The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is poised to beat its full-year $858.6m deficit target by a wide margin after incurring just 28 percent of that sum during the 2021-2022 first half, it was revealed yesterday.

Michael Halkitis, minister of economic affairs, hailed the fiscal performance for the six-months to end December 2021 as the deficit - which measures by how much the Government’s spending exceeds its revenues - fell by $467.2m or 63.5 percent year-over-year, dropping from $736m to $290m due to the re-opening economy.

However, fiscal analysts warned the Government against “putting too much faith” in the first half numbers becoming a trend given the multiple risks to The Bahamas’ near-term economic and fiscal outlook posed by COVID-19, rising inflation and anticipated US interest rate hikes.

James Smith, head of the Davis administration’s debt advisory committee, told Tribune Business that the seemingly “impressive” 2021-2022 first-half numbers “are not a basis for optimism” until the possibility of further COVID case surges and new variants starts to recede.

He warned against the Government becoming complacent over the six-month figures, and “easing off expenditure restraints” prematurely, given the pandemic’s ability to resurface and strike again when it was least expected.

And Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told this newspaper he could not “hang my hat” on the six months to end-December 2021 as an indicator of future performance given that the Government has yet to complete the switch to accrual-based accounting.

While Mr Halkitis yesterday pledged that the Government is committed to seeing this transition through, Mr Bowe said The Bahamas’ financial reporting “has not caught up to the 21st century” because it still relies heavily on cash-based accounting that fails to catch all liabilities. As a result, the Fidelity chief said it was impossible to place too much reliance on the first half numbers.

The Government’s 2021-2022 fiscal year first half was also up against weak prior year comparatives, given that the last six months of 2020 were disrupted by COVID-19-related lockdowns and related restrictions that depressed tourism and overall economic activity, and which greatly impacted its revenue collections.

And the Davis administration, which has largely maintained the fiscal projections developed by its predecessor, has conceded that the 2021-2022 revenue forecasts are conservative given the uncertainties related to the pandemic and its economic impact - factors which mean the first-half revenue performance comes as little surprise.

The Government’s income was $92m ahead of projections for the 2021-2022 first quarter, which was largely overseen by the former Minnis administration, and Mr Halkitis said this outperformance had increased by a further $40m in the three months to end-December - aided by a $24.5m dividend payout received on its 49 percent stake in the Bahamas Telecommunications Company (BTC).

“I would like to foreshadow this report,” he added in reference to yesterday’s release of the 2022-2022 fiscal snapshot, “by saying that our performance to-date and our outlook are positive. The report will reveal that preliminary estimates for the first six months show revenues have outperformed projections by approximately $162m.”

Mr Halkitis added that the Government’s total first-half revenues, at $1.137bn, represented a $465m year-over-year increase driven by improving hotel occupancies, tourism arrivals numbers and associated spending. “The mid-term deficit, the deficit at the half-year, was estimated to be at $290m, a $467m decrease from the deficit of $736m in the same period last year,” he said.

The deficit slash was driven entirely by the revenue increase, as the Government’s total spending barely contracted, dropping by just $1.4m to $1.406bn at the fiscal year’s mid-way point. However, the report indicates the Davis administration could significantly slash the projected full-year 2021-2022 deficit target if present trends hold - something that will heavily depend on COVID-19.

“Preliminary data on central Government’s fiscal performance for the first six months of fiscal year 2021-2022 indicate a deficit of $269m, $467.2m (63.5 percent) lower than the same period of the year prior and 28.3 percent of the budget target,” the six-month fiscal report said.

“Total revenue settled at $1.137bn, advancing $465.8m (69.4 percent) over the prior year and 50.6 percent of the Budget target. Tax receipts widened by $402.6m (70.7 percent) to settle at $972.1m and 50.5 percent of the Budget.

“During the period, VAT aggregated $576.5m (68.2 percent of budget). Improvements were also noted in taxes on property of $36.8m (23.2 percent of budget); excise taxes of $40.4m (17.1 percent of budget); gaming taxes of $21.4m (39.5 percent of budget); departure taxes at $26.5m (27.9 percent of budget), reflecting increased economic activity,” it added.

