The Tribune

• Top finance official says VAT up 16- 17% in December

• Expects first half to ‘translate into strong peak revenue’

• Gov’ts $500m loan ‘cannot refinance’ pre-existing debt

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Government’s top finance official yesterday assured he has “no reason to panic yet” over the early 2023-2024 fiscal deficit as VAT revenues for December exceeded the prior year by 16-17 percent.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business the near-$120m deficit for the four months to end- October 2023, equivalent to 91.3 percent of the full-year forecast, did not necessarily signal that the Government will blow its fiscal projections given that “peak revenue season” has just started.

Asserting that VAT and import tariff revenues for the six months to December “bode well” for the Government’s tax and fee income between now and April, he added that the half-year performance “should translate into a strong revenue outturn” over the next two-three months.

Pointing out that the cyclical nature of the Government’s revenues makes it impossible to estimate the full-year Budget outcome on just a few months’ data, Mr Wilson told this newspaper that “we’ll know for sure where we stand after March” - a period that includes peak tour- ism and economic activity; Business Licence fee payments; the bulk of real property taxes; and commercial vehicle licensing month.

The impact from increasing cruise departure fees, implementing tour- ism development and environmental levies, and raising boat registration fees will also now be felt as they kicked-in from New Year’s Day. And the financial secretary argued that VAT and import duty collection during the 2023-2024 fiscal year’s first half shows “the economy is strong”.

The political Opposition earlier this week warned that the Govern- ment “must adjust” its fiscal targets and figures in next month’s mid-year Budget, after the $119.7m deficit for the first four months was almost equal to the $131.1m full-year goal, but Mr Wilson told Tribune Business there is “no concern yet”.

“The first six months of the fiscal year, the only revenue we see.. we don’t see any Business Licence rev- enue, and we see reduced activity for the first three months on real property tax. You’re looking onlyat Customs duty and VAT,” he explained. “That’s a good indicator of what’s happen- ing for the rest of the fiscal period.”

VAT revenues, derived from September filings which included both monthly and quarterly filers, rose 7.5 percent or by $8.8m year-over-year to hit $126.8m for October 2023 as compared to $118m in 2022. And, for the first four months of the 2023-2024 fiscal year, VAT was up by 3.5 percent, growing by $15.6m to strike $464.6m as opposed to $449m.

However, despite the increase, as a percentage of the total full-year forecast the Government collected less VAT during this fiscal year’s first four months as compared to last year - 29.2 percent versus 31.8 percent.

VAT, which is the Government’s main revenue source, accounting for almost 48 percent or nearly half its recurrent income, has to increase by a much greater 27 percent or $339m over the $1.252bn collected in 2022-2023 to hit this year’s target of $1.591bn.

However, Mr Wilson said December’s VAT collections matched the 16 percent year-over-year revenue growth rate that the Government must achieve to hit its $3.319bn revenue target for the full year. “Where we ended up in December, we ended up roughly 16-17 percent ahead of the prior year for VAT,” he disclosed.

“We were up significantly in VAT. That says to me the economy is strong, and that bodes well for my peak revenue season. VAT was very robust in the first half of the year, and that bodes well. That should translate into strong revenue performance over the next two months.”

Mr Wilson said the Government’s revenue is “even more cyclical now”, with the bulk of its income concentrated in the first

four months of the calendar year. “If you look at the VAT performance, it’s a good indicator for what will happen for the rest of the year,” he reiterated. “It continues to perform strongly, and we feel confident going into peak revenue season.

“Our revenues are really concentrated in three to four months towards the end of the fiscal period. This is why we have to borrow so much early because we’re getting the bulk of our revenue at the end of the fiscal period, not the beginning.

“I think we will know for sure where we stand after March. This is the peak revenue season, so after March we’ll know. We’ll see what happens. There is no con- cern yet. I have no reason to panic yet. We’ll have a clear picture then,” Mr Wilson said.

