The Tribune

* Gov't plan won't hit 50% debt-to-GDP by 2030

* Hints at new/increased taxes, spending cuts

* Says public must be informed so can ready

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday warned that the Government must impose harsher austerity measures on the Bahamian people to hit its 50 percent debt-to-GDP target by 2030.

Unveiling its statement on recent Article IV discussions with the Government and private sector elements, the Fund argued that the Government's medium-term fiscal framework was inadequate to bring its finances back in line with the goals set out by the Fiscal Responsibility Act.

That law requires the Government to bring the debt-to-GDP ratio, which measures the amount it owes as a percentage of the Bahamian economy's size, to a maximum of 50 percent and maintain it there. However, the combined fall-out from COVID-19 and Hurricane Dorian has sent this ratio racing off in the opposite direction, with the IMF forecasting it will exceed 85 percent this fiscal year.

This backs Tribune Business's article earlier this week, as calculations suggest debt-to-GDP is already "upwards of 90 percent" due to the economy's COVID-induced contraction, and the IMF - using heavily coded language - said the Government needed to go further with austerity plans once The Bahamas has rebounded from the pandemic to bring order to its own finances.

This would inevitably involve new and/or increased taxes, spending cuts or a combination of both to bring the annual fiscal deficit down from the $1.327bn projected for 2020-2021 and thus slow, then reverse, the persistent increase in a national debt that has soared by $1.5bn over the past 12 months.

Warning of grim times ahead for Bahamian households and businesses, the IMF said: "Achieving the Fiscal Responsibility Act targets over the medium term will require additional fiscal effort......

"Given the significant increase in public debt, postponing the achievement of the debt target by another two years in response to the pandemic would be appropriate. However, achieving the debt target of 50 percent of GDP by the beginning of the next decade will require significant additional fiscal effort compared to what is planned in the medium-term budget framework."

The IMF, whose "significant additional fiscal effort" phrase effectively means greater austerity than that planned by the Government, also urged that a road map be developed and released publicly so that Bahamian businesses and households can prepare themselves for what could be especially harsh measures.

"It is advisable to start preparing measures now, and communicate a timetable to implement them as soon as the pandemic-related uncertainty subsides," the Fund added, as it urged the Ministry of Finance to immediately activate its planned debt management office given the sudden increase in the Government's liabilities.

"The Bahamas would benefit from a robust financing strategy," the IMF said. "Central government debt is projected to increase to over 85 percent of GDP this fiscal year. Financing needs will decline only gradually over the medium-term, resulting in elevated risks of debt distress.

"A robust, multi-year government financing strategy should also aim to support the overall foreign exchange position. The new debt management office within the Ministry of Finance should be fully operationalised without delay."

To generate increased revenues, the IMF urged the Government to phase-out all Dorian and COVID-19 related support at the earliest opportunity. "The authorities are encouraged to phase out the broad set of hurricane and pandemic-related tax waivers at the first legislative opportunity as there are more effective and targeted measures to support the vulnerable," it added.

"Given the substantial uncertainty about the outlook, a detailed and explicit contingency plan should be developed.... The withdrawal of fiscal support is expected to start next fiscal year as the various pandemic and hurricane-related measures phase out."

This would mean that, in addition to the tax credit/deferral initiative targeted at all VAT registrants, and the Business Recovery Loan targeted at micro, small and medium-sized businesses (MSMEs), the IMF is essentially advising the Government to discontinue all tax breaks providing relief to the Dorian reconstruction effort in Abaco and Grand Bahama.

This was met with immediate push back yesterday by Ken Hutton, Abaco's Chamber of Commerce president, who said of the IMF's advice: "It's wonderful that an institution like that, which has no idea what is going on here, is able to tell us what to do from on high.

"They are an institution that has never seen a tax they don't like. I think we have a serious difference of opinion with their assessment primarily because I would like to see a single study from anywhere on the planet showing where increased taxation results in increased economic activity. Just show me one.

"I just hope the Bahamas government takes their role as a sovereign nation, and a sovereign government, seriously, which I think they do." Nevertheless, facing a 50 percent year-over-year reduction in revenues for the 2020-2021 first quarter, the Government will be eager to make up the shortfall wherever it can.

Asked about the IMF's call for greater austerity measures, Marlon Johnson, the Ministry of Finance's acting financial secretary, said the Government would set out its own strategy, estimates and fiscal recovery road map when the Fiscal Strategy Report is likely tabled next week.

"The Government will speak to that a bit more in the context of the Fiscal Strategy Report, and provide government's perspective on measures that need to happen for the Government to stay aligned with what we're projecting going forward and the timeline for getting back to that level of fiscal balance," he told Tribune Business.

"They [the IMF] have their view. What you'll see is the Government's perspective on what needs to happen." The IMF, meanwhile, called for "a reprioritisation of public spending" that "would promote inclusive and resilient medium-term growth".

It urged: "Savings could be achieved through containing administrative costs and improving the operational efficiency of state-owned enterprises to facilitate a reduction in subsidies. The planned comprehensive spending review should be used to identify areas offering scope for savings, and to develop a guiding framework to rank outlays by their medium-term effects on growth and resilience."

Rick Lowe, an executive with the Nassau Institute, who has been sounding the alarm over The Bahamas' exploding debt for almost two decades, yesterday also interpreted the IMF's language as a call for harsher austerity measures and higher taxes than those planned by the Government if the state is to right its fiscal ship.

"I'm worried. I really am," he told Tribune Business. "I can't quite put my finger on it but it's very disconcerting. It's a hell of a long suffering road if we want to reach a 50 percent debt-to-GDP ratio by 2030. They'd better start loosening up price control and this regulatory burden. The regulations just keep piling on and piling on and piling on.

Mr Lowe added that the debt figures currently do not include the $2bn in estimated unfunded civil service pension liabilities, and said: "It's been a long time coming, but the political class always knew best how to tax and spend. The writing's been on the wall for a couple of decades now."