The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank's governor has echoed warnings that Bahamians should brace for new and/or increased taxes as he dismissed suggestions the Government may soon default on its debt.

John Rolle, in guarded, technical language, said The Bahamas has "significant space for public finance reform and taxation" as he rejected assertions by Marla Dukharan, the former Royal Bank of Canada (RBC) chief economist for the Caribbean, that a sovereign debt default by The Bahamas could occur as early as 2021.

However, in negating comments that Ms Dukharan offered no empirical evidence to support, the Central Bank governor effectively warned Bahamian households and businesses that they will likely soon have to pay for the debt and deficit blow-outs caused by the combination of COVID-19 and Hurricane Dorian.

Calling for the Bahamian people to better understand and recognise the fiscal and economic difficulties facing the country, as it grapples with a $1.327bn fiscal deficit, national debt forecast to hit $10bn by mid-2022 and a gross domestic product (GDP) that may shrink by up to 20 percent this year, Mr Rolle warned the country had little choice but to adopt austerity measures in the "medium term".

"We must accept that The Bahamas has the resources and capacity to repair the Government’s balance sheet," Mr Rolle said in a statement rejecting Ms Dukharan's assertions. "The Bahamas is not at the level of debt distress, nor is the burden of public debt such that it would make a sovereign default a credible likelihood in the near-term.

"The Bahamas has significant space for public finance reform and taxation should it become more urgent than is already apparent. The Bahamas is far off from having exhausted its fiscal options, and sophisticated creditors of the sovereign are conscious of this.

"Moving forward, though, there is a need for greater recognition and embrace by domestic stakeholders of the credible, non-default, range of options that are available to the sovereign. These options would impact the taxpayer well before creditors are harmed."

Translated, Mr Rolle is warning that new and/or increased taxes, as well as greater enforcement and compliance, will be required to boost the Government's annual revenues, lower the deficit and bring the fiscal ratios back in line with the Fiscal Responsibility Act to avoid any possibility that current debt levels will create the problems Ms Dukharan referred to.

"As there continues to be support for fiscal stabilisation, based on deficit financing, over the recovery path from the pandemic, I encourage stakeholders to balance their discourse with the recognition that the Government will indeed require more means to repay the extra debt taken on," Mr Rolle continued, :"and to recognise that as taxpayers we are all expected to help repay these obligations in one form or the other that does not involve default.....

"The Bahamas will have to do more to reduce the public debt burden in the medium-term. The debt burden leaves The Bahamas exposed to increased hardships from severe hurricanes and other shocks, as the sovereign will continue to need more flexibility and space to repair infrastructure, give relief to private businesses and provide social safety net assistance, after such setbacks.

"National consensus must continue to be developed around both taxation and expenditure management that pay down the debt burden within the medium-term fiscal consolidation plan."

Mr Rolle's position echoes that set out in the International Monetary Fund's (IMF) Article IV report on The Bahamas just last week, which warned that the Government must impose harsher austerity measures on the Bahamian people to hit its 50 percent debt-to-GDP target by 2030.

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. The Fund - 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.

"Achieving the Fiscal Responsibility Act targets over the medium term will require additional fiscal effort," the IMF said.

"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."

The timing of any new and/or increased taxes is uncertain, with the Government likely to delay until it is certain the economy has recovered from the COVID-19 pandemic and with a general election approaching.

Dr Hubert Minnis, in his national address last night, admitted that the Bahamian economy was in "terrible shape" due to COVID-19 with the Government's tax revenues off by as much as 50 percent compared to pre-pandemic.

He added that the soon-to-be-tabled Fiscal Strategy Report would "highlight some of the immediate fiscal adjustments and accelerated reform efforts that are necessary and critical to remain on a stable economic and financial footing over the near and long-term".