National Review

Edge of the cliff

Will our burgeoning debt lead to inevitable doom?

Economic and financial analysts and experts have characterized the 2021/2022 budget, presented by Prime Minister and Minister of Finance Dr. Hubert Minnis in the House of Assembly a week ago, in mixed tones – from safe and predictable, to unrealistic and lacking in vision.

“If you were rating it as a baseball hit, at best it might be a double, or likely a single, but it sure will not be regarded in my mind by anybody as a home run,” said former Minister of State for Finance Zhivargo Laing, who analyzed the budget on his Guardian Radio show “Z Live” over the last several days.

“What will matter more than anything is how it translates in actual effect.”

In the coming fiscal year, which commences July 1, the deficit is projected at $951.8 million, 7.7 percent of GDP.

The government projects to take in $1.8 billion in proceeds from borrowing. 

In the first nine months of the 2020/2021 fiscal year, the government borrowed $2.1 billion as compared to $530.9 million over the same period a year prior.

Government debt is projected to rise to $10.3 billion in 2021/2022.

This is a chilling and sobering reality, especially in light of the fact that the Minnis administration has yet to outline a debt management strategy.

“In the short term, the only option is to borrow,” said Gregory Bethel, Fidelity Bank (Bahamas) president, in an interview with National Review.

“Certainly, the government cannot increase taxes and the government cannot reduce spending because it is the prime driver of the economy right now until the end of the year. And so, I thought it was prudent to borrow instead of increasing taxes and instead of reducing expenditure, which would shrink the economy and we certainly don’t want to do that, so that’s my short-term perspective.”

In 2021/2022, the government projects recurrent revenue at $2.24 billion. That compares to the $1.66 billion projected outturn in the current fiscal year; $2.09 billion in 2019/2020 and $2.4 billion in pre-pandemic 2018/2019.

The projection is also above the $2.04 billion collected in 2017/2018 prior to Hurricane Dorian, which the Minnis administration points to as causing a significant hit to its revenue position.

The revenue forecast is optimistic given our current circumstances and the projected circumstances over the next year.

“On the face of it, that doesn’t surprise me,” said Laing, in relation to the projected revenue.

“Twenty twenty was a bad year. Terrible year. So that you believe you will collect $700 million more (than this current year); okay, maybe I buy that.

“But what I find interesting is that the government is suggesting that it will collect a little under $200 million more than it did in 2019/2020 because in 2019/2020 it collected $2.09 billion and it’s suggesting it is going to collect above that in 2021/2022. To me, that’s fairly optimistic. That is an optimistic revenue forecast and I believe that it will take something to do that.”

CFAL President Anthony Ferguson believes the projection is simply unrealistic.

“No government in the last 20 years has met their revenue projections. Invariably, they always exceed their expenditures,” Ferguson told us.

“If you use their numbers, they are suggesting that The Bahamas’ economy for 2021/2022 will recover 90 percent of the 2018/2019 revenue and that is totally, absolutely impossible.

“If they do it, I would be happier than anyone in this country, but to suggest that we are going to recover 90 percent, and we are already headed into July, the fiscal year, and I just don’t see how we’re going to recover 90 percent of the 2018/2019 prior COVID, prior Dorian revenues.”

Bethel, however, shares the government’s optimism on revenue intake in the coming year.

Asked whether he thinks the revenue projection is realistic, he said, “Yes. I think tourism will bounce back based on what most economists are predicting for the US and European economies and certainly Asia. There is pent up demand for travel.

“Everybody needs a vacation. Everybody needs a break. And if we can get more of our people to go and take the shot (COVID-19 vaccine) then we would be well positioned for that. I am optimistic that tourism will bounce back. I think it will bounce back at a level that will surprise many people.”

UNAVOIDABLE

The new budget does not propose any new taxes.

Bethel said this is cause for optimism.

“They did not increase taxes and they are patient,” he said. “They understand that this year and last year are extraordinary, so don’t overreact. Wait it out and do what you got to do after the economy recovers.”

Ferguson predicted that tax increases will soon be unavoidable and said the only reason why the government held off on such increases is because we are in an election year.

“It’s inevitable,” he said. “Any lender today wants to know ‘how are you going to pay me back?’ And the only way you can do that is to increase my taxes.” 

He also believes The Bahamas will be unable to avoid an International Monetary Fund (IMF) bailout.

“Under the current trajectory it’s inevitable,” Ferguson said. “It’s like night following day.

“Think about it, we have to borrow another $1.4 billion. That’s nearly another $100 million in interest payments, so at the end of the 2021/2022 fiscal period, our debt-servicing cost is going to be over $600 million, just servicing it; then of course you continue to have the civil servants there, but let’s leave the civil servants. You cannot continue to have up to $400 million in subsidized payments for state-owned enterprises. For every year that we continue to subsidize these companies we are putting on an additional $1.5 billion to $1.8 billion on the backs of your kids.”

The next government is going to have to make some really tough decisions, he added.

When a member country approaches the IMF for financing, it may be in or near a state of economic crisis, with its currency under attack in foreign exchange markets and its international reserves depleted, economic activity stagnant or falling, and a large number of firms and households going bankrupt – the IMF notes in explaining its loan program. In difficult economic times, the IMF helps countries to protect the most vulnerable in a crisis.

The IMF and the government agree on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities’ economic program.

Minnis appears confident, though, that such a measure will not be necessary.

