The Tribune

• Govt interest payments exceed health and education

• More than $1 out of every $5 in tax to creditors

• Fears govt ‘sugar coating’ as knows ‘can’t kick the can’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government’s annual debt servicing (interest) costs were yesterday branded “deadly” after they breached the $500m mark to now exceed combined health and education spending.

Robert Myers, the Organisation for Responsible Governance’s (ORG) principal, told Tribune Business “tell me in God’s name how anyone thinks that’s sustainable” after the 2021-2022 budget revealed that the government’s $512.469m interest payments alone for the upcoming fiscal year equal 22.8 percent of its projected $2.245bn revenue intake.

That means that more than $1 out of every $5 earned in taxes is going to service The Bahamas’ still-growing $9.6bn national debt, further exposing the costs inflicted by the COVID-19/Hurricane Dorian debt and deficit blow-out and just how much money is now being diverted away from critical public services to pay The Bahamas’ creditors.

Now by far the biggest line item in the government’s annual budget, interest payments in 2021-2022 will exceed the combined expenditure allocations to the Department of Education ($202.554m) and Ministry of Health ($298m) which together come to just over $500m.

These were, some years ago, the two greatest spending sources in the budget. While adding in the spending allocations for the Ministry of Education and Department of Public Health would comfortably exceed the government’s upcoming interest payments, the addition of $951.8m in additional debt by June 30, 2022, could see debt servicing soon consume $1 out of every $4 in tax revenues.

Dr Hubert Minnis, in unveiling the 2021-2022 budget, conceded that “debt servicing charges have increased over $100m” year-over-year without disclosing just exactly how high they have now reached.

However, the accompanying budget booklet disclosed that the half-a-billion dollar mark has now been breached, and debt service (interest payments) are forecast to remain elevated for the foreseeable future at at $481.513m and $459.154m in the fiscal years 2022-2023 and 2023-2024 respectively.

“Tell me in God’s name how anybody thinks that’s sustainable,” Mr Myers told this newspaper, as the cost associated with COVID and Dorian-related borrowing start to hit home. “Taking on any more debt, how’s that sustainable? If austerity measures are not high on the agenda, and I’m sure they are, we’ve got to get somebody else [into government] that takes it more seriously.

“There’s no doubt that in the next cycle, whoever the government is, they are going to have to deal with the size of government relative to the economy. It’s got to go in reverse. It cannot continue. Right now, ignoring the fact we’ve eaten away at whatever headroom used to have for external shocks, the debt service costs are now a significant chunk of overall government expenditure.

“Debt servicing is now higher than two major social programmes. That’s deadly. We don’t get any value from that. The public does not get any value from that. That’s just paid to bankers because of the irresponsible behaviour in the past. It makes you want to throw up. Not paying that back, defaulting on that, is a very strong reality if there are any more external shocks.”

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, while lamenting the absence of a multi-year debt management strategy in yesterday’s Budget, also told Tribune Business that the $500m-plus debt servicing costs are equivalent to almost “a quarter” of the projected $2.245bn revenue intake and not far off one-fifth of $2.825bn in planned recurrent spending.

“The absolute amount of debt owing is the key,” he added. “We are where we are, and can’t dismiss that, but at some point we’re going to have to make harsh decisions that we’re going to reduce the absolute dollar amount regardless of where GDP is, with its ebbs and flows, so we’re in a comfortable debt service position.”

The Minnis administration shied away from any major spending cuts or across-the-board revenue increases via new and/or hikes taxes, instead opting for a package of narrowly-focused, targeted income enhancement measures as forecast by Tribune Business.

Some observers will likely describe it as a ‘balanced Budget’ because the Prime Minister appeared to be trying to appease multiple competing forces and pressures such as fiscal prudence, economic growth, the Bahamian people with one eye on the upcoming election, and hammering home a message of economic growth.

Dr Minnis outlined the framework of what he described as a growth strategy, the Accelerate Bahamas Recovery Plan, while also seeking to persuade voters about the strength of his government’s performance in managing the COVID-19 pandemic and its economic devastation.

