Thursday, October 12, 2017
By NEIL HARTNELL
Tribune Business Editor
The Bahamas could be locked into "a death spiral" by 2022, with its national debt virtually equal to total economic output (GDP), if it fails to hit growth and fiscal consolidation targets.
The International Monetary Fund (IMF), in its full Article IV report on the Bahamas, warned that "persistent economic weakness" and a failure to achieve fiscal consolidation would take the national debt perilously close to 100 per cent of GDP within five years. Warning that the risks surrounding debt sustainability were tilted towards the "moderate to high side", the IMF's modelling projections showed the national debt, as a percentage of GDP, heading towards 100 per cent should the Bahamas suffer adverse economic or hurricane-related shocks.
"Overall, the heat map points to moderate to high risks to debt sustainability, underscoring the urgent need for fiscal consolidation, complemented with structural reforms to lift potential growth," the IMF concluded.
The Fund, likely using Bahamian GDP data from before the Department of Statistics' recent 28 per cent upward revision to $10.22 billion, projected that the debt-to-GDP ratio will peak at 73.3 per cent this fiscal year in the absence of any external shocks. However, a failure of the Minnis administration's economic and fiscal policies would see a continual increase in the $7.2 billion national debt. Keeping the projected primary deficit at this fiscal year's 2.6 per cent of GDP resulted in a debt-to-GDP ratio of 91 per cent come 2022, the IMF revealed. And, employing the past decade's average -0.1 per cent GDP growth and -2.1 per cent primary deficit resulted in a debt-to-GDP ratio almost equal to the size of the Bahamian economy.
"Under this severe adverse scenario, the debt burden would rise sharply to close to 100 per cent of GDP over the medium term, with gross financing requirements also rising to 11 per cent of GDP," the IMF said.
The Bahamas' fared slightly better in the 'hurricane scenario', which simulated a strike from a storm stronger than Hurricane Matthew. "Staff assumed a temporary reduction in real GDP growth of 0.5 per cent for fiscal year 2018 and fiscal year 2019," the IMF said.
"With lower tax revenue and larger fiscal spending due to post-hurricane reconstruction, the primary balance would worsen by 3.7 per cent and 0.8 per cent of GDP over the same period, and the debt would increase to 81 per cent of GDP by fiscal year 2022."
Robert Myers, an Organisation for Responsible Governance (ORG) principal, told Tribune Business that the IMF data showed how close the Bahamas was to "a death spiral" in relation to the public finances, especially if a natural disaster or economic crisis occurred.
He added, though, that the Fund's modelling and his own 'back of the envelope' calculations also revealed the same scenario - how the Bahamas could turn its fiscal crisis around by achieving faster GDP growth and eliminating the deficit, a combination that could reduce the existing $7.2 billion national debt.
"We've got to do the debt cutting and deficit reduction to stimulate growth, because at the current trajectory the Government is a drag on the economy," Mr Myers said. "That's exactly what's happening now.
"The Government is a drag on the economy, and we've got to reduce that drag. That's inefficiency, low productivity, wastage and shrinkage. The very people governing us is what is holding us back."
The Fund, in its Article IV report, suggested the Government could slash recurrent spending by just over $200 million, or 2.4 per cent of GDP, if it cut the civil service wage bill by $70 million; required public servants to contribute to their pensions; and reduced subsidies to public corporations by 1.3 per cent of GDP.
Turning the IMF's grim projections into a positive, Mr Myers added: "It just makes it abundantly clear that if we do the right thing; if we can get the albatross of government off our backs, improve the economy and the cost and ease of doing business, and convert some of these government jobs to private sector jobs through training and re-education, there is a chance.
"Sell-off some of those deadbeat entities the Government owns. Bahamasair, Bank of the Bahamas and ZNS don't have any value. They're not productive, have no return on investment. Let's shed them all."
Mr Myers acknowledged that "we can't do it in one swoop, as that will crash the economy" - a nod to the fact that the public service downsizing recommended by the IMF would cause enormous social and economic dislocation if done on one go. Unemployment would rise significantly, further depressing the economy by reducing disposable incomes and spending power.
"This is not a walk in the park," Mr Myers conceded. "We're going to feel some pain. We're already feeling it with high unemployment and crime, and an effective tax rate that's a lot higher than people say it is.
"But if we don't take that medicine now, we're going to be a fatality. As bitter as it may be, it's better than not taking it. That can change with 5 per cent growth, 2 per cent growth."
The ORG principal also urged the Government to "cap" the multi-billion dollar civil service pension liability, warning that the Bahamas "can't let that spiral out of control" and that it had to "stop the bleeding".