The Tribune

In the first article we assessed some of the consequences from a high, and growing, national debt. With The Bahamas’ debt-to-GDP ratio expected to remain above 80 percent over the mid-term at least, the question that dominates is the extent to which this is sustainable. The International Monetary Fund (IMF) recently concluded that it is. We are, however, aware of the Fiscal Responsibility Act’s requirements to lower this to 50 percent - the Government now targeting the 2030-2031 fiscal year to achieve this. You might ask, if the debt is sustainable, why the IMF arguing for new and increased taxes, and other reforms geared towards reducing the cost of government debt. Based on the current fiscal arrangements, The Bahamas’ growth trajectory and taking into account all the debt implications, it is unsustainable. However, the IMF anticipates changes to underlying fiscal arrangements and reforms to support government projections.

High versus sustainable debt

For decades, the IMF promoted the idea that a debt-to-GDP ratio of 60 percent, and annual fiscal deficit equal to 3 percent of economic output, were optimal levels for a country. This argument rests on the theory that acquiring debt generally has a positive impact on GDP. In other words, borrowing leads to growth, all things being equal. According to the IMF, up to approximately 30 percent of GDP, debt has a positive impact on growth. Beyond this 30 percent mark the positive effect diminishes with each additional dollar of debt until the 56 percent debt-to-GDP threshold is reached. Here, every additional dollar of debt has a negative impact on GDP.

Based on this argument, The Bahamas is well within the red zone, and borrowing is largely a negative adventure. How do we reconcile this with empirical evidence that suggests something completely different? Recent data shows that average general government debt in advanced economies is 122 percent of GDP compared to 64 percent for emerging markets.

For many advanced economies, the level of debt is staggeringly high. For those same economies, growth rates are comparatively higher than those enjoyed by The Bahamas and the wider Caribbean; development is in greater evidence; and the challenges we face to generate growth appears not to be shared by them. A recent graph captured countries with the highest levels of debt. Japan at 257 percent; Italy at 159 percent; the US at 130 percent; Singapore at 130 percent; France at 116 percent; Spain at 120 percent; UK at 117 percent; Canada at 110 percent; Brazil at 91 percent. And, in our region, Jamaica at 98 percent; The Bahamas at 103 percent (now lower); and Barbados at 138 percent.

A few important issues immediately come to the fore. Why are these countries with high debt burdens thriving when The Bahamas and other small island states are not? Is it appropriate to limit lack of growth to the incidence of debt? What other factors may be driving the inertia, in our case, and the vibrancy in the case of developed nations?

There is evidence that even the IMF is rethinking the benchmarks above. The performance of countries with debt ratios well beyond 60 percent of GDP gives us reason to pause and rethink not only outcomes but also causes, the effect of high debt and the existence and impact of other factors that contribute to national economic output. In fact, I propose that performance is multi-dimensional and complex, with multiple factors affecting actual outcomes. Having considered these other countries, The Bahamas unfortunately falls in the grouping where the effects of high debt seem to have greater adverse implications for growth.

Objectively assessed, the high debt level faced by The Bahamas is very challenging. This is normally the case for many small developing states. However, I believe it is important that we disabuse ourselves of the idea that it is the incidence of high debt alone which hurts growth. While instinctively this may seem like an accurate and elegant proposition, evidence suggests there is much more to the relationship of high debt and economic performance.

Ultimately, it is a matter of sustainability and not simply the amount. Let us ask ourselves two questions. First: “What are the consequences of high and growing national debt on the growth and development of the Bahamian economy?” If we were to base our answer on the performance of developed states, it would be reasonable to conclude that The Bahamas could fare well and, in fact, realise vibrant growth just as some of these states do. On the other hand, if the second question is styled: “What are the consequences of unsustainable and growing national debt on the growth and development of the Bahamian economy?”, the responses would take on a very different perspective. We would not be so concerned with the level of debt in absolute terms but, rather, asking at what level is debt sustainable for The Bahamas?

The answer to this is clearly not $10bn. Therefore, as the question currently stands, it is without doubt that the country will not grow and develop with debt at current levels, and which is expected to only increase in the near-term. This reframing, however, bring us closer to a new realisation and starts to set us on the path of deconstructing the fundamentals of the debt problem faced by The Bahamas.

