The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must move away from its 50 percent debt-to-GDP target and instead prioritise achieving economic growth rates “north of 3.5 percent” to get back on track, a governance reformer is arguing.

Hubert Edwards, the Organisation for Responsible Governance’s (ORG) economic development committee head, told Tribune Business that The Bahamas should adjust the debt-to-GDP ratio it is targeting by 2030-2031 upwards to 60 percent as the present figure is “unrealistic” given the present economic circumstances.

Instead, he argued that this nation needs to focus on expanding and diversifying its economy as the 1.8 percent gross domestic product (GDP) growth projected by Standard & Poor’s (S&P) for The Bahamas in 2024 simply “does not cut it” when it comes to making the necessary inroads into the $11.5bn-plus national debt.

“The Government have indicated that by 2030 the debt-to-GDP ratio will be 50 percent,” Mr Edwards told this newspaper. “I always thought that was extremely ambitious having regard for all the things we’re dealing with now. I don’t see any over-arching reason for us to necessarily rush to achieve a 50 percent debt-to-GDP target.

“Having said that, that the only thing that the Government can be held accountable to by the rating agencies. I would suggest again that, with some of the challenges being experienced, that number being raised to 60 percent, which would take the pressure off the Government to achieve that and shift the focus towards growing the economy.”

The 50 percent debt-to-GDP target was among the key fiscal benchmarks to achieve in the 2018 Fiscal Responsibility Act, which was subsequently repealed by the Davis administration and amalgamated with the Public Financial Management Act 2023.

The timeline for achieving it was pushed back to 2030-2031 by the former Minnis administration as a result of Hurricane Dorian and then COVID-19, which together combined to produce a debt blow-out that accelerated an already-deteriorating fiscal situation. The Davis administration, though, reaffirmed the 2030-2031 target date and 50 percent ratio.

Mr Edwards, though, argued that “given what we know now and a better understanding of how our creditworthiness is shaping up, the Government needs to be in position to shift some energy to finding avenues and means for growth as opposed to being tied down to achieving a target which, all things considered, is highly unrealistic at this point in time.

“We have to accept, understand and appreciate where we are and the overall impact debt is going to have on decision-making going forward,” he said. “Anything that makes that process more difficult is not going to inure to the benefit of the country at this time. We have to look at where we are, accept where we are, look at some of the realities for what they are, and have conversations on the path to fix some of the things highlighted by S&P and Moody’s.”

Calling for reforms to state-owned enterprises (SOEs), the ease of doing business and the public finances, along with multiple other measures, Mr Edwards added: “The biggest risk we face now, which has been highlighted in the [S&P] report and discussed many times, is the fact The Bahamas is reverting to limited growth rates; 1.8 percent does not cut it.

“We need greater growth rates north of 3.5 percent to make some serious dents.” The ORG economic development chief said higher economic growth rates will drive more commercial activity and lead to greater government revenues, which could be key given that the Government has now likely “maxed out its options for raising revenues” without introducing new and/or increased taxes.

He added that it was clear from the S&P report that, despite tourism’s performance getting back to and surpassing pre-COVID levels, this and the industry by itself will not be sufficient to drive the economic growth that The Bahamas requires to both provide jobs for its citizens and reduce the national debt.

And Mr Edwards also agreed that S&P’s forecast that the 2023-2024 fiscal deficit will come in three times’ higher than the Government’s own prediction, standing at 3.2 percent of GDP as opposed to the latter’s 0.9 percent, is “an important point of reflection”.

“The rating agency is obviously not satisfied the target set by the Government is going to be achieved,” he said. “I don’t, though, believe we need to get to 0.9 percent in terms of the deficit. We certainly don’t need to go all that deep. A slightly higher amount would be fine, but S&P indicated we would not even get to 1 percent. But, if we look at the report in its totality, it doesn’t seem S&P are too much bothered by a 2-3 percent deficit. “

However, Mr Edwards acknowledged that the $131m deficit forecast for 2023-2024 is designed to set the stage for the Government to achieve a Budget surplus the following fiscal year. As a result, failing to achieve that goal could “cause some other things to fall behind, but shouldn’t be fatal”.

S&P, in its report, warned that the Government will likely struggle to meet its debt reduction targets “without material new revenues, significant cost-cutting or well above average economic growth”.

The rating agency, in a report that made no change to this nation’s creditworthiness, said the debt blow-out produced by Hurricane Dorian and the COVID pandemic means the Government’s “previous fiscal consolidation plans” are insufficient to achieve its fiscal goals unless economic growth is strong enough to avoid the imposition of further austerity measures.

“We believe the country’s record of slow progress in reforming public finances and key economic sectors has weakened its financial profile over the long-term and hurt its economic performance,” S&P said of The Bahamas. “The Bahamas has faced two large negative shocks (Hurricane Dorian in 2019 and the pandemic in 2020), resulting in a significant rise in government debt and testing the Government’s resolve to put the nation’s finances on a sustainable path.

“The rapid increase in debt in recent years means the Government’s previous fiscal consolidation plans will likely be insufficient to meet its debt targets without material new revenues, significant cost cutting or economic growth well above historical averages. Furthermore, the country remains vulnerable to environmental risks.”

Joining Moody’s and the Inter-American Development Bank (IDB) in warning that The Bahamas faces “elevated” external financing risks, with the Government requiring $2.1bn during the present 2023-2024 fiscal year to refinance maturing debt, S&P nevertheless hinted it was optimistic that it will source the necessary funding to cover the $300m foreign currency bond coming due for repayment in January 2024.

However, it then warned that “material spending cuts will be more difficult to implement if they become necessary”, pointing to the “drain” imposed by subsidies to loss-making state-owned enterprises (SOEs) which consume 15 percent of the Government’s total annual expenditure.