as it called for more “trimming” of the civil service wage bill.

The International Monetary Fund (IMF), in its newly-released Article IV report, suggested that further sacrifice was required for the Government to hit its fiscal consolidation goals even though its 2017-2018 targets were “within reach”.

The Fund “urged” the Minnis administration to further cut recurrent spending, which goes on fixed costs such as civil service salaries and rents, and avoid “an undue squeeze” on capital spending on essential infrastructure - the very method by which it has narrowed the 2017-2018 deficit.

The Government’s Fiscal Responsibility Bill, unveiled yesterday, seeks to cut the fiscal deficit to 0.5 per cent of gross domestic product (GDP) within three years. But the IMF warned it might miss this target without its recommended Budgetary ‘adjustment’.

“The fiscal target for fiscal year 2018 is within reach, despite the unbudgeted purchase of [Bahamas] Resolve promissory notes, although at the expense of lower-than-budgeted capital spending,” the IMF said.

“Staff recommended an additional adjustment of 2.25 per cent of GDP to bring the deficit to 0.5 per cent of GDP by fiscal year 2021- the medium-term target under the proposed fiscal rule - to put the public debt-to-GDP ratio on a firmly downward trajectory.

“Staff urged the authorities to identify measures to undertake this adjustment, with a strong focus on reducing current spending and avoid an undue compression of capital spending.”

The Fiscal Responsibility Bill’s key targets require the Government to slash the fiscal deficit to 0.5 per cent from 2020-2021 onwards, slashing it from a sum equivalent to 5.8 per cent of GDP in the 2016-2017 Budget year.

The Bill’s ‘first schedule’ sets out a ‘glide path’ or ‘road map’ for achieving this, acknowledging - as the IMF stated - that “significant fiscal adjustments” are needed over the next two Budget years to hit this objective.

To enable the public sector and wider Bahamian economy “to achieve the fiscal objective in an orderly manner”, and avoid unnecessary shocks, the Bill calls for 2018-2019 and 2019-2020 deficits that “shall not exceed” 1.8 per cent and 1 per cent of GDP, respectively.

K P Turnquest, Deputy Prime Minister, last night indicated to Tribune Business that achieving these “fiscal balance” targets would not be painless. “We’re going to do our best to meet the targets,” he confirmed. “It’s going to require some reconciliation and some adjustment, but that [a 0.5 per cent deficit[] is our goal.”

The Bill also sets out a “long-term” target of reducing the Government’s direct debt-to-GDP ratio from the current 58 per cent to “no more than 50 per cent”. The year by which this target is to be achieved has to be set out in the Government’s ‘fiscal strategy report’, which must be submitted to Parliament no later than the third week of November each year.

“It’s difficult to say at this particular point,” Mr Turnquest replied, when asked to specify when the 50 per cent debt-to-GDP target will be achieved. “But we are planning for a balanced Budget in 2019-2020; 2020-2021 at the latest, at which point we expect to start the claw back depending on GDP growth.

“This is about putting in the framework that will help us start this process” of fiscal consolidation. The Bill also permits a “compliance margin” equal to 0.5 per cent of GDP in assessing whether the Government has hit its targets, and ‘caps’ recurrent spending growth at the “estimated” long-run nominal GDP growth rate once “fiscal balance” is achieved.

The Article IV report, unveiled yesterday, shows the Government has followed the IMF’s recommendations ‘to the letter’, given that the targets set out in the Bill mirror those suggested by the Fund.

“The fiscal rule should include a permanent ceiling on the fiscal deficit no larger than 1 per cent of GDP, with annual deficit targets set at 0.5 per cent of GDP to allow space for automatic stabilizers to operate,” the IMF said.

“These targets, binding from fiscal year 2021 on, would allow space to accumulate savings in the proposed natural disasters fund. To further avoid procyclicality, the rule should also cap the growth rate of current expenditure at the estimated long-run growth of nominal GDP; and include exceptional circumstances clauses to be triggered only when confronted with significant negative shocks.”

Such shocks would include major hurricanes, and Tribune Business reported earlier this year on the IMF’s call for the Bahamas to build-up a ‘disaster relief’ fund equivalent to 2-4 per cent of GDP to mitigate the financial effects of such disasters.