The reframing also leads us to another important point. Debt-to-GDP at 60 percent is but a benchmark and, where it signals sustainability, it might be of great value. But where it is either above or below an objective, sustainable level, then it might very well be counter-productive to growth and development. An economy that is not growing, with debt at or below 60 percent ratio, is likely not investing enough. An economy that is unable to afford debt but shoots towards the upper limit of this “safe threshold” is likely to face peril. What is the main point here? We should shift our focus to measures that signal optimal performance rather than absolute benchmarks.

If the IMF position holds, then The Bahamas has a significant amount of work to do to claw itself back to a place where deficit financing is growth generating. The US, our nearest neighbour and largest trading partner, grows consistently with a massive debt-to-GDP. In 2021, the US federal debt was $29.6trn - up $7trn from 2019 - and is projected to grow by over 3 percent. On the other hand, The Bahamas is expected to rapidly revert to its average economic growth of below 2 percent in the near to medium-term.

Even before experiencing current debt levels, The Bahamas did not demonstrate the ability to secure robust growth. It is unlikely to do otherwise in the face of downward pressures exerted by the level of debt on the books. This is one of the major consequences of having unsustainable debt, and the main reason I conclude that the current situation is not sustainable. The historical anemic economic growth must be reversed, but the ability to do so has become more difficult and is worsening. I have consistently suggested that we become more aggressive about growing the economy, take more chances and make bolder moves. The Bahamas should not settle for the current economic construct but must work to expand and enhance what currently exists, diversify and grow.

The Caribbean Context

Let us contextualise this issue further. According to a report by the Inter-American Development Bank (IDB), Economic institutions for a resilient Caribbean: “The history of public debt in Caribbean countries is striking. Several countries in the region have been among the most indebted in the world (measured in terms of the public debt-to-GDP ratio) since gaining independence beginning in the 1960s. While economic and debt crises have been common throughout Latin America and the Caribbean over the past century, particularly when compared to other regions, the frequency, depth and duration of such episodes for Caribbean countries makes it an outlier relative to the rest of the world.

“High debt levels within a context of weak public financial management processes have held back growth, incomes and living standards for millions of people…developing countries also tend to suffer from large and persistent public and social infrastructure deficits that act as brakes on private sector investment and productivity growth. Many of these deficits must be addressed with prudent public investment and expenditure, generally requiring governments to borrow both domestically and from abroad.

“So why have Caribbean countries been so indebted and crisis prone? There are many reasons for these outcomes. It is clear that initial conditions mattered for many of these countries, as the group includes some of the youngest nation-states in the hemisphere, and many were severely lacking in terms of financial and technical resources after gaining independence, amplifying existing vulnerabilities to economic and other shocks. Caribbean countries are small, open and, in most cases, island economies, making them particularly dependent on external demand and capital flows, as well as susceptible to related shocks from abroad. Their small size and limited economies of scale have led to narrow production bases, and in some cases outsized sectors - for example, commodity exports or tourism - that further amplify vulnerabilities to swings in external demand. Similarly, their geography makes them amongst the most vulnerable on earth to weather-related shocks, as well as the implications of climate change.”

In my opinion, the takeaways from the above closely match the realities for The Bahamas. The effects of economic crises and shocks for the Caribbean last longer than in rest of the world. The global financial crisis of 2008 is a useful reference point. While the world recovered, The Bahamas’ economic performance still lagged in many important ways.

Often it is the inadequacy of public financial management that creates the impediment to growth, not the debt in and of itself. Currently, The Bahamas’ public financial managhement systems are weaker than desired. There are great needs for development that necessitate borrowing. Development needs in the country are wide ranging and currently beyond the country’s financial capacity.

And, finally, the circumstances of these countries are more significant due to lack of diversification and vulnerabilities to climate change. The Bahamas is highly dependent on two industries with tourism accounting for over 60 percent of GDP. Therefore, while it will be challenging for The Bahamas to secure economic growth, it is important to pay attention to not just the debt but also effective management of the country’s economics.

NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. He specialises in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.