“Non-tax performance firmed by $63m (61.8 percent) to $164.9m, supported by improvements in Immigration fee collections of $66.1m, a $33.2m (100.8 percent) increase period-over-period as tourist travel increased.”

Although the significant year-over-year percentage increases were anticipated, given that tourism did not re-open until November 2020 and did so only gradually, it is still rare for the Government to gain 50 percent of its annual revenue in the first half of a fiscal year.

Typically, the Public Treasury collects a percentage in the low 40s during the first six months, as it did in 2019-2020 when just 42 percent of the full-year target came in. The Government has historically gained most of its revenues in the fiscal year’s third quarter as this coincides with tourism’s winter peak, and Business Licence and real property tax collections.

The 2021-2022 fiscal first-half report also revealed that revenue performance for the six months to end-December had outpaced that for the same pre-COVID period in 2019.

“Government fiscal performance during the second quarter 2021-2022 indicates continued levels of strong revenue collections with total revenues for the first six months exceeding pre-Dorian, pre-COVID-19 levels,” it said.

This year’s first-half revenues, at $1.137bn, exceeded the $1.104bn collected during the same period in 2019-2020, although the report did not mention that the latter figure would have been impacted by Dorian taking Abaco and Grand Bahama’s economy off-line.

However, observers warned the Government against becoming carried away - not least because the Government’s direct debt increased by a further $395.6m during that period to hit $10.318bn at year-end 2021. The latter figure is equivalent to 96.4 percent of Bahamian economic output, making its liabilities almost equal to the economy’s size.

And, when debt guaranteed on behalf of government agencies and state-owned enterprises (SOEs) is factored in, the picture becomes even more strained. “The debt stock of the public sector aggregated an estimated $11.636bn at end-December 2021, a gain of $207.6m over end-September 2021 and $822.4m over end-December 2021,” the Government said.

That means The Bahamas’ total debt stock is more than $1bn greater than the economy’s size. Meanwhile Mr Smith, a former finance minister and Central Bank governor, said the 2021-2022 first half could not be used to predict even the short-term fiscal outlook.

“We still don’t know what will happen with the COVID situation,” he told Tribune Business. “When you think you are out of it, there’s a new variant and that sort of thing, and a lot of the recovery in The Bahamas and elsewhere depends on getting a handle on that.

“Any revenue increase is good, but it’s not a basis for optimism until we have more certainty around the health sector. The impact of COVID can happen so quickly and devastatingly if you don’t have the health. It can close down your airport, travel advisories.

“It’s good to watch the numbers but we don’t want to put too much faith in that as an indicator of what will happen in the next quarter. It could result in you making decisions that you might not otherwise make. If you assume that you are on an upward trajectory you might ease off expenditure restraints,” Mr Smith continued.

“Be thankful for good news, but we have to be constantly cautious until we’re out of this health threat. We’re not just there yet.” Mr Halkitis himself yesterday acknowledged that The Bahamas was “not out of the woods yet”, and pledged that the Government would be “continue to be prudent, look at ways to contain expenditure, eliminate waste and improve the fiscal position”.

However, Mr Bowe echoed Mr Smith in saying of the 2021-2022 first half performance, and the possibility it could beat deficit forecasts by a nine-figure sum: “Until we’ve gotten to accrual-based accounting all of that is a mirage unfortunately.....

“We have to get away from getting too excited about the quarterly fiscal performance until we get to accrual-based accounting. The fiscal year’s third quarter is usually very productive because that is when a lot of money comes into The Bahamas’ government; Business Licence and real property tax, but April to June, the fourth quarter, is usually a dry period.

“You have ebbs and flows, and have to be careful not to get ahead of ourselves because our financial reporting has not caught up to 21st century reporting... We need to get to where we are confident the information being presented is indicative of future performance.”

The Government’s continued reliance on largely cash-based system means it only measures, or accounts for, expenditure when it is actually incurred. It does not account for future liabilities and spending commitments that have yet to be activated, as an accrual-based system would do, and thus many believe the present structure does not give a totally accurate picture.