By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must escape "the frog in the pot" scenario if it is to avoid Barbados's descent into an International Monetary Fund (IMF) bail-out of its unsustainable 175 percent debt burden.

Marlon Johnson, the acting financial secretary, last night told Tribune Business that the fellow Caribbean nation provided a "cautionary tale" that illustrated just why the Minnis administration felt it must take decisive action in the 2018-2019 Budget.

While the Bahamas is "a ways away" from treading in Barbados' footsteps, Mr Johnson said Ministry of Finance officials were continually warning about a scenario where this nation could follow its lead as "the heat turns up" through credit rating downgrades and spiralling interest (debt servicing costs".

"I think it's a cautionary tale for Bahamian governments, and all governments, as to why it is important to address big fiscal imbalances decisively and comprehensively to avoid ending up, down the road, in the situation Barbados is facing now," Mr Johnson said.

"We really, truly wanted to avoid kicking the can down the road. The Government wanted to be truly open with the Bahamian people in this Budget on all outstanding commitments that are due. We wanted them included in the Budget.

"One, we wanted to address the structural issues, the arrears ($360 million), and ensure there was sufficient funding to address the known commitments of the Government. Going forward, the Government wanted to ensure we didn't end up in a situation where we would be forced to go to the IMF or any external body, which would take policy control outside of the Government itself."

Mr Johnson's message is that pain and sacrifice at the hands of their own government now, via a 60 per cent Value-Added Tax (VAT) rate hike to 12 per cent, and other revenue-enhancing measures will be easier medicine for the Bahamian people to swallow than any IMF prescription imposed from outside.

The Government is seeking $500 million in extra tax revenues to finance a similar increase in spending, which is designed to pay off $172 million in unfunded arrears in 2018-2019 plus provide an extra $79 million to end the "sham" of governments knowingly under-budgeting for certain expenditure lines that were bound to cost more.

Barbados's newly-elected government announced last week that it had no choice but to go 'cap in hand' to the IMF after discovering similar unknown, unfunded spending commitments that pushed its debt levels to $15 billion or 171 per cent of GDP.

The country has also suspended debt repayments to foreign creditors with its Central Bank reserves critically low at $220 million, amid fears these will be exhausted and Barbados will lose control of its exchange rate.

Mr Johnson yesterday agreed the Bahamas, with a debt-to-GDP ratio of around 58 per cent thanks to the recent revision to the National Accounts, was "a ways away" from falling into Barbados's trap.

"I don't think there was anything imminent," he told Tribune Business. "But at the administrative level we impress upon the Government the 'frog in the pot' scenario, where the heat starts turning up, where you continue to face downgrade after downgrade, and your situation becomes too tenuous to manage.

"We were still a bit aways, but wanted to avoid getting to the point where our financial situation deteriorates to the position where Barbados is now."

Mr Johnson's concerns were echoed by K P Turnquest, Deputy Prime Minister and minister of finance, who said: "The Barbados experience should serve as a cautionary example to us in the Bahamas.

"The decision by this government is to ensure that the Bahamas remains strong and viable, and that we never enter into a situation such as Barbados is facing.... We remain fundamentally strong and our economy is growing. However, as we are all aware, we have been trending in the wrong direction.

"The fundamental job of any government is to protect the long-term integrity of the society and the economy. And that is what we are doing. We understand it is unpopular. We appreciate it requires real sacrifice. But we have seen the example of Barbados and others, and our actions will ensure that we avoid ending up where they are."

Tribune Business sources, speaking on condition of anonymity, suggested the Government wanted to deal with any required fiscal correction 'one time', rather than drag it out over many years. Dealing with it over the next three years, they said, would ensure that the harshest austerity did not run into a likely general election, which is due by 2022.

One source added that the revenue increase, which is projected to take the Government's recurrent income to just over 20 per cent of GDP, would also help address IMF and credit rating agency concerns over what is perceived to be a relatively low take compared to the economy's size.

The Chamber of Commerce, though, has said tax rate comparisons with other Caribbean states are "inappropriate and, in fact, irrelevant". Others have pointed out that the Bahamas' ratio of revenue to GDP looks low once again because of the recent upward revisions to the size of the economy.

Dr Hubert Minnis, meanwhile, has come under fire from the Government's political opponents for suggesting that devaluation could have resulted without the Budget's tax measures. This seemingly contradicted Mr Turnquest's Budget assertion that the Central Bank's external reserves are healthy at just over $1.6 billion.