The Tribune

• ‘Very frightening’ debt-to-GDP ratio over 100%

• Central Bank data shows ‘enormity’ of fiscal task

• Foreign currency debt over $5bn; near 50% of all

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ $10.4bn national debt is bigger than the size of its economy, it was confirmed yesterday, further exposing the “daunting challenge” the Government faces in tackling twin economic and fiscal crises.

The Central Bank’s affirmation that The Bahamas’ national debt-to-GDP ratio stood at 100.4 percent at end-June 2021 was said by economists and fiscal observers to illustrate “the enormity of the work ahead” for the newly-elected Davis administration to pull the country out of its public finances tailspin.

The regulator, in its quarterly review for the three months to end-June 2021, revealed that the past year’s borrowing to keep Bahamian society and the economy afloat amid the devastation inflicted by COVID-19 had produced a $1.45bn increase in the national debt. This, in turn, has driven it to a size greater than the country’s total economic output.

With the Government’s direct debt increasing to 96.3 percent of GDP at the end of the 2020-2021 fiscal year, a 13.6 percentage point rise year-over-year, some $420.7m worth of liabilities guaranteed on behalf of state-owned enterprises (SOEs) pushed the national debt beyond the size of an economy thought to have contracted by up to $2bn as a result of the pandemic.

“The national debt-to-GDP rose to an estimated 100.4 percent, compared to 89.9 percent in the same quarter last year. While extraordinarily elevated because of the contraction in the nominal GDP, the ratios will remain expanded significantly above pre-pandemic levels after the nominal GDP recovers in the near to medium-term,” the Central Bank warns.

Its revelation places The Bahamas in unwanted, and uncharted, territory with a shrunken economy weighed down by a bigger national debt. While the economy is projected to regain much of its former strength and size by year-end 2023, due to the tourism industry’s rebound, the Central Bank is warning that the country’s debt levels and ratios will remain extremely high into the medium term.

Rupert Pinder, the economist who lectures at the University of The Bahamas (UoB), told Tribune Business that the Central Bank report represented an unfortunate vindication of what he had been arguing since last year.

He suggested then that the national debt was getting perilously close to matching the economy’s size, and said yesterday: “This is something I have said over and over again; that we were approaching a 100 percent debt-to-GDP mark.

“This report only gives a confirmation of what I have been saying all along. I don’t know how to say it better than that. We were certainly on track with our earlier estimates in terms of percentage. I think it’s fair to say this points to the enormity of the work that lies ahead; the enormity of the challenge that lies ahead.”

The Minnis administration’s 2020-2021 fourth quarter and full-year fiscal “snapshot”, though, had pegged the Government’s direct debt at 86.3 percent of GDP - a full 10 percentage points below the Central Bank. This was despite the two using very similar debt figures of $9.909bn and $9.935bn. The fiscal “snapshot” gave no ratio for the $10.356bn national debt.

Branville McCartney, the former Democratic National Alliance (DNA) leader, described the 100 percent debt-to-GDP ratio as “very frightening” and said it indicated The Bahamas’ economic and fiscal position is “a little worse than expected”.

“That’s even more reason for the Government to get to work and put certain priorities in place,” he told this newspaper. “We are in crisis, from an economic and financial point of view, to say the least. That’s very daunting for the new government in terms of reorganising and restructuring what needs to be done. It’s a very daunting situation.

“That’s not good news for the Government and, more particularly, it’s not good news for The Bahamas; not good news at all. The question is: How is the Government going to deal with it. The outlook, although we knew it was bad, is a little worse than expected. The Government has got some work to do, I can tell you that.

“It’s very frightening. As a citizen of this country as well, it’s very, very frightening. They’ve got to put some boots on the ground in terms of being very deliberate in how they deal with the financial situation, very deliberate, and getting the best minds together to get us out of this crisis. That’s what we’re in; a financial crisis. Period.”

Rick Lowe, an executive with the Nassau Institute think-tank, told Tribune Business that he had long anticipated The Bahamas’ national debt expanding to match the economy’s size ever since fiscal deficits began to explode in size in the wake of the 2008-2009 global financial crisis when the last Ingraham administration was in office.

“It’s been anticipated, but anticipated for a long time,” Mr Lowe said of the Central Bank’s report. “We anticipated this. It’s just here a little earlier because of Dorian and COVID-19. It’s a challenge for the new government, that’s for sure. We knew it’s a challenge for all of us, but it’s definitely a challenge for the new government to work in.

“It’s one thing that revenues are down, but spending hasn’t stopped and likely had to be increased for the election, so the fiscal position can only be worse. The biggest challenge for this new government is spending, and how they bring that under control.”

And Mr Lowe added: “Will this government be honest enough to admit the country is headed in the wrong direction? Rather than tweaking public policies, they need to do what New Zealand did to turn itself around, with less onerous regulation and lower taxes. Those are two of the primary ones.

“You cannot just keep tweaking, tweaking and, all of a sudden, increase borrowing and load up the public sector with more people. If you don’t expand the economy you are headed for a fall, headed for the cliff. I wish the new government the best of luck because the country needs it.”

Mr Davis, in his initial addresses as prime minister, has pledged that he and his administration will tackle The Bahamas’ woes head-on. He added that there would be “no tinkering at the edges” given the breadth and extent of The Bahamas’ economic, health and fiscal crises, and yesterday said: “The many challenges we face mean we have to put all hands on deck.”

However, another sobering revelation from the Central Bank’s quarterly economic report is that the Government’s foreign currency debt now exceeds $5bn and is close to 50 percent of the total national debt.

“The public sector’s foreign currency debt grew by $352.6m (7.4 percent) to $5.091bn during the second quarter, and by $1.301bn (34.3 percent) relative to the same period last year,” the Central Bank said, in a nod to the fact that more than 90 percent of the Government’s 2020-2021 borrowing was in foreign currency to help prop up the external reserves.

“In comparison to the same quarter of 2020, total foreign currency debt service payments rose by $37.7m (47.6 percent) to $116.3m. Underlying this outturn, government’s debt service payments moved higher by $42.1m (73.4 percent) to $99.6m, as interest charges expanded by $42.8m (84.8 percent) to $93.3m, while amortisation payments fell by $0.6m (9.3 percent) to $6.3m.”

Mr Pinder yesterday reiterated his concerns about the growing pressure rising foreign currency debt will impose on the external reserves, and tourism and foreign direct investment (FDI), to generate sufficient inflows to cover higher repayment costs.

“It tells you again the enormity of the challenge, having to service that debt from our foreign reserves,” he told Tribune Business, adding that the Government has greater flexibility to manage its Bahamian dollar-denominated debt.