Noting that on its current track the country’s fiscal position is unsustainable, Economist Marla Dukharan, who is also a leading economic advisor on the Caribbean, said The Bahamas needs to conduct an orderly debt profiling exercise.
In an analysis report on the government’s 2021/2022 annual budget, Dukharan said while there is cautious optimism on a few growth-oriented initiatives and the revival of the US economy, there is a fundamental need for the government to restructure the existing unsustainable debt load.
“I believe that the commitment to fiscal responsibility articulated in this budget and demonstrated by this administration is commendable and unique. I am not aware of any independent country in the Caribbean, which has legislated and implemented any such fiscal responsibility framework/fiscal rules, without the commitment to do so under an IMF-supported program,” she said in the report released by RF Bank and Trust, on which Dukharan serves as a board member.
“The Bahamas is in the midst of the worst crisis in its history. And while the authorities and the multilateral lending agencies are clearly doing all that they can and should to keep The Bahamas afloat, the data unfortunately suggests that the current situation is still unsustainable from a fiscal and external standpoint. As such, an orderly debt reprofiling exercise is preferable, versus a disorderly debt restructure/balance of payments crisis. It is worth reiterating here that any such outcome would not necessarily reflect on the authorities as much as it reflects The Bahamas’ acute vulnerability and indeed, that of every country in the Caribbean.”
This fiscal year is expected to close with the national debt just below $9.5 billion.
With more borrowing planned, debt is expected to continue rising over the medium term by at least another 13 percent, Dukharan noted.
“It is important to note that up to a certain point, acquiring debt has a positive impact on GDP. According to the IMF (International Monetary Fund), up to around 30 percent of GDP debt has a positive impact on growth, but beyond 30 percent, this positive effect diminishes with each additional dollar of debt until around 56 percent of GDP. At this point, every additional dollar of debt has a negative impact on GDP. Debt to GDP in The Bahamas crossed the 56 percent threshold in FY2017/18 and is expected to close FY2020/21 at 87.7 percent,” she said.
“There has also been a shift from domestic debt to external debt, which creates balance of payment pressures over time. External debt accounted for roughly 43 percent of total central government debt in December 2020. This compares to 21 percent at the end of FY2010/11. A total of US$225 million in interest payments to non-residents are slated for FY2021/22. To put this in perspective, total goods exports averaged US$219 million annually over the five years prior to COVID-19, meaning it takes roughly a year’s worth of goods exports to generate enough USD to pay interest on government debt for the coming fiscal year.”
In the upcoming fiscal year, the cost of debt servicing costs is expected to reach $512 million, a thirty percent increase over the 2020/2021 fiscal year costs.
Dukharan highlighted that it marks the highest level of debt servicing costs in the country’s history and accounts for 18 percent of budgeted recurrent expenditure.
“The largest interest payment in FY2021/22 will be on the US$825 million bond issued in October and December 2020, with a coupon rate of 8.95 percent. This was the largest cross-border debt issuance in the Caribbean in 2020, according to the UN-ECLAC (United Nations Economic Commission for Latin America and the Caribbean,” she said.
Speaking to the fiscal deficit for this fiscal year, which is expected to come in at $1.3 billion, Dukharan made the comparison that the country’s deficit for FY2020/2021 was the level of the entire national debt 24 years ago in June 1997.