The IMF’s Article IV report called for central government debt to become the Bahamas’ fiscal responsibility ‘anchor’, which the Bill also incorporates. “A natural anchor is the central government debt ratio, which helps guide expectations and (if prudently calibrated) ensures the sustainability of public finances,” the IMF said.

“Debt anchors need to be complemented with operational targets, such as deficit and spending ceilings, that guide fiscal policy towards the medium-term fiscal anchor.”

The long-term 50 per cent debt-to-GDP target was also recommended by the IMF, together with a ‘deficit ceiling’ equal to 1 per cent of GDP and a recurrent spending ‘cap’ at 3 per cent. The Fund said the 0.5 per cent annual deficit target, which the Government has also agreed to, will create space to set aside funding for the ‘disaster relief fund’.

The IMF also yesterday reiterated its call, first made last year, for the Government to gradually reduce the public sector’s size - but only once the private sector was able to pick up the job creation ‘slack’, and absorb persons released from the civil service.

It recommended “trimming the wage bill through a gradual rationalisation of public sector jobs - as private sector job creation strengthens - and wage restraint”. The Minnis administration’s termination of temporary workers, many of whom were hired just before last year’s general election, once their contracts have ended has already caused political controversy.

The Government, though, is arguing that it has little choice but to bring the civil service’s $733 million wage bill under control, and relieve the burden on hard-pressed Bahamian taxpayers from a public sector that has become too big.

The IMF’s Article IV report yesterday said of the Government: “They are taking steps to gradually trim the wage bill, and have asked state-owned enterprises (SOEs) to prepare plans to become self-sufficient. They also acknowledged the need to reform the pension system.

“The authorities highlighted that the reduction in capital spending is temporary, and in response to their ongoing efforts to identify priorities. In addition, they expect to rely more on Public Private Partnership (PPP) in the future to fund infrastructure investment.”

The Fund’s report also revealed that the Government is mulling whether to treat some food products as ‘zero-rated’ for Value-Added Tax (VAT) purposes, in the belief this will be more effective than increased social security spending to alleviate the tax burden on lower income Bahamians.

This would fulfill a 2017 election campaign promise, but the IMF warned: “The administration has announced fiscal austerity measures and intends to table fiscal responsibility legislation. However, Dr Minnis has also promised introducing a zero-rate VAT for some food items, which would have to be weighed against fiscal sustainability objectives.

“They [the Government] are carefully reviewing the potential impact of a zero-VAT rate on some food items, and noted that this option may be easier to administer than conditional cash transfer programmes, which have been difficult to manage in the past.”

ohdrap4 6 years, 6 months ago

cut the ten thousand allocated for the spouse to buy tea.

As reported by the nassau guardian on March 21, 2018:

Asked about the budget for the office, Minnis said, “They asked me about a budget, and I probably said around $10,000 for the year, and I see that specifically, like I [said], for just the slight entertainment as teas; maybe some stationery. Yes, I think around $10,000.”

Sickened 6 years, 6 months ago

Don't forget, that amount doubled a couple of weeks later.

proudloudandfnm 6 years, 6 months ago

Do not cut VAT on bread basket items! That will only increase prices. A 7.5 discount on a couple of items is not worth it, it will never benefit a soul.

Eliminate duty! Then raise VAT.

Damn man! Use your friggin heads. VAT is collected primarily by private business, the more work you put on them the higher prices will go!

DDK 6 years, 6 months ago

No more VAT! VAT is on almost everything as it is. Even things the man in the street does not see. Just leave it on bread basket items and cut more duties. It will even out and should be explained to The People.

DWW 6 years, 6 months ago

these two ^^^ white and priviledge eh? maybe i am too?

Well_mudda_take_sic 6 years, 6 months ago

This comment was removed by the site staff for violation of the usage agreement.

DDK 6 years, 6 months ago

Right you are on all points. Hope one of these days we will be able to tell IMF and Co. how far to jump!

TalRussell - i cant believe im agreeing with you but yes YOU ARE CORRECT this new govt has yet to tell us where the VAT money has gone under their watch, not to mention as you say number house money.

I heard KP say about 2 months ago that it is in the consolidated fund. That is the same foolishness we heard from Halkitis. We want it segregated and assigned to certain categories like a special fund.

TheMadHatter 6 years, 6 months ago

Bogart - reduced duties at same time as increased VAT.

VAT is a MUCH more efficient and accountable tax. Duties are just "i ain't got nothin to declare".

