By NEIL HARTNELL Tribune Business Editor THE Bahamas was yesterday warned to "pick up the pace" of fiscal reform, the Inter-American Development Bank's (IDB) top Caribbean economist saying this country needed to achieve primary Budget surpluses equivalent to 2-2.5 per cent of gross domestic product (GDP) to set the national debt back on a sustainable path. Speaking to Tribune Business from Washington, Valerie Mercer-Blackman, the IDB's lead economics specialist, said that if the Bahamas "wakes up now" and implements the necessary reforms it would avoid an ever-increasing debt mountain that eventually stagnates economic growth. Emphasising that the Bahamas "cannot sit back" and wait for US economic growth to 'bail it out' of its fiscal problems, Ms Mercer-Blackman said the Government's debt servicing (interest) costs were getting "close" to the 15 per cent of revenues ratio that represented a 'danger zone'. Ms Mercer-Blackman was part of an IDB team that gave presentations, including a debt sustainability analysis on the Bahamas, at a two-day workshop in Nassau last week. Two of those presentations urged that the Government run a primary Budget surplus (recurrent revenues minus recurrent spending and debt servicing/interest) equivalent to 1 per cent of GDP to first slow, then reduce, the growth trajectory of its debt-to-GDP ratio, setting this back on a path to 40 per cent. One of those presentations yesterday summed up the Bahamas' position thus: "The current fiscal position is clearly unsustainable. A primary surplus in the neighbourhood of 1 per cent of GDP should be maintained in order to hold the current debt-to-GDP ratio at its current level." But Ms Mercer-Blackman yesterday urged whoever formed the next government to go further, telling Tribune Business: "One per cent would be the sort of minimum. If you really started getting somewhere, you'd probably have to go to 2-2.5 per cent. There's an issue of how quickly you get there, how quickly you want to get there." Based on an estimated annual $8 billion gross domestic product (GDP), she is really telling the Government that it needs to generate annual primary Budget surpluses of between $160-$200 million. That, as well-known fiscal hawk, Rick Lowe, told Tribune Business, will be "a tall order", given that the Government has never run a primary Budget surplus since the Bahamas became an independent nation some 38 years ago. "Since time began in the Bahamas we've been depending on economic growth to sustain the behemoth that is the Government, and the larger the Government gets, the more we need to sustain it," the Nassau Institute executive said. Suggesting that the Bahamas needed to experience an immediate economic upturn given its existing $4.25 billion national debt, which is projected by the International Monetary Fund (IMF) to hit more than $5.5 billion by mid-2016 if no policy adjustments are made, Mr Lowe questioned how the Government could reverse course given the current macroeconomic environment. "How do you do that when revenue is declining?" Mr Lowe asked rhetorically, when Tribune Business disclosed the IDB's assertions that a primary budget surplus was needed quickly. "Easy answer: Raise taxes." The IDB's Ms Mercer-Blackman, though, said Bahamian GDP was projected to grow "not as quickly as you'd like it to". "The debt has been growing very quickly over the last five years," the IDB economist said of the Bahamas. "The debt-to-GDP ratio has increased by 16-17 percentage points in the last four years, so the dynamic is not good. It should not continue that way." As a result, the Government needed to implement enhanced debt management and tax administration, together with the likes of property tax reform and the introduction of a consumption-based tax, such as a sales or value added tax (VAT) levy. Ms Mercer-Blackman said last week's workshop was aimed at "getting the discussion going, and looking at what the options were" in relation to setting the Bahamas' public finances back on a sustainable path. Using historical numbers, and their underlying variables, from the past 10 years, the IDB economics specialist said that without policy adjustments to the primary fiscal balance the Bahamas would "continue to see growth in the debt-to-GDP ratio, and it will rise to 60-65 per cent in four-five years". Ms Mercer-Blackman told Tribune Business: "I think the Bahamas has one advantage. It's not at the point of no return. In the Caribbean, a lot of the countries are at high levels of debt-to-GDP, more than 100 per cent, and they are not able to grow. "It's more of a warning sign - to do it now [reforms] while you still can. It's not at that level where everything is exhausted, and there are no more tax increases you can do. They have a lot of things they can do, a lot of potential for improvement. The Bahamas has an old-fashioned tax system that is not working for them any more." Ms Mercer-Blackman said this nation, with its reliance on import duties for the bulk of government revenue, was behind many Caribbean counterparts and other countries when it came to administration and tax system efficiency. These other countries, she said, had minimal points of revenue collection, unlike the Bahamas with its multiple points. The IDB economist said that the Bahamas' debt-to-GDP ratio remained well below the 60 per cent 'danger threshold'. The same applied to its debt servicing costs, which as a percentage of revenues remain below 15 per cent. But Ms Mercer-Blackman warned: "That 15 per cent is usually the danger zone. The Bahamas is not quite there, but close/ "The good news is that if they do wake up and start doing something now, you'll be OK, but you have to pick up the pace. That's our general feeling. "They're doing some things, revamping tax administration and property taxes, but you're going to have to pick up the pace and level of reform. I think that they need not to wait until it's too late." Aware that the upcoming general election might serve to delay serious fiscal reforms, Ms Mercer-Blackman said much could still be done behind the scenes to lay the groundwork for the necessary policy adjustments. It then all depended on political will in the next government. "The hope is that after the election they will really pick things up," Ms Mercer-Blackman said of the Bahamian government. "Given the way the world is now, what's happening in the US, what's going on in Europe, you're not going to see a strong recovery; it's going to be a weak recovery. "They [the Bahamas] can't sit back and wait for the US; there's going to be a bit more work this time." Ms Mercer-Blackman told Tribune Business that the IDB agreed with the IMF, and the likes of Moody's and Standard & Poor's (S&P), that the Bahamas' national debt and fiscal affairs were "very much" the key issue facing the country. And, if the Bahamas did not make the necessary policy adjustments, she warned: "Debt will just continue to levels that will be very hard to reduce, but then it will start affecting economic growth. "There comes a point where it will impact the kinds of foreign direct investment you get, as they will be afraid they will be taxed to pay back the debt, and you will not have the money for infrastructure investments. "You will find yourself in a situation where you are borrowing to pay back your debt. That's a situation you want to avoid." And she added: "The Bahamas is very small, and very susceptible to what happens in the US. It has much less control over a lot of things, so in that sense it's more important to get the finances under control, otherwise it will be very difficult to do any other type of policy."