Op-Ed

The Essentials of debt restructure, the IMF and Marla Dukharan

The things that frighten us the most tend to maintain a constant presence in our consciousness and can cause great trepidation and anxieties. If those things can be bound up with a layer of emotion, then discussion is quickly skewed.

If it is possible to add an even greater layer of emotion by singling out personalities, then it sets the scene for the complication of generally straightforward (not simple) issues, at least by some who would rather invest time in personality management than an accurate exploration of the fundamentals of the matter at hand.

Recently, Caribbean economist and advisor Marla Dukharan stated that The Bahamas and Trinidad and Tobago are two regional countries likely to enter an International Monetary Fund (IMF) program.

The Jamaica Gleaner, capturing her comments stated, “…following defaults by Barbados and Suriname, The Bahamas was likely to be next, necessitating restructuring and IMF stringency in the near term”.

In 2020, she had made a more forceful statement to the effect that within one year, The Bahamas would find itself in an IMF program.

This has contributed much to the emotive responses. At the time, many persons, myself included, expressed our considered disagreement.

Earlier this year, I had a brief discussion with her, reiterated my sentiments, to which she graciously stated that she was comfortable with contrary views and gracefully expressed her delight that it had not yet happened.

The Gleaner article and a recent interview I conducted with Dukharan on “The Essentials!” has again drawn very close assessment, analysis, commentary and much discussion.

Unfortunately, many persons have allowed themselves to be ensnared by the possibility of default that she expressed, while losing sight of the fundamental implications of the issues she has raised and eloquently discussed with consistency, openness and great professionalism.

This piece is based largely on the interview I conducted with Marla Dukharan. While there may not always be attributable quotes, her responses inform many of the ideas stated here.

The interview is available on www.guardiantalkradio.com.

The default position

The stated possibility of a default is genuinely tripping up many commentators or arresting their attention too much while some others have disingenuously latched on to the discussion with rabid opportunistic intentions.

Dismissing the possibility of the default event, they are failing to focus on the underlying issues that the country must contend with, regardless of the outcome.

From my perspective, the government is in a reasonable position to defer any immediate default. The prime minister recently noted that work is afoot to extend maturities as an immediate means of staving off any such default.

Let us agree there is no default. There will be no default. We do not think there will be a default. Now what?

Consider why a reasonably-informed person would highlight such a possibility over the next two years? Is she simply being mean or are her statements informed by the economic factors she has assessed?

Let us consider the following scenario:

Doctor: “You have six months to live.”

Patient: “Not me. I am not ready to die!”

Patient reflecting on what the doctor said: “Why did he draw that conclusion?”

The patient then decides, “Let me take a good look at this and try to fix it.”

The doctor could have been dead wrong or right only to the extent where there is no intervention.

We must therefore be very careful not to lose sight of the story behind the story. I would not ascribe unsavory motives to Ms. Dukharan as some have done.

No one should wish for the default of a country’s debt and as stated above, I do not believe that she does.

My experience from the interview was that she was open, sober, fundamental and balanced. What I am more concerned about is not who is actually right or wrong today, but the narrowness of the conversations we are so far having in the public space.

In the first instance, what does it mean to have “no default”? The ability to repay or reschedule? Likely, the latter.

On rescheduling the debt, what will be the impact on interest payments? We currently budget 18 percent of expenditure for that. How much more will it increase or reduce?

Once we reschedule, what happens to the deficit if we are unable to secure growth initiatives and investment, which produce positive results?

The conversation is bigger than that which we are having, trying to prove Marla Dukharan wrong.

The ability to stave off default, while a good thing, does not immediately solve the fundamental underlying issues. For example, based on a recent interview, Dr. Greggory Pinto indicated how significantly under-resourced the hospitals are.

Arguably, these deficiencies have either not been budgeted for, or funding has been redirected due to the crises. The deficiencies and lack are clearly not unique to the health sector.

There is more that the current administration is assessing and discovering as we speak. Surely, we will need to fix them.

With what, you may ask? Well, we would have to borrow and that would mean higher deficit, more debt, more interest and possibly further downgrades, if there were no growth!

We can now all agree that, based on publicly-available information and potential strategies that can be employed, there is a remote chance of default.