Economist 6 years, 6 months ago

That is because the slack inefficient Civil Servants aren't doing their job. The private sector has to do the collection of tax and still pay for an incompetent civil service. Time to reduce the civil service by at least 10%

bogart 6 years, 6 months ago

...yep VAT is extremely efficient....majority of the citizens who it catches are the pore whose portion of small paycheck if any is greater than those wealthier citizens who is affected lesser degree as was the initiial arguement when implemented, but then we have more wealthier legislators than pore ones to stamd up .....what also wss a winfall was the busonesses who appears to have increases prices first to cover the administration costs and then added the 7.5% and then rounded figures to eliminate as much coins and ajusted. What we needed was the prpgressive income tax but many businesspersons would cheat not paying themselces full salary but taking it out in dividends not trapped by NIB.

TheMadHatter 6 years, 6 months ago

Bogart but you can see the increase in the number of little import businesses over the past 3 years. In cases where the price gouging is too much then people just use Amazon.

The Bahamian people need to get serious and fight against our invasion the same way Hungary is doing. They just re-elected President Orban in July and EVERY BAHAMIAN would do will to watch and read this AWESOME speech he recently gave in Pohland. Dr. Minnis would do well to emulate him.

Watch. It is worth your time. 13 minutes.

https://youtu.be/EbINrdyAXlE

realitycheck242 6 years, 6 months ago

The Video shows that countries around the world are experiencing the same poblems . The immigration issues can certainly be applied to the Bahamas

Aegeaon 6 years, 6 months ago

What invasion? You mean putting foreigners behind the backburner who works to develop your country? There is NO invasion of the sorts, but rather an invasion in the later future by ISIS and Drug Cartel groups who see this place as a paradise for chaos.

TheMadHatter 6 years, 6 months ago

Sorry...not July....i meant April just a few weeks ago. Typo.

Bahama7 6 years, 6 months ago

Get that oil rig drilling.... last roll of the dice for us.

John 6 years, 6 months ago

The introduction of VAT may have saved the government (temporarily) but it stagnated the economy and killed many businesses. VAT was never intended to be collected along with customs duties. It was an alternative form of taxation and customs duties were supposed to be eliminated. And remember that government is now collecting taxes on services and this added to government’s revenue but also drove up the cost of living. And while government calculates the VAT on the total landed cost of goods (cost plus freight plus insurance plus other costs PLUS CUSTOMS DUTIES). The VAT collected in the first instance is much more than 7.5 %. But businesses were told they only need add 7.5% to their price after they add profit to calculate VAT they must now give to the government after deducting the VAT paid at the port, any businesses ended up short changing themselves i, especially if they were calculating their prices based on first costs. And also be reminded that government increased minimum wage by 40% at basically the same time The VAT was introduced. This also resulted in a corresponding i40% increase in National Insurance contributions for many workers and many businesses still cannot figure out why they cannot turn a profit since both the VAT was introduced and minimum wage was increased. These increases takes a ledge chunk of cash out of circulation every time businesses pay their VAT returns and NIB. And if businesses tried to increase prices to compensate for these costs increases their sales would have plunged. So many operated ‘in the negative ‘ and the result is what you are now seeing on Wulff Road, on Mackey Street on parts of East Street and Carmichael Road and even now in Marathon Mall . Since their cash flow is negative, it will eventually dry up and businesses will have to borrow more cash for working capital or close down. And then there are ever increasing costs to businesses by banks. Some banks have effectively raised their lending rate to over 12% by requiring cash collateral on overdrafts, on which they pay no interest and their add on monthly fees that must be added to their basic loan rate. Then some businesses have seen increases in their rent, utilities and general supplies and others had to hire accountants to keep their book in order for the Department of Internal Revenue (IRS) and so it will always be impossible for them to make a profit under current conditions. AND if THE Government does not make the necessary adjustments and get the economy moving, the NATIONAL DEBT can surpass $11 BILLION before the current government’s five year term in office ends.i

DDK 6 years, 6 months ago

Right you are John, you just neglected to mention the gross negative effect on the economy of the numbers slime houses.

TheMadHatter 6 years, 6 months ago

John....all if your points are correct. Regardless of those facts, the general response of Bahamians is quite predictable:

Have even more babies;
Hire even more "cheap" Haitians.

This is because "majority rule" even applies in Hell.

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IMF’s bitter pill - find extra $240m

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