The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday said the Government is targeting a five-year average growth rate that falls short of that recommended to restore The Bahamas to economic and fiscal “health”.

Michael Halkitis, in leading off debate on the supplementary Budget in the Senate, said the Davis administration is aiming for real economic (GDP) growth “of at least 3 percent” for the duration of its five-year term in office.

“The Government is targeting potential real economic growth of at least 3 percent per year for the next five years, rather than the low growth rate previously experienced for decades of roughly 1.5 percent per year,” he said. “This growth level would result in lower levels of unemployment and higher revenues for government.”

While Mr Halkitis’ target may be more realistic, and is still double the average annual economic expansion rate achieved in the years prior to COVID and Hurricane Dorian, it is also well below that called for by the University of The Bahamas’ (UoB) Public Policy Institute in a study commissioned by the Ministry of Finance.

The UoB study warned that The Bahamas needs to achieve an average 5 percent annual gross domestic product (GDP) growth rate over the next decade to return the Government’s finances and the economy to “a healthy state of affairs”.

To achieve this, it added that the country needed to attract “significant” investment in multiple industries at levels far higher than it has traditionally done so, while recommending that there be a major focus on renewable energy to reduce electricity costs and thus keep inflation under control.

It revealed that, based on an August 12, 2021, note from outgoing BPL chairman, Dr Donovan Moxey, the state-owned energy monopoly has estimated a $451m investment is required if it is to generate 33 percent of its energy from renewable sources by 2030.

“To reverse its current economic and fiscal trajectories, and achieve targets that represent a healthy state of affairs for the country, The Bahamas must generate economic growth levels averaging about 5 percent over the next ten years,” the UoB study said, while conceding “that this has not been achieved previously but must be targeted moving forward.

“To achieve such high levels of growth, the country must attract significant direct investment over multiple economic sectors. Of the five economic sectors under review, the highest yields come from investments in the “transformation and trade” sectors while the largest impact on GDP comes from the tourism sector.

“Reducing inflationary pressures from high levels of investments that generate a significant number of jobs, and therefore tightens the job market, a significant investment in renewable energy is necessary to curtail price increases,” the report continued.

“To optimise the benefits of a growing economy to the country’s fiscal outcomes, reducing government tax expenditures, i.e.concessions, is necessary. And in alternative scenarios where there is no direct investment, increased dependency on non-renewable energy, and increases in tax expenditures occur, the economic and fiscal circumstances of the country deteriorate below the baseline.”

The International Monetary Fund (IMF) is currently projecting that The Bahamas’ post-COVID GDP growth will peak at 8.5 percent in 2022, following a modest 2 percent rebound in 2021.

Thereafter it will gradually decrease, having recovered much of what was lost in COVID with 4 percent and 3.5 percent growth in 2023 and 2024, respectively, before the country returns to its long-run average of 1.8 percent and 1.5 percent economic expansion in 2025 and 2026.

Meanwhile, Mr Halkitis pledged that the reconstituted Revenue Enhancement Unit (REU) will not “hound” struggling businesses and taxpayers unable to pay their debts and will focus on higher-yielding delinquents who can afford to do so.

“To shore up revenue, the reestablishment of a fully resourced Revenue Enhancement Unit (REU), as established in our first term in office, will be supported by local and international management consultants and have as its goal increasing the tax base by minimising tax avoidance and fraud,” he said.

“Within a two-year period, it is expected that the unit would account for $200m over the five-year period in additional taxes or about 2 percent of GDP at the current levels. When fully up and running, this is a unit tasked with ensuring that what is owed to the Government is paid, and those who can afford to pay, do pay.

“It is not the intent of this unit to hound businesses and individuals who are still struggling.” The minister indicated that payment plans will be used to help collect tax arrears.

Mr Halkitis added that the Government is targeting a 25 percent revenue-to-GDP target to ensure the Government is not “hamstrung in its ability to deliver services to the Bahamian people”. And it is also aiming for annual capital spending equivalent to 3.5 percent of GDP to help underpin economic growth, arguing that this has “fallen short” and “been lagging in the past”.

The minister also promised that the Government was “not abandoning” capital works projects, as might be indicated by its capital spending cuts in the supplementary Budget, but is instead realigning Budget allocations to when they will likely be executed. Those that cannot be executed this year have had their funding removed, and delayed to another fiscal period.

Asserting that The Bahamas was now seeing “some light at the end of the tunnel” with respect to its COVID recovery, Mr Halkitis said: “Signs point to an improving economy. We remain cautiously optimistic that we have seen the worst of the pandemic, but we know that we must remain vigilant in our health precautions and disciplined in our fiscal management because as Omicron has shown us, we are not out of the woods as yet.... It’s not over.”