The Tribune

By NeIL Hartnell

Tribune Business Editor

nhartnell@tribunemedia.net

THE DEPUTY prime minister yesterday said there are no plans for new or increased taxes to finance Dorian rebuilding "at this point", adding: "That is not part of the discussion."

K P Turnquest told Tribune Business that the Government had yet "to exhaust all our options" other than taxes for funding a restoration effort that will cost several hundred million, if not billions, of dollars.

Confirming that the Government will "likely" have to draw down on the entire $100m Inter-American Development Bank (IDB) emergency credit line, Mr Turnquest said The Bahamas did "not have the option" of delaying post-Dorian recovery given the importance of Grand Bahama and Abaco to the overall economy.

Estimating that the two island combined generate up to 20 percent of annual Bahamian gross domestic product (GDP), he added that the loss of this output was likely to cost the Government some $200m in projected revenue for the 2019-2020 fiscal year (see other article on Page 1B).

Mr Turnquest said the magnitude of the Government's revenue loss would depend on how quickly both islands' economies were restored, with the Ministry of Finance currently assessing how it can re-purpose already-allocated Budget financing to Dorian recovery efforts.

Conceding that the severity of Dorian's destruction had dealt "a multi-year" blow to the Government's fiscal consolidation efforts, the deputy prime minister said it would seek to rebalance rebuilding needs with "containing any extraordinary expenditure".

He added that Bahamian taxpayers, either via direct loans or government guarantees, will need to help finance the Abaco restoration efforts of the two cash-strapped state-owned utilities, Bahamas Power & Light (BPL) and the Water & Sewerage Corporation, although he declined to specify the sums involved.

Mr Turnquest, though, was adamant that new and/or increased taxes were not yet being entertained by the Government as a financial response to the damage inflicted by Dorian - especially given its continued ability to tap the local and international capital markets for debt funding.

"There are no new taxes at this point," he replied, when questioned by Tribune Business. "That is not part of the discussion. We just haven't reached there yet. We haven't exhausted all our contingency options before we get to that."

There has been significant speculation on social media and elsewhere that the Government has no choice but to levy new or increased taxes, such as another VAT rate rise to 20 percent, to finance Dorian-related reconstruction and recovery given the sheer scale of this task.

But Mr Turnquest, in rejecting such fears, said it was examining "a combination of sources" to finance post-storm rebuilding efforts. "Local borrowing will be a part of it as well as foreign borrowing," he said.

"We're drawing down on the [$100m IDB] contingent facility, and will supplement where we have to supplement from both local and foreign sources." Asked whether The Bahamas will have to fully draw down on the IDB credit line, he replied: "It's a little early to say, but based upon estimates, it's likely.

"We have our lending sources. We will look at those and what offers the best rate of return on interest rate and go for that. We're going to be as deliberate and cautious about any additional debt as we can."

Mr Turnquest's confirmation that new or increased taxes are not being considered will likely produce a sigh of relief from both Bahamian consumers and businesses, not least because further sudden increase in the taxation burden could well drive the economy into recession.

The Government can access ample excess liquidity in the commercial banking system, which stood at $1.855bn at end-July 2019, for Dorian rebuilding. External reserves, too, were relatively healthy, standing at $1.583bn at the same date, and will likely gain a further boost from the multi-million dollar foreign currency reinsurance inflows that will materialise once claims start to be paid.

The international capital markets also remain accessible, as The Bahamas still retains 'investment grade' status - albeit barely - with Moody's. Neither that credit rating agency nor its counterpart, Standard & Poor's (S&P), have yet given an indication they will further downgrade this nation's creditworthiness although they may be waiting for Dorian's full impact to emerge.

Gerry Rice, an International Monetary Fund (IMF) spokesman, recently said The Bahamas has not asked it for financial assistance in Dorian's wake - a position confirmed by Mr Turnquest yesterday.

"The authorities have not yet requested IMF’s support," Mr Rice said. "We stand ready to help with other member countries and, of course we are - Bahamas and the people of Bahamas - are very much in our minds, and what they’ve gone through with this terrible hurricane. And, again, we stand ready to help."

Mr Turnquest said the magnitude of Dorian's costs and economic loss depended on how quickly The Bahamas could restore commercial activity in Grand Bahama and Abaco.

"It depends on how long the restoration of the economic sector takes," he told Tribune Business. "We have to get the businesses going, and construction activity and reinsurance inflows will help in the interim, but we have to get the tourism sector back up and running as quickly as possible.

"I don't think anyone anticipated, certainly, the magnitude of the destruction incurred with this hurricane. We have to face it. We don't have the option of delaying the recovery, as the combined economies of Grand Bahama and Abaco accounted for 15-20 percent of GDP.

"We don't have the option not to rebuild. We have to get people back into their homes and the business sector re-energised, building back smarter and stronger."

Mr Turnquest said the Government was prioritising utilities restoration, especially water and electricity, to kickstart reconstruction efforts and private sector rebuilding given that these services are critical to sustaining livable communities.

While deferring the associated costs to Desmond Bannister, minister of works, the deputy prime minister said taxpayer support for such an effort was essential given the loss-making status of the Government-owned utilities.

"You fully understand BPL is strained to incur this kind of infrastructure rebuilding cost, so there's going to be some form of mechanism to address it whether it's direct or guaranteed loans," Mr Turnquest told Tribune Business. "There will be some public commitment to ensure that infrastructure gets rebuilt as soon as possible."

While discussions were continuing over whether BPL's post-Dorian financing needs could be met through its planned $450m-$550m rate reduction bond issue, Mr Turnquest said the Water & Sewerage Corporation's repair costs would also be imposed on Bahamian taxpayers.

Asked about the extent to which Dorian will throw the Government's short and medium-term fiscal recovery plans off-course, he said: "It's difficult to say until we have the quantum, and I wouldn't want to speculate on that, but I imagine we've got a multi-year problem."

The Fiscal Responsibility Act mandates that the Government achieve a fiscal deficit equivalent to 1 percent of Bahamian gross domestic product (GDP), or $137m, for 2019-2020 but that target will inevitably be breached to the tune of hundreds of millions of dollars due to Dorian’s shock to the economy.

The loss of $200m in revenue will likely push the deficit close to $300m by itself, and the massive borrowing and increased spending necessary to finance the recovery will probably push those closer to the $660m worth of "red ink" incurred by the Christie administration in Hurricane Matthew's aftermath (with a general election thrown in).

Besides having to obtain parliamentary approval for the extra borrowing, Mr Turnquest and the Ministry of Finance are examining the approved 2019-2020 Budget to locate funding sources that can be reallocated for Dorian rebuilding.

Acknowledging that the Government "still has a country to run", and that islands unaffected by Dorian still needed "the resources allocated", he added: "This is a significant disruption and we are going to have to figure out how to redeploy the priorities that are best to contain any unanticipated and extraordinary expenditure."