The Tribune

• Minister: COVID ‘ripped cover off’ decades-old woes

• Exposed low growth, soaring deficits ‘plaguing economy’

• $7.8bn, or two-thirds of debt, incurred in just 13 years

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday warned The Bahamas “has to break free from this cycle” of $500m-plus fiscal deficits and economic growth that has barely averaged 1 percent for the past 30 years.

Michael Halkitis, minister of economic affairs, told the Abaco Business Outlook conference that the COVID-19 pandemic had merely “ripped the covers off, and exposed, the problems that have been plaguing our economy for decades”.

Asserting that The Bahamas’ present economic and fiscal plight must be set in its historical context, he added that the Government’s annual fiscal deficits exploded to an annual average of half-a-billion dollars during the 2008-2009 global financial crisis and have remained elevated ever since.

The huge nine-figure sums by which the Government’s spending exceeded its revenue income triggered a corresponding increase in the pace at which the national debt has climbed to its present $11bn-plus level, with the fiscal fall-out from Hurricane Dorian and COVID simply exacerbating an already-troubled situation.

Mr Halkitis added that the deterioration in The Bahamas’ national finances has largely occurred against a backdrop of anemic economic growth, with the country’s gross domestic product (GDP) expanding by an annual average of just 1.09 percent between 1990 and 2021.

While 2020’s COVID shock may have inflicted a disproportionate impact on the country’s economic growth average over those three decades, The Bahamas had struggled to expand GDP by 2 percent per annum ever since the 2008-2009 recession. Mr Halkitis yesterday warned that low growth, combined with rising fiscal deficits and debt, “is a formula that cannot continue” if The Bahamas is to deliver prosperity and a rising living standard for its citizens.

With the exception of the 1995-1996 and 2007-2008 fiscal years, when “slight recurrent surpluses” were generated, the minister added that “every year the Government of The Bahamas has run Budget deficits and that’s going back to the 1970s.

Between 2001 to 2008, Mr Halkitis said these deficits had averaged $164m per annum during a period covering both FNM and PLP administrations. But the onset of the global financial crisis, and subsequent 2008-2009 recession, triggered a major surge that - with just a few exceptions - has seen the Government suffer huge deficits on an annual basis ever since.

“In the aftermath of the global financial crisis, beginning in 2008, we began to see larger and larger deficits,” the minister added. “From 2008-2009 up to 2022, the deficits have averaged $511m per year every year.” Mr Halkitis said 2010-2011 was only an exception due to the $206m in gross proceeds received from selling the then-51 percent majority stake in the Bahamas Telecommunications Company (BTC), otherwise the deficit would have come in at $580m.

His analysis neglected that the Minnis administration brought the 2018-2019 fiscal deficit in at $215m, following $415m of ‘red ink’ the prior year, which were both below the $511m average. Mr Halkitis, though, said the deficit explosion meant there was a similar impact on The Bahamas national debt.

While the national debt grew by some $1.015bn between 2001 and 2008, since 2009 it has expanded by some $7.8bn. This means that more than two-thirds of The Bahamas’ national debt was incurred within the last 13 years based on the $11.2bn attained at end-June 2022.

Mr Halkitis, meanwhile, said the soaring deficits and debt had been accompanied by low to no economic growth. “From 1990 to 2021, the Bahamian economy grew by an average of 1.09 percent annually and, of course, we know the rating agencies have delivered a steady diet of credit downgrades throughout that period,” he added.

“I wanted to make the point that, obviously, with low growth - 1.09 percent over a 30-year average - growing deficits, and increasing debt is a formula that cannot continue. In reality, COVID-19 just ripped the covers off and exposed the problems plaguing our economy for decades - low or negative growth, increasing deficits and increasing debt. We have to break free from this cycle.

“We recognise that the situation we find ourselves in has been building for decades, so we recognise we will not right or correct the ship in one Budget cycle.” Mr Halkitis reiterated that the Government’s strategy has four core pillars - economic growth, better revenue administration, the containment of public spending, and finding new revenue sources.

While economic output is still recovering to post-COVID levels, the pace of this rebound is likely to slacken in 2023 and 2024. “Our expectation is that economic growth will moderate going into 2023 and 2024, but we’re working very hard to disprove this projection,” Mr Halkitis said.

As for efforts to control government spending, the minister added: “We have re-established the Central Purchasing Unit, which we expect will help us to realise significant cost savings as we can make purchases across ministries and achieve economies of scale.”

The Ministry of Finance is also “encouraging” state-owned enterprises (SOEs), which in the 2021-2022 fiscal year consumed some $492m in taxpayer subsidies to maintain their operations, “to follow our lead in terms of fiscal management”.

Mr Halkitis said that apart from bringing businesses in the ‘informal’ economy into the formal tax-paying side, the Government’s main focus when it comes to new revenue sources is carbon credits. “We are spending a lot of time exploring opportunities in the carbon markets, and the ability to monetise our country’s status as a carbon sink, particularly with all our Marine Protected Areas,” he added.

“We’ve been doing a lot of work on that, and believe very shortly we will see the fruits of that in terms of money with the work being done.” Mr Halkitis did not give any figures, but said carbon credits are a key part of the Davis administration’s strategy to restore fiscal breathing space.

“We have set some aggressive but achievable targets for revenue growth, deficit reduction and the gradual decline of our debt-to-GDP ratio to more acceptable levels that will restore headroom and hence the ability of the Government to respond to any future shocks,” he added.

“We face many challenges, and the position that has built up over many years will not be solved in one year. It requires consistent, focused attention, and it will receive consistent, focused attention.... We remain committed to do the work that is necessary to move from recovery to not only growth, but balanced development and shared prosperity.”