The Tribune

• Recommends unheard-of budget surpluses

• Tells govt to start preparing Bahamian public

• $600m capital raise from local investors plan

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday exposed the harsh austerity Bahamians face post-COVID by urging the government to increase its “net income” by more than $300m over four years.

The fund, in its full Article IV report on The Bahamas, argued that strict fiscal measures are required to get the national finances back on track over the next decade to meet the Fiscal Responsibility Act’s targets following the debt and deficit blow-out produced by the pandemic and Hurricane Dorian.

The Washington DC-based organisation, while admitting that new and/or increased taxes and deep spending cuts were not practical in the near-term as this would only depress the Bahamian economy further, setting back its post-COVID recovery, warned that major adjustments will be required in the mid-2020s to ensure The Bahamas’ hits its 50 percent debt-to-GDP target ratio by 2030-2031.

“To achieve the debt target by fiscal year 2030-2031, staff recommended additional fiscal effort of about three percent of GDP over four years starting in fiscal year 2022-2023, and a constant primary surplus of about five percent of GDP thereafter,” the IMF urged.

“To preserve credibility, the authorities should start preparing measures and communicate a timetable to implement them once the pandemic-related uncertainty subsides.” The term “fiscal effort” is defined as “the profit a government collects”, or the positive difference between revenues and spending, estimating what the Public Treasury can collect and the government’s capacity to achieve this.

With one percent of Bahamian GDP equivalent to more than $100m, the IMF is thus recommending that the government must generate more than $300m per year in extra “net earnings” per year for a four-year period from 2022-2023 to bring its debt ratios back in line with the Fiscal Responsibility Act targets.

And a five percent primary surplus would require the government’s revenues to exceed its recurrent (fixed cost) spending by more than $500m per year even with debt interest payments stripped - a level of performance that The Bahamas has never come close to achieving post-independence.

Marlon Johnson, the Ministry of Finance’s acting financial secretary, yesterday said the Government would be putting out a statement in response to the IMF’s full Article IV report and did not want to comment before that was issued. It was not received before press time last night.

However, James Smith, the former finance minister and ex-Central Bank governor, described the IMF’s fiscal consolidation and austerity recommendations as “pie in the sky”. He explained: “You couldn’t reach those targets without any impact on GDP and employment, which doesn’t help us very much.”

Arguing that “it’s too narrow a measurement” to focus on debt-to-GDP ratios, which only assess a country’s debt as a percentage of its economic output, Mr Smith added that last year’s recession exceeded all the growth The Bahamas has achieved in the last 15 years.

While the IMF is forecasting that the Bahamian economy shrank by 16.2 percent in 2020 due to COVID-19, the Article IV report said the Government’s own estimates place this closer to a 19 percent contraction.

“I think that any kind of forward looking plan over the next three-five years, 10-plus years, can only be wild guesstimates,” Mr Smith said. “That is for the simple reason over the next three to four years our economic fortunes are really tied to external events over which we have no control.”

He identified these factors as the speed, and success, of the global COVID-19 vaccine roll-out, especially in key tourism source markets such as the US as well as in The Bahamas, as this will determine how quickly travel confidence returns and persons start coming back to this country for vacations.

Acknowledging that it will likely take three to four years for The Bahamas to recover the economic output lost to COVID-19, Mr Smith added: “We need to grow by 20 percent, and I can guarantee that we haven’t achieved that over the past 15 years.

“The sub-structure of the economy has not really changed, and before the pandemic we were unable to generate consistently more than 2 percent per annum growth, and that’s being generous.”

The IMF has forecast that The Bahamas will return to pre-COVID-19 levels by 2023 or 2024, predicting that a rapid snap-back of travel demand once vaccines are rolled out will lead to 8.5 percent GDP growth in 2022 and higher-than-average economic expansion over the following two years.

However, Mr Smith argued that it was hard to see The Bahamas “do a lot better in the next 15 years without some major structural changes in the economy”. He added: “The IMF seems to be using the same playbook that the pandemic will dissipate at some point, and we go back on to the same trajectory. The damage to the economy is serious and long-term. The world has changed for us.”

Besides generating faster economic growth, Mr Smith said The Bahamas needs to focus on increasing employment “at medium and low levels”. He added: “That’s where you get aggregate demand from to keep the economy spinning.

“If we create a few thousand hi-tech jobs that will not do what needs to be done. You’ve got to mop up a lot of unemployment among the growth. What our analysis sometimes doesn’t look at is the day-to-day impact on the population of unemployment, low income and suppressed living standards for a group of people who may be losing their homes and selling cars to convert them to cash.

“That’s going on now, and is going to have an adverse effect on living standards. They’re going to fall into poverty, and we’re going to have to drag them out with GDP growth. I don’t see that in the proposals by the IMF.”

The Fund, meanwhile, outlined the Government’s plan for funding the remainder of its $2bn gross borrowing requirements for the 2020-2021 fiscal year. The deficit remains at its initial $1.327bn figure, which is a net amount representing the increase in national debt, as some of the $2bn will be used to refinance existing.

Revealing that the Government plans to raise $600m from local investors in the Bahamian capital markets, the IMF said: “They expect to borrow an additional $150m from the Inter-American Development Bank, $100m from the World Bank Development Policy Operation, and up to $75m from international commercial banks under the World Bank Multilateral Investment Guarantee Agency (MIGA) framework by June 2021.”

The Fund added that the Government has to-date settled $240m of the $360m in arrears payments, which it had planned to do over a three-year period. This was used as the justification for hiking the Value-Added Tax (VAT) rate to 12 percent in the 2018-2019 Budget.