The Tribune

• Low GDP cuts just 5% pts off debt ratio in 20 years

• IDB: Deficits add 30% pts to make ‘sharp contrast’

• Exposes why Gov’t pushing for rapid deficits end

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Weak economic growth has been overwhelmed by the six-fold greater impact of surging fiscal deficits and failed to keep The Bahamas’ debt ratios in check, a multilateral lender is asserting.

The Inter-American Development Bank (IDB), in its latest Caribbean quarterly bulletin focusing on the region’s debt issues, unveiled an analysis which showed the average 1 percent annual economic growth rate The Bahamas has achieved this century has only been able to shave five percentage points off the country’s debt-to-GDP ratio.

In contrast, the Government’s recurring primary deficits, which measure by how much its total non-interest spending exceeds revenue income, have had six times’ greater impact by adding 30 percentage points to the Bahamian debt-to-GDP ratio over the past 20 years.

The “cost of debt”, meaning interest payments made to lenders to service the principal amount, was said by the IDB to have added a further 41 percentage points to the debt-to-GDP ratio during the past two decades. The data explains why the Davis administration is so urgently, and rapidly, seeking to eliminate the long-standing annual deficit by generating a fiscal surplus in its 2024-2025 Budget year.

The Bahamas’ debt-to-GDP ratio, which measures the size of the national debt compared to that of the economy and its output, started to accelerate upwards when the 2008-2009 financial crisis struck, and the IDB identified the principal culprits as weak economic growth and persistently elevated fiscal deficits.

“In terms of (real) GDP growth, in line with the trend of other high-income Caribbean countries, The Bahamas experienced a deceleration of economic growth from 2009 onward - from 2.5 percent in the 1990s to around 1 percent in the 2000s and 2010s,” the IDB report said, acknowledging that losses and damage caused by major hurricanes was a key factor.

“At the same time, revenues underperformed, and current expenditures have been downwardly sticky. These persistent deficits significantly increased the country’s vulnerability to unexpected shocks, as the COVID-19 pandemic of 2020 demonstrated,” it added.

“Net debt-increasing flows are large and are composed of two main drivers - the cost of debt, which has added 40 percentage points to the (debt-to-GDP) ratio since 2004 followed by the primary balance, which has added 30 percentage points to the ratio over the same period.

“The net debt-reducing flows, on the other hand, which are the real growth rate of GDP and the inflation rate, are low - as expected in the case of inflation but not in the case of GDP - and have only reduced the ratio by 11 percentage points during the last 20 years.”

Delving further into the Government’s primary fiscal balance, which strips out interest payments in measuring by how much spending on salaries, rents, goods and services exceeds tax revenues, the IDB described the consistent annual ‘red ink’ as “a debt-creating flow”.

“The primary balance has registered a 2.3 percent of GDP deficit on average over the period [last 20 years], whereas the required primary surplus hovered around 0.7 percent of GDP on average,” the report said. Thus the average annual difference between the Government’s primary balance performance, and where it needs to be, is some 3 percent of GDP - a sum equivalent at present to around $435m.

“Among the reasons that explain this difference between the actual primary balance from the debt-stabilising one are subdued economic growth that exacerbates revenue under-performance; increasing public spending on goods and services and on transfers and subsidies (particularly to state-owned enterprises); the increasing incidence of natural disasters with four major hurricanes in the last eight years; and the COVID-19 pandemic,” the IDB said.

And, with interest (debt servicing) costs adding 41 percentage points to The Bahamas’ GDP ratio over the past two decades, the IDB noted how rates have increased since COVID due to in part to the battle developed country central banks are waging to bring down inflation.

However, the report also noted that “increasing financing needs have increased risk premia” post-COVID, especially for so-called emerging markets such as The Bahamas, with investors and lenders demanding greater compensation through higher interest coupons for the perceived extra risk these countries present.

And, by comparison, the IDB said: “Low growth rates in The Bahamas over the last 20 years did little to reduce the debt-to-GDP ratio. Specifically, the 20-year cumulative effect of the real GDP growth rate on the debt-to-GDP ratio is a reduction of five percentage points, in sharp contrast to the 30 percentage points added by persistent primary deficits and the 41 percentage points added by interest rates.

“Many reasons explain the low growth rates of Bahamian GDP, the most important being vulnerability to natural disasters, increasing debt levels and structural factors (human capital, the business environment, and institutions).

“On the other hand, inflation - measured by the GDP deflator - accounts for a cumulative reduction of six percentage points. While inflation most often contributes to reductions in the debt-to-GDP ratio, in the case of The Bahamas, this contribution has sometimes been positive, as the GDP deflator has shown deflation in some years.”

The IDB’s findings show why the Davis administration is so keen to finally eliminate the Government’s annual GFS deficit, and generate an overall Budget surplus in just over 18 months’ time at end-June 2025, as this will eradicate arguably the key driver of the $11.53bn national debt.

It has unveiled an ambitious target to slash the 2022-2023 fiscal year’s $533m deficit by 75.4 percent, or three-quarters, year-over-year to $131.1m or 0.9 percent of GDP to bring the Government within striking range of the following year’s surplus.

The Davis administration has continued to voice confidence that it will hit its targets despite the International Monetary Fund (IMF) recently forecasting that this year’s fiscal deficit is likely to come in almost three times’ higher than the Government’s own prediction at around $379m or 2.6 percent of GDP.

“The current budget expectation is that revenues will increase 14% percent above those in the revised budget for fiscal year 2022-2023, equivalent to two additional percentage points of GDP in tax revenue in a single year,” the IDB report said, “and that total expenditures will continue a downward trend but recurrent expenditure will increase by 0.4 percent of GDP. This implies a primary fiscal surplus rising from $39m to $486m (3.3 percent of GDP).”

The Bahamian economy’s post-COVID reflation, and increased growth, has helped hold the debt-to-GDP ratio in check and lower it from 100 percent at end-June 2021 - a figure that meant the Government’s debt was equal to the size of the economy. However, overall debt levels have continued to increase, albeit at a much slower rate than during COVID-19.

“With the recovery in the GDP estimates, the ratio of the direct charge to GDP decreased by an estimated 5.5 percentage points on a yearly basis to 80.4 percent at September-end. In addition, the national debt-to-GDP declined to an estimated 80.1 percent compared to 89.1 percent in the third quarter of 2022,” the Central Bank said in its latest quarterly economic review.