The Tribune

• Debt to stay 22% pts over pre-COVID medium term

• Nation’s liabilities almost match economy size at 90%

• Observers fear ‘dark days ahead’; tax hikes ‘inevitable’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday confirmed the Bahamian economy shrank by over $2bn last year to almost match the size of the country’s rapidly-growing national debt.

The Washington DC based fund, in a statement on the end to its Article IV consultation with The Bahamas, warned that the government’s debt will “jump” to a level where it almost equals the country’s gross domestic product (GDP) - or economic output - for 2021 due to the COVID-19 fall-out.

It added that The Bahamas’ national debt will “remain more than 22 percentage points above its pre-pandemic level over the medium-term”, leading some observers to predict “dark days” lie ahead for the country and that new and/or increased taxes are “inevitable” once the economy has started to recover from COVID-19.

The IMF, in a statement that largely regurgitated its pre-Christmas 2020 commentary on The Bahamas, reiterated that it will take this country until end-2023 to recover the economic value destroyed by the pandemic and return to pre-COVID growth levels.

This illustrates how far the tourism-dependent Bahamian economy has fallen, with the gund sticking to its predictions that it shrank by a mammoth 16.2 percent in 2020 and will only enjoy an anemic two percent rebound this year.

While GDP growth rates of 8.5 percent and four percent are projected for 2022 and 2023, respectively, The Bahamas will merely be recovering the tourism activity it lost to COVID-19. While 3.5 percent growth is forecast by the IMF for 2024, it also foresees that this will quickly peter out to 1.8 percent and 1.5 percent in 2025 and 2026.

“The COVID-19 pandemic has exacted a significant human, social and economic toll on The Bahamas,” the IMF statement said. “The archipelago was just starting to recover from the severe damage caused by Hurricane Dorian in fall 2019, when the global outbreak of COVID-19 led to a sudden stop in tourism, the main source of its income and employment.”

Acknowledging that the Bahamian economy’s re-opening “has been challenging”, due initially to the country’s own COVID-19 ‘second wave’ and now surging infection rates in its key source markets, the Fund added: “Public debt is expected to jump to almost 90 percent of GDP by 2021, and to remain more than 22 percentage points above its pre-pandemic level over the medium-term....

“The recovery to pre-pandemic levels will likely take years and downside risks loom large, reflecting the uncertain evolution of the pandemic and The Bahamas’ vulnerability to natural disasters.” While praising the Government’s COVID-19 response, the IMF warned that “significant fiscal effort” will be required in the near future to set the Government’s finances back on the consolidation path.

“[IMF] directors agreed that the near-term priority is to save lives and livelihoods, and postponing the achievement of the public debt target by another two years in response to the pandemic is appropriate,” the Fund added.

“However, putting debt on a clear downward path over the medium‑term and rebuilding buffers will require significant fiscal effort. Directors called for tax policy and administration reforms, and expenditure prioritisation, to ensure a robust and equitable consolidation once the pandemic abates.”

Rick Lowe, an executive with the Nassau Institute think-tank, told Tribune Business that he interpreted “significant fiscal effort” as a clear call for The Bahamas to introduce new and/or increased taxes once COVID-19 has abated in a bid to set the deficit and debt-to-GDP ratios back on the path to meeting the targets set out in the Fiscal Responsibility Act.

Describing the national debt’s 22 percentage point rise as “a huge increase”, he added: “There’s no discussion about reducing government spending and that’s key. That’s half the battle. It depends on the stance they take when we come out of this thing; what stance will they take when this thing turns around?

“There are some dark days ahead I’m afraid. It’s inevitable that they’re [the IMF] going to recommend even higher taxes when the turn around happens.” The national debt has soared due to the combined impact of Hurricane Dorian and COVID-19, with the gap between the Government’s revenues (income) and expenditure (outgoings) this fiscal year forecast to be a record $1.327bn.

That may still be subject to downward revisions given that the strength, and timing, of the tourism industry’s rebound is unlikely to match current projections due to the new travel restrictions being imposed by the US, Canada and UK, and the soaring COVID-19 infection rates in these key tourism source markets.

The IMF yesterday predicted that The Bahamas’ debt-to-GDP ratio will peak at 88.6 percent this year, compared to just 58.8 percent at year-end 2019, highlighting the fiscal blow-out produced by Dorian and COVID-19. This ratio is forecast to moderate slightly to 86.2 percent in 2022, and drop to 82.8 percent by 2025 - a level that is still uncomfortably high given the hurricane threat posed to this nation.

As for nominal GDP growth, which includes the impact of inflation, the IMF said this had declined by more than $2.34bn to $11.235bn in 2020. This effectively measures the decline in the economy’s output, or value/worth, exposing just how deeply the pandemic has scarred it with unemployment projected to remain stubbornly in the double digits through 2026.

Marlon Johnson, the Ministry of Finance’s acting financial secretary, declined to comment when contacted by this newspaper yesterday because he had not seen the IMF statement. Besides praise for its handling of the pandemic, the other good news for the Government was that the Fund predicted external reserves will remain relatively robust despite the anticipated drawdown that will begin this year.

After peaking at $2.339bn last year, the IMF is forecasting that the reserves - which are critical to preventing a devaluation of the Bahamian dollar by supporting its one:one peg with its US counterpart - will fall to $1.683bn by year-end 2021. The decline will then bottom out in 2022 at $1.653bn as tourism-related foreign exchange inflows start to recover.

“[IMF] directors commended the authorities for the timely measures to sustain public health, protect the vulnerable and cushion the impact of the pandemic on employment. They noted that the recovery to pre-pandemic levels will likely take years and downside risks loom large, reflecting the uncertain evolution of the pandemic and The Bahamas’ vulnerability to natural disasters,” the Fund said.

“Directors agreed that the near-term priority is to save lives and livelihoods, and postponing the achievement of the public debt target by another two years in response to the pandemic is appropriate..... [But] directors underlined that The Bahamas faces long-standing structural impediments and vulnerability to natural disasters.

“They recommended modernising the business climate, rationalising state-owned enterprises (SOEs) and reducing labour market frictions. Directors called for gradually restoring the disaster relief fund, which was depleted following Hurricane Dorian, while improving the targeting of social programmes.”