The Tribune

IN this segment, we will explore The Bahamas’ current standing with the International Monetary Fund (IMF), who they are and why they are important. When the IMF comes knocking, it is not always a good way to start the day. But does this mean that the Bahamian government is out of time to meet its debt obligations, control spending and reduce borrowing? There has been talk of an income tax, currency devaluation and other harbingers of financial doom. While this is an important angle to consider, we should also discuss solutions such as a proportionate tax system, decreasing the cost of living, realistic debt management and using the National Development Plan (NDP) to diversify the economy. After all, one of the most important solutions is to achieve real economic growth.

Who is the IMF and what do they do?

The IMF was formed in 1945 under the Bretton Woods monetary agreement. This agreement was meant to set-up an international monetary system that ensured exchange rate stability, prevent competitive devaluations and promote economic growth. To ensure that countries worked together to achieve this, the IMF was established. But the system of currency convertibility that emerged from Bretton Woods lasted until 1971. Today, the IMF is widely known for lending money to countries that are in the thick of financial troubles. Like any lending institution, it pays close attention to how its money is being used and ultimately ensures its return on investments is secured. The IMF is now a target for those that scrutinise the fund’s lending policies, conditions linked to politics and moral hazard violations.

When does the IMF come knocking?

The IMF lends money to nurture the economies of member countries with balance of payments problems. instead of lending to fund individual projects. But this comes with strings attached. So, the IMF comes knocking when the criteria of lending conditions are not being met or fulfilled within a timely manner. Some member countries, particularly those vulnerable groups, are not able to meet payments because of economic and financial constraints. An IMF bail-out usually involves high interest rates and the imposition of restrictions, such as government spending cuts, to ensure its investments are secured. But many weak and vulnerable countries cannot satisfy this, and are forced to hike taxes, create new taxes, shore up their foreign reserves and, ultimately, cut public spending and reduce the size of government - all of which acts as a drag on economic growth. The focus on vulnerable economies is important because it is often difficult for these countries to pay back what they have borrowed. Debt has often ballooned, and government borrowing continues to expand. The financial imprudence of vulnerable economies does not necessarily keep the IMF away from lending a hand. This may be termed a ‘moral hazard’, since it has first-hand knowledge that these countries are already struggling. Even if a government has great plans to recover, seek favourable terms on a loan, promise to control spending and slowdown on government borrowing, a combination of these steps is not always enough for countries that face deeper economic problems.

Ideally, in a free market economy, everyone plays a part in the road to recovery from financial disruptions. Bankruptcy and/or government bail-outs are not an easy pill to swallow, but the idea is to steer the economy back on track without the need for excessive borrowing. On the downside, this may take several years to accomplish. However, vulnerable economies often do not have the time or resources for this cycle to complete since there is little to no diversification. With limited sources contributing to the direct credit on the balance of payments sheet, these economies are strapped and under pressure. This is when the IMF makes its move, offering relief in the form of a bail-out or request for emergency financial assistance (RFI).

Snapshot of The Bahamas’ finances

Some vulnerable economies are small island developing states (SIDS), which are countries that depend heavily on foreign direct investment (FDI) to diversify their economies. Most of these countries are also burdened with frequent natural disasters such as hurricanes, which create a significant dent in government revenue and spending. It does not help that some of these countries fail to practice financial prudence in their spending and borrowing habits. For instance, The Bahamas’ balance of payments direct credit flow is primarily weighted on FDI and tourism. With no diversification outside of this, meeting its demand for foreign currency is difficult and the country relies on borrowed funds to shore this up. Bosltering foreign reserves is important to ensure that the currency value remains pegged to the US dollar. But the problem is even worse when there is not much that can be done. We have had years to figure out ways to diversify the economy to ensure profitable revenue for businesses, become competitive and expand beyond tourism and financial services. Yet, as of today, The Bahamas’ national debt is close to the $10.5bn mark and almost equal to gross domestic product (GDP) or the size of the country’s economic output. Included in the Government’s debt obligations is the IMF’s $252 loan, comprising special drawing rights (SDRs), to support The Bahamas’ ongoing COVID-19 response and budgetary operations.

While these figures are alarming, the worst is yet to come if we are not deliberate in the next one to two years. When expenses outweigh revenue, it is hard to find a mix of solutions that will combat a negative financial legacy and new debt. Tax revenue such as VAT, import and export duties, real property tax, motor vehicle tax, gaming tax and others are not enough to pay off $10.5bn in debt. That is because the problem does not lie in what goes in and out of the Public Treasury. There are many countries that have a variety of taxes at high rates, yet economic conditions continue to worsen. But taxes and other short-term solutions are only a good way to pacify the crux of the issue, which remains diversifying the economy enough to grow at higher levels. Diversification helps taxes as revenues are meant to increase as the economy grows. However, under the current tax regime, diversification of the economy could be restricted. Therefore, now would be a good time to look at more direct taxes (corporate/individual income tax esor capital gains tax) that would promote economic growth.

Out of time?

As it stands, the Bahamian government is in a tight spot. In recent headlines, Caribbean economist, Marla Dukharan, continued to predict that The Bahamas will fall into an IMF debt restructuring programme by 2023 or 2024, given the country’s high external debt burden. Another option is that the country suffers a currency devaluation. Ms Dukharan’s predictions may be frowned upon by many, but they are not far off. The reality is many other countries who have borrowed from the IMF have all faced similar realities, such as Jamaica, Mexico and Thailand. The Bahamas’ reputation is put at risk when it does not follow measures pushed by the IMF or other international organisations. For instance, the IMF has already warned the government to “pre-empt” global tax pressures by imposing a corporate income tax. The Bahamas was among 136 countries who, in early October 2021, signed on to international tax reforms that will see a 15 percent minimum global corporate tax rate levied on the largest multinational enterprises. The pressure for a 15 percent corporate income tax must be carefully weighed. While government revenues would increase, and thus help to address the debt issues at hand, the domestic economy will be impacted. On the other hand, the cost of living remains high. It is perceived that, in preparation for an income tax, VAT was reduced to 10 percent, but this is still not enough to offset the impacts ahead. The idea of a corporate income tax is favourable but there are many things that need to be put in place. One of the main things is figuring out how to blend a proportionate tax into a regressive tax system.

A comprehensive solution

The National Development Plan (NDP) offers a comprehensive solution to helping make The Bahamas more competitive. By being more competitive, the nation has more to offer to investors, it spurs growth in the domestic economy, and diversifies the economy beyond tourism and financial services. The answer is never clear, and we do not expect governments to know and do everything. But at least we can expect a commitment from our government to do its very best. Implementing and finalising the working draft of the NDP, and its policies, will help to diversify the economy, appropriately manage public debt and ensure accountability. By sticking with the NDP, the Davis administration has an opportunity to show they are dedicated to meeting the needs of the Bahamian people regardless of unpredictable events.