By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE International Monetary Fund (IMF) last night demanded that the Government take “decisive fiscal consolidation” measures, including the introduction of a low-rate income tax.

The Fund, in a statement on its Article IV review of The Bahamas, urged the Minnis administration to develop “detailed policy measures” for achieving its targeted reductions in the annual fiscal deficit to 1.1 per cent of GDP in 2019-2020.

It suggested that The Bahamas introduce an income tax to replace revenue that will be lost as the Bahamas reduces import duties to fulfil its trade agreement obligations, and urged the Government to develop a “savings buffer” against natural disasters such as hurricanes.

To bring the public finances under control, the IMF called for the Government to impose “a permanent ceiling” on its annual fiscal deficits and “a cap” on its fixed-cost spending that includes wages and rents.

The Fund’s statement said the Government’s direct debt, as a percentage of Bahamian economic output or GDP, had increased by 28 percentage points in just six years as a result of persistent deficits.

“Sharp increases in public debt call for decisive fiscal consolidation efforts to ensure that debt remains sustainable and external buffers are strengthened,” the IMF said. “The sharp increase in the deficit in fiscal year 2017 to 5.7 per cent of GDP pushed central government debt to an estimated 73 per cent of GDP (up from 45 per cent of GDP in fiscal year 2011).”

Many Bahamians are likely to go pale at the mere mention of ‘income tax’, but the IMF called for its introduction on the basis that it will be a fairer tax linked to a person’s ability to pay.

“Over the medium term, introducing a low-rate income tax as import duties are further reduced should make the tax system more progressive and help protect infrastructure and social spending,” it argued.

However, the IMF frowned at the National Health Insurance (NHI) programme left behind by the former Christie administration, describing expanded coverage as “not affordable without new revenues (taxes) to fund it”.

Backing the Minnis administration’s plan to introduce Fiscal Responsibility legislation, it added: “This legislation should include as key elements a simple fiscal rule with a permanent ceiling on the deficit and a cap on current expenditure growth, consistent with a downward trajectory for the public debt-to-GDP ratio; the requirement to incorporate into the Budget process medium-term fiscal projections with their underlying assumptions; an assessment of relevant fiscal risks, particularly those associated with natural disasters, and mitigating policies; exceptional circumstances clauses, triggered only after significant negative shocks.”

The IMF said the Government’s fiscal targets would achieve the desired consolidation, but warned they could only be achieved “by reversing the sharp increases in the wage bill” resulting from the former Christie administration’s pre-election spending binge.

It added that public corporations and state-owned enterprises (SOEs) needed to be restructured to improve their efficiency, while fees for their services needed to allow full cost recovery.

“The new administration has pledged a strong commitment to restore fiscal sustainability,” the IMF said. “Its first Budget envisages a reduction in the deficit to 3.5 per cent of GDP in fiscal year 2018, and sets deficit targets of 2.3 per cent and 1.1 per cent of GDP for the two subsequent fiscal years.

“However, detailed policy measures to meet these targets still need to be developed........ If properly designed and implemented, these initiatives should support fiscal consolidation and strengthen fiscal discipline, accountability, and transparency over the medium term.”

The IMF also called for Bahamian civil servants to start contributing towards their own pensions, with benefits matching contributions, in a bid to tackle the unfunded $1.5 billion public pension liability.

In a nod to the Bahamas’ vulnerability to hurricanes, the IMF also urged the Government to build-in Budget savings to provide “an additional buffer against the fall-out from natural disasters”.

“Incentivising the use of private natural disaster insurance, including through targeted subsidies to improve affordability for low-income households, and making sure that building regulation, land use and zoning guidelines are adequate and reviewed and updated frequently, would enhance economic resilience and reduce fiscal contingent liabilities,” the IMF said.

It added that energy reforms were vital to reducing power costs, and improving reliability. “Moving ahead with the planned issuance of the rate reduction bond by the electricity company is a critical step in this direction,” the IMF said, referring to the financing mechanism both governments have been reluctant to initiate.

The Fund also called for improvements in the Bahamas’ ‘ease of doing business’ and the creation of a Credit Bureau - recommendations that have frequently been made by the private sector.

The “credibility” of the Bahamas’ one:one exchange rate with the US dollar will be enhanced by reducing the Central Bank’s holdings of government bonds, the IMF added, while also calling for an “intensified” effort by commercial banks to restructure their delinquent loans.

“Commercial banks remain liquid and well-capitalised but reluctant to lend in an environment of low growth,” the IMF said. “As of March 2017, the average capital adequacy ratio stood at 27.8 per cent, well above the regulatory requirement of 17 per cent, and liquid assets represented 25.6 per cent of total assets.....

“Despite ample capital and liquidity for the sector as a whole, the stock of commercial bank credit to the private sector has remained flat.”

The Bahamian economy remained in recession during 2016, contracting by 0.25 per cent due to the impact of Hurricane Matthew.

“Real GDP growth is projected to pick up to 1.75 per cent in 2017 and 2.5 per cent in 2018, and to stabilise at around 1.5 per cent over the medium term,” the IMF said. “The baseline scenario is predicated on an expected acceleration in US growth in 2017, the phased opening of Baha Mar, and related construction activity.”

However, it added that the Bahamas faced numerous “downside risks”, with the current account and external reserves “weaker than suggested by fundamentals and desirable policy settings”.

“Over the medium term, the current account deficit is projected to narrow to 7.1 per cent of GDP but would still be above the level consistent with fundamentals and desirable policy settings,” the Fund said.

“At an estimated 2.4 months of next year’s imports of goods and services, reserve coverage remains below traditional adequacy benchmarks.”

Summing up, the IMF said: “The Bahamas has been struggling with a stagnant economy since 2012. Natural disasters, interruptions in the completion of the mega resort Baha Mar, and eroding competitiveness have resulted in declining real GDP and income relative to other Caribbean economies.

“Weak economic activity, compounded with high fiscal deficits, have led to a sharp increase in the public debt burden, and has complicated the resolution of banks’ high levels of non-performing loans (NPLs).”