The Bahamas government is relying on economic buoyancy and some revenue enhancement measures to achieve the targeted collection.

In the coming fiscal year, GDP growth is projected at 3.9 percent.

In his budget communication, Minnis said, “I am proud to say that with the many steps taken by my administration to shore up our economy, the growth prospects for the Bahamian economy are as boundless and unlimited as the incredible talent of our Bahamian people.”

He said as the global economy rebounds, the Bahamian tourism industry is poised to emerge from its forced hibernation.

Minnis said his administration intends to maintain a focus on improving revenue administration and restoring the country’s fiscal health through strengthening the collection of existing taxes and improving tax policy.

The government’s plan proposes several amendments and clarifications in respect to tax law and tax policy intended to provide “incremental revenue” for the government.

MISSED OPPORTUNITY

In his communication, the prime minister failed to send a strong signal regarding just how close we are to falling off the fiscal cliff, in some instances presenting an overly optimistic view of where we are headed.

Laing thinks the communication in some respects was a missed opportunity.

We could not agree more.

“… That the government has to continue to support a number of people in the throes of this economic downturn is not surprising, so I do expect continuing deficit spending … The economy is going to continue to struggle though,” Laing said.

“If you look at our tourism numbers, they are much better than they were in 2020 … What challenges me about the tone of the speech, and I understand it to some degree, is that the tone of the speech doesn’t seem to emphasize enough for me the real burdens of our economic situation and the fiscal situation.

“I think that Bahamians should not believe, should not think, that we are not headed in a positive direction. You should think that we are headed in a positive direction, but you should also know that our economy remains significantly strained and that the government’s financial situation remains significantly strained, that the [rate] at which we are borrowing, there is a price to be paid for that; and I think that the prime minister in announcing any number of the things that he announced, wonderful, no problem.

“… I think that there should have been greater balance in the speech to emphasize the weight being carried by the government. The prime minister alluded to it somewhat, but I think that he should have emphasized that weight more. This is a precarious financial situation we are in.”

Laing noted that the $2 million allocated in the budget for a Junkanoo headquarters, though a minuscule part of the overall budget, sends the wrong signal.

Businessman Sir Franklyn Wilson made a similar point when he spoke with National Review yesterday, noting that Minnis downplayed the extent of our crisis.

“For example, he talked about how the foreign reserves are $2.3 billion. That’s intended to say we are in great shape, but my point is, you go and borrow money to put in the bank and say, ‘I’m flush’,” Sir Franklyn said.

The government is far from “flush” – or financially stable.

In 2021/2022, government debt as a percentage of GDP is projected at 84.3 percent.

“What has happened for the entire period that we have been in this pandemic and from the time of Dorian, we have made no real adjustment to our circumstances to reflect our changed environment. We were deficit spending from 2016/2017 and beyond,” Laing said.

“… People need to know you cannot do what you’re doing now for another year or two. It can’t happen. It cannot.” 

While he seemed to understand the government’s projections in the near term, Bethel, too, acknowledged that we cannot continue with indefinite borrowing.

“What was missing is the long-term perspective,” he said.

“That was missing. Three key points: How do you grow the economy? That was missing. The second thing that was missing is ‘what’s the plan to restructure the debt?’ We need longer terms, we need lower interest rates and we need lower annual payments; so that has to be dealt with, and then of course tax reform – moving away from a business license fee to a corporate income tax and I stress this point. A corporate tax on all businesses, domestic and offshore, because for far too long the corporate tax burden has been borne by the domestic businesses and very little by the offshore businesses and it’s time to make that adjustment. The offshore businesses must pay more in taxes.” 

We asked Bethel whether he could think of any realistic and creative measure the government could have proposed to beef up revenue intake.

“Not in the short term,” he responded. “These are extraordinary times and you don’t take risks, not now.”

While not speaking specifically about anyone, Bethel added, “I would encourage the pundits who don’t like the budget to give me some alternatives. I would be delighted to hear those. I think it’s unfair to be critical without presenting an alternative plan. That’s easy. Anyone can do that.”

Given his view that the budget lacked vision, we asked Ferguson what approach a visionary government ought to have taken given the ongoing fiscal and economic crisis.

“First of all,” he said, “we would have cut all salaries by five percent or 10 percent. 

“The private sector has had to take a significant hit and continues to take a significant hit. Secondarily, we paid a lot of people to just sit home. We should have job retraining …” 

Ferguson added, “We don’t have a strategic plan in terms of where we wish this country to be. Did we invest in alternative energy when we have an abundance of sun and all of this? No. Did we do job training – because a lot of jobs in the tourism sector are not going to come back; a lot of jobs in various industries are not going to come back – so that we can retrain these people to take advantage of potential opportunities out there? No.”

For his part, Laing was not completely dismissive of the new spending plan.

“I would not call it a bad budget,” he said. “I would say it’s a budget with some concerning elements, but I wouldn’t call it a bad budget. If I called it bad it would be because I don’t think it signals sufficiently the seriousness of the hour in which we find ourselves.” 

In the budget debate, which starts in the House of Assembly today, we expect to hear Minnis and his ministers and some other government MPs tout the leadership they insist has saved us from an even worse scenario than the one we currently face, but we do not expect the much needed debt management strategy to be clearly articulated by any of them.

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Candia Dames

Candia Dames is the executive editor of The Nassau Guardian.

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