The Tribune

• Ex-minister: No one has levelled with voters

• Warns against ‘sugar coating’ fiscal challenge

• $470m subsidies exceed $422m debt interest

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister yesterday warned that Bahamians must hope “a small miracle happens” if the country is to avoid harsh post-COVID austerity measures and low growth in coming years.

James Smith, also an ex-Central Bank governor, told Tribune Business that this nation faces “enormous challenges” to place its fiscal and economic affairs back on a sustainable footing following the deficit and $10bn-plus debt blow-out produced by the pandemic and Hurricane Dorian.

Agreeing that none of the political parties competing for office on September 16 had fully levelled with the Bahamian people on the extent of the new and/or increased taxes and spending cuts that may be necessary to right the public finances, he added there was “no point sugar coating” the challenges as they would rapidly reveal themselves after the general election.

“A quick answer to that would be: ‘No’,” Mr Smith replied, when asked by this newspaper whether each of the parties had been sufficiently forthcoming with voters on what might lie ahead. He argued that the Free National Movement’s (FNM) continual assertion that no civil servants were laid-off during COVID-19’s peak was nothing to boast about, while the Progressive Liberal Party (PLP) had “no appetite” for spending cuts.

Mr Smith said public sector jobs accounted for around 25 percent of the workforce, yet it was the 75 percent in the private sector that had taken the brunt of the terminations, furloughs and loss of income over the past 18 months as COVID-19 raged.

“If we are one society, and 25 percent were saved from 75 percent paying their taxes, it’s not good policy,” he argued. “It’s an unequal application of national resources. It don’t see it as something to be bragging about. The Opposition party is saying they are not going to slash any of the benefits the Government has in place; scholarships and social programmes, meaning there is no appetite for decreasing expenditure.

“From a policy perspective we’re going to be facing enormous challenges for a couple of years out unless something extraordinary from the outside comes in to change our outlook. Bahamians can only cross their fingers and hope that, like in the past, a small miracle happens. It’s not reflected in the policy positions from my point of view.”

Mr Smith said it was “not surprising” that the political parties had not been totally forthcoming with voters about the realities all will likely face moving forward, as “you obviously don’t want to scare the voting public”.

Yet he conceded: “Sometimes you have to be open and transparent, and treat people as intelligent and articulate. It’s a challenge that many of us are prepared to meet, and there is no point in sugar coating it because it will reveal itself in short order.”

With a $10.356bn national debt at end-June 2021 that likely did not include a $275m overdraft disclosed in the Central Bank’s latest quarterly statistical report, Mr Smith said it was vital that the next administration “from day one try to get its arms around what position we are in”.

“How much of the debt is from international agencies, how much is from private investors?” he asked. “What is the tenor of the debt - is it five, ten, 15 years? To lower your debt service charges, you might have to reschedule it or stretch it out so that the monthly payments are less or interest-only.

“You need to give yourself some breathing room until tourism rebounds. You’re looking at flow, not the stock. Debt servicing is already the highest line item in the Budget, and it’s going to be by far the highest item in the Budget.”

Public debt interest payments totalled $422.4m for the 2020-2021 fiscal year, some $77.7m ahead of the prior year’s $344.7m. It was also $25.5m ahead of the $396.9m Budget forecast for 2020-2021, standing at equivalent to 106.4 percent of original estimates.

However, it was not the highest expenditure item for subsidies to state-owned enterprises (SOEs) hit $469.7m in the 2020-2021 fiscal year - coming in nearly $100m higher than budgeted due to the heavy outlays needed to save the likes of Bahamasair ($78m) and the Water & Sewerage Corporation ($40m). 

Mr Smith, meanwhile, warned that the next administration “cannot lull ourselves to sleep” over the Central Bank’s reserves standing at a record $2.6bn because “most of that is borrowed money” from the Government’s financings that will have to likely be repaid in foreign currency at some point.

And he voiced misgivings that foreign currency borrowings are moving towards 50 percent of The Bahamas’ total debt. Some $1.571bn, or 91.5 percent, of the net new debt taken on in the 2020-2021 fiscal year involved foreign currency borrowed to help stabilise the external reserves.

The Bahamas’ primary use of foreign currency is to help pay for its huge import bill with the earnings/flows generated by tourism and foreign direct investment (FDI). Yet Mr Smith expressed concern that an ever-increasing amount of these earnings may now be required to pay debts, and this was against a backdrop where foreign currency inflows had been relatively flat even pre-COVID.

The former Central Bank governor added that “one of the more sensitive” issues facing the Government was “whether we continue to have access to credit”. Given The Bahamas’ elevated risk profile, he warned that some institutions may not have any appetite to lend to this nation even at extremely high interest rates and yields.

“We’ve got to sit down with local and international institutions very quickly to find out what that position is, and what rates we would get in a scenario where they begin to peel back lending,” Mr Smith said. He also reiterated that The Bahamas, due to COVID-19’s impact, needed to again make the case that it should qualify for various forms of grant, development and assistance funding.