“The key thing to under- stand; the key message is to look at VAT and Customs duty, what their performance is, and their performance tells you what will happen in other areas like the Business Licence fee and real property tax. If they are performing, that bodes well.”

Mr Wilson’s message is not to write-off the Government’s prospects of achieving its $131.1m full- year deficit target, which measures by how much its new spending exceeds revenue income, just yet despite the sceptics and naysayers who are basing the 12-month outcome on just one-third of the period.

But, while October’s $61.5m deficit represented a decline on the prior year’s

$74.9m by almost 18 per- cent, the amount of ‘red ink’ incurred over the first four months increased by 24.4 percent or $23.5m from $96.2m to $119.7m.

Total government spend- ing for October, while increasing at a slower rate than revenue, jumped by 2.5 percent or $7.6m to hit $309.7m. And, for the first four months of 2023-2024, spending overall has risen by 5.5 percent to $1.032bn - a rate that is slightly faster than the revenue increase. Recurrent spending, on fixed costs such as salaries and rents, grew by $43.6m or 4.8 percent to reach $952.4m.

Hubert Edwards, principal of Next Level Solutions, told Tribune Business on Wednesday that the projected $131m deficit for the current fiscal year is “already out the window” and sophisticated investors and the likes of the credit rating agencies will have already “baked into expectations” that it will come in much higher.

The IMF, in unveiling its statement on the annual Article IV consultation with The Bahamas in late November 2023, 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 fore- cast 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.

Meanwhile, Mr Wilson said the Government’s $500m loan that was partially-guaranteed by the Inter-American Development Bank (IDB) “cannot be used” to refinance or pay-off old debt such as the $300m foreign currency bond that is due to mature this month.

He added, though, that the facility will not breach the $131m in net new borrowing approved by Parliament for the 2023-2024 fiscal year. The financial secretary explained that the proceeds will be used to smooth out the Government’s cash flows, and cover valley months when it runs deficits, while the Davis administration will use the months when it runs a surplus to remain within Parliament’s borrow- ing limits.

“It cannot be used for refinancing,” Mr Wilson said of the 10-year credit facility. “The release speaks to what the proceeds can be used for. It cannot be used for refinancing. When you read the Public Debt Management Act in conjunction

with the borrowing resolution for $131m, that helps people to understand how we can borrow at this level and the deficit still be $131m.

“One thing it is not going to be used for is to refinance existing debt. The Public Debt Management Act gives the minister of finance the ability to borrow to meet short-term cash needs. Our revenue is cyclical in nature. We have very strong months of revenue when we have a surplus, and we have months when we run a deficit,.

“Between July and December the deficit expands, and between January and April the deficit shrinks. The borrowing resolution gives us the authority to borrow a net amount at the end of the fiscal period. During that period, borrowing goes up and down depending on how the deficit performs. That’s what gives us the authority to borrow this amount.”

Reiterating that the Government is sticking to its plan to borrow the necessary $131.1m in net new money to cover the projected fiscal deficit, Mr Wilson said the $500m loan aligned with the Davis

administration’s 2023-2024 annual borrowing plan.

“We cannot deviate from the plan. Any deviation from the plan impacts your credit rating with the market, so you have to stick to the plan,” he added. And, while there have been calls for greater transparency surrounding the $500m loan, especially on its undisclosed interest rate and other terms, Mr Wilson said these have not been revealed because the transaction has not reached full maturity.

“I cannot speak to what the interest rate is because of non-disclosure agreements,” the financial secretary said. “The release had to be approved by both the bank [Santander, as lead arranger and placement agent] as well as the IDB. That was the information they felt which could have been disclosed at this time. As the transaction matures we will be able to release that information, but right now the transaction is not mature.”

Mr Wilson said institutional investors were still securing hedges to protect their position, and added: “I can also say simply that the cost is significantly cheaper than if we went to market. In a couple of weeks and so forth, once the transaction matures, we’ll be able to disclose that information.”