There should be little to no argument here. However, the main reason there is unlikely to be a default rests on the ability to rollover the debt, to borrow and replace maturing debt, to reschedule and not a sudden positive shift in the economic fortunes of the country.

Against that backdrop, to totally ignore rollover risk in the face of consistent downgrades would be a suboptimal approach to assessing the future possibilities for the country and the broader strategies that must be contemplated to secure sustainable solutions to the current debt crisis that it faces.

It is my view that there is greater value in looking beyond a default event with a view to develop a full and accurate appreciation of the potential cause and effect of what the country faces.

A debt stock of $10.5 billion; debt-to-GDP of over 100 percent; a deficit of $951 million; a decade of growth of less than one percent on average; and flirtation with primary deficits; a narrow fiscal space with little or no headroom; and an economic environment which is likely to be suppressed over the next two to three years.

One should be very circumspect when listening to the commentary of anyone who purports to be pro-country but readily makes arguments that are in essence dismissive of these facts, and question whether they are truly invested in the long-term well-being of the country, or rather a closely-guarded set of self-interests.

The current state of affairs of The Bahamas, especially as it relates to debt, is firmly captured in a narrow vortex because of the escalation of the national debt and weakness in the economy.

Following decades of anemic growth and deficit spending, with consistently-widening deficits, the country finds itself in a cycle of borrow, weak performance, gets downgraded, borrows some more because performance is weak, gets downgraded because we borrowed more, and our capacity to repay is being questioned because of weak performance and high level of debt.

Less than one percent annual growth over the last decade has led to five separate downgrades by the rating agency Moody’s.

The starting point therefore ought not to be what might have been said by an economist or anyone else, but to ask fundamental questions as to why the economy is not growing and how to change the trajectory of that reality.

The Bahamian song “Stop the World and Let Me Off” aptly captures the essence of the only viable and prudent approach available to policymakers.

The cycle of borrowing must be slowed and eventually broken and the only way to do so is to grow the economy.

Admittedly, as a layperson, there are many aspects of economics that eludes my understanding. However, in the case of The Bahamas’ national debt, it is simply mathematics while keeping an eye on policy and how income is derived.

If The Bahamas continues to borrow without growth, at some point no one will wish to lend it at any reasonable cost and there will not be sufficient monies available to provide normal services for the country.

The question is, at what point do we change this vicious cycle? Even if one argues that we are not there, how do we stop us from getting there?

It is useless to continue to argue against a default while highlighting its improbability as the end of the argument.

Delaying or deferring any instance of default is critically important but is not the “success event”. The success lies in fixing the underlying fundamentals of the economy and effecting the structural changes leading to economic growth.

The fact is that even with successful extension of the life of debt instruments, there is still a crisis with serious attendant issues and that is the main thing that ought to be the focus.

As we bring focus to bear in the right place, let us consider the elements that are considered important going forward.

Let us broaden the conversation to where it must be. There will be no immediate default. That is the starting point.

Good!

Then what? What is next? There are great insights as to what is next and what needs to be done.

Of that, I am highly confident. For some, there appears to be a reluctance to accept the facts and the implications of what fundamentally fixing the challenges may mean.

That said, I am sure that information will emerge soon as to what the country is really faced with, what the policymakers are intending on doing and what has been achieved so far.

We must exercise some patience and wait to see what will unfold.

Interestingly, if one reads Ms. Dukharan’s recently-released Caribbean Monthly Report (September 2021) closely, the concluding statement reads, “We expect a debt restructure and an IMF program in the next year or two,” two separate things; one, which as noted above will happen voluntarily without external support.

The necessity of the second will be subject to the effectiveness of the first and it, too, would be voluntary, with the support of external agencies, primarily the IMF. In fact, default is not a requirement for the latter.

Consider the fact that Jamaica had two consecutive three-year programs without being in default, but primarily to solve its high debt levels and to inject discipline and structure in implementing reforms that had evaded it up to that point.

There was no default but a major crisis where debt-to-GDP was 147 percent and an overarching need to inject confidence in the credit market.

Very likely, there will be no debt default for The Bahamas, but it currently has a debt crisis of notable significance. We must never lose sight of that important reality.

• Hubert Edwards is the principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. Hubert specializes in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. www.facebook.com/hubert.edwards www.nlsolutionsbahamas.com www.linkedin.com/hubertedwards.

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