The Budget went about as far as it could in being pre-election friendly without abandoning fiscal prudence ahead of harsher austerity measures that will have to be introduced in coming years to tackle a national debt that is forecast to hit $10.755bn at end-June 2024.

One observer, speaking on condition of anonymity, told Tribune Business of the Budget: “There was no sense of urgency to address some of the serious issues we have. It was really an election budget. To say I was disappointed was an under-statement. The reality is that the Government’s having some serious cash flow issues. That’s my suspicion.”

Mr Myers, meanwhile, said that both the Government and opposition Progressive Liberal Party (PLP) had acknowledged The Bahamas’ fiscal peril in discussions with ORG. However, he argued that the Prime Minister was still “sugar coating a very dangerous set of social and fiscal circumstances, in my opinion” and failing to fully level with the public on just how dire the situation and consequences are.

“I think the Government is taking it seriously, and from conversations we’ve had with the Opposition they are also taking it seriously. I do believe we have potentially turned the corner on the understanding we can no longer kick the can down the road. I do believe they’ve reached that sobering reality,” Mr Myers told Tribune Business.

“Whichever administration gets in understands the sobering reality of having to deal with the irresponsible actions and behaviours of previous governments. Unfortunately it’s a little too late, but they’ve arrived at that reality.

“They understand we’re at the beginning of a long haul to get out of a social and fiscal crisis. I don’t think they’ve [the Government] gone far enough but they clearly understand they have a problem. I think they need to do a lot more, but it’s a start.”

Mr Myers, though, said the Government’s decision to place on hold efforts to make loss-making state-owned enterprises (SOEs) more efficient and get them to a position where they can recover all their costs was “not the right answer” given the growing fiscal pressures.

“Our fiscal strategy plan did call for the gradual reduction of interventions to the SOEs as they moved toward greater self-sufficiency and cost recovery. However, this element of the plan has been deferred for this year, due to the effects of the pandemic on the customary revenue flows of these entities,” Dr Minnis admitted.

“The outlays to those SOEs in the aviation sector have this year far exceeded their allocations. Despite some return to normalcy, the allocations to Bahamasair, Water & Sewerage and Nassau Flight Services will be higher than typical years, as cash flow slowly returns to normal.

“The increased allocation to National Health Insurance (NHI) is in line with a key pillar of Accelerate Bahamas to improve access to health care by supporting more increased sign-ups for NHI and allowing greater access by our citizens to public and private primary care.”

Taxpayer subsidies to SOEs are forecast to increase by more than $18m year-over-year to almost $426m in 2021-2022, representing a further drain on the Public Treasury. Bahamasair is forecast to receive $30m, up from the initial $19m allocated for the current fiscal year, while Water & Sewerage is due to gain some $26m.

The projected $951.8m deficit for the 2021-2022 fiscal year means that the Government will likely have borrowed more than $3.1bn in three years by the time June 2022 is reached.

“With signs pointing to a global rebound in fiscal year 2021-2022 - and with the revenue measures announced earlier - total government revenues are projected at $2.247bn, representing an increase of $588.3m or 35.5 percent over the projected fiscal year 2020-2021 total revenue,” Dr Minnis said.

“Despite this improvement, revenues are projected to remain 7.5 percent below the $2.426bn posted in fiscal year 2018-2019, reflecting the fact that our economy will not likely return to full capacity during the upcoming fiscal year. Recurrent expenditure is estimated at $2.83bn, an increase of $270.1m or a 10.6 percent increase over the projected spend for fiscal year 2020-2021.”

As for capital spending, he added: “If we are to have an accelerated economy, we must continue the investments in infrastructure that will undergird economic development and commerce, and provide necessary economic stimulus.

“We are projecting some $372.4m in capital outlays in the upcoming fiscal year. While this is below the $515.5m budgeted last year, it represents an increase over the projected $200m in actual capital expenditure for this fiscal year.”