The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) last night blew a hole in the Government’s 2023-2024 Budget projections by warning the fiscal deficit will likely be almost three times’ higher than forecast.

The Washington D.C. based Fund, unveiling its statement on the annual Article IV consultation with The Bahamas, estimated that the current fiscal year’s deficit will be “considerably larger than that expected in the Budget” at a sum equal to 2.6 percent of gross domestic product (GDP).

This is almost triple the Davis administration’s forecast of a deficit equivalent to 0.9 percent of GDP or total Bahamian economic output. The IMF’s prediction, if accurate, would mean that the deficit - which measures by how much government spending exceeds its revenue income - would balloon to around $378.73m compared to the Government’s $131.1m forecast.

“While the objectives of the authorities’ medium-term fiscal plan are laudable, staff assesses that more policy measures will be needed to achieve this targeted adjustment,” the IMF said of the Davis administration’s fiscal consolidation targets.

“In particular, based on current policies, the fiscal deficit is expected to be 2.6 percent of GDP in 2023-2024, considerably larger than that expected in the Budget. Over the medium-term, debt would fall to 78 percent of GDP by 2027-2028 but gross financing needs would remain high for the next several years at around 20 percent of GDP.

“Even though, under this path, debt is judged to be sustainable, a faster reduction in debt would be valuable in lessening the risk of sovereign stress and, in so doing, would be rewarded through a lower interest burden for the public debt.”

Time will tell who is correct - the IMF or the Government - given that there is a $247.6m difference between their respective fiscal deficit estimates for the 2023-2024 fiscal year. However, if the Fund is proven right, it will mean that the Government’s ambitions of generating a fiscal surplus of $109.2m in the 2024-2025 Budget year will likely become less achievable and this goal will have to be pushed back.

The Government will also have to undertake significantly more borrowing than planned to cover this year’s fiscal deficit if the IMF’s predicted outcome comes true, resulting in a further increase to the $12.556bn total public sector debt that was in existence at end-September 2023. While new revenue sources, such as carbon credits, are being targeted, these are unlikely to come to fruition in 2023-2024.

And the IMF’s statement that “more policy measures will be needed to achieve” the Government’s fiscal consolidation targets signals the Fund’s belief that further austerity measures may be required. It does not detail these, but among the possible options are new and/or increased taxes plus spending cuts - measures the Davis administration has thus far rejected in favour of The Bahamas’ growing its way back to health.

The Fund, though, called for tax reforms that both raise revenues and make the Bahamian system more “progressive” by turning away from the regressive consumption-based levies that have dominated for decades, such as VAT and Customs duties. Instead, it urged the implementation of a corporate income tax - something the Government consulted on earlier this year via the release of a ‘green paper’.

“Beyond reducing the fiscal deficit, a set of comprehensive tax reforms would be valuable in both raising revenues and improving progressivity. In particular, the implementation of the OECD [15 percent] global minimum corporate tax by trading partners provides an opportunity for The Bahamas to introduce a well-designed corporate income tax accompanied by a personal income tax on the highest earners,” it added.

“There is also scope to significantly rationalise existing preferences, loopholes and exemptions in the tax system.” The call for an income tax on high-earners, which the IMF has made before, is designed to prevent businesses evading/avoiding corporate income tax by paying out profits to their owners in salaries.

Still, acknowledging The Bahamas’ progress to-date, the IMF statement said of the Government’s fiscal ambitions: “A strong cyclical recovery in revenues and a wind down of pandemic-related spending have reduced the fiscal deficit to 4.1 percent of GDP in fiscal year 2022-2023, bringing the central government debt down to 84 percent of GDP at end-June 2023.

“The authorities intend to reduce the deficit to 0.9 percent of GDP in 2023-2024, reaching an overall surplus of 2.1 percent of GDP by fiscal year 2026-2027. The bulk of this adjustment would come from 3.5 percent of GDP increase in revenue collections, largely from improvements in administration.

“In addition, 0.5 percent of GDP in additional capital spending is expected to be funded from lower recurrent spending. This fiscal path is expected by the authorities to bring public debt to 68 percent of GDP by fiscal year 2026-2027.”

However, the IMF also urged greater efficiency in government spending and better financial management at the loss-making State-Owned Enterprises (SOEs) that collectively account for a projected $455.229m in Bahamian taxpayer subsidies during the current 2023-2024 fiscal year.

“Efficiency gains in spending programmes and improvements in the financial management of state-owned enterprises will be needed to offset some of the budgetary pressures arising from an aging population,” the IMF said. 

“To improve longer-run growth and strengthen social inclusion, there will be a need to reorient spending priorities toward education, healthcare, targeted social transfers and infrastructure - particularly those which will increase resilience to the effects of climate change.”

And the IMF added: “Better debt management would help reduce the vulnerabilities created by The Bahamas’ high debt rollover needs. Recent reforms to strengthen the primary and secondary debt markets should help increase the liquidity of government bonds and incentivise an increase in domestic holdings of longer duration securities.

“In particular, the Central Bank continues to facilitate the issuance of Treasury Bills by competitive auction and intends to extend this across domestic government security maturities. Further reforms to bolster these efforts can include improving investor relations and increase the transparency and predictability of sovereign issuance plans.”