Tuesday, May 15, 2018
By NEIL HARTNELL
Tribune Business Editor
The Bahamas will take ten years to hit its long-term debt target, the IMF warned yesterday, as it again blasted the Christie administration's "lax spending control" pre-election.
The International Monetary Fund (IMF), in its latest Article IV report on The Bahamas, said the long-awaited Fiscal Responsibility Bill will "lock in" VAT and other revenue reform gains, and prevent their squandering through "repeated misses of budget targets".
The former PLP government ran up $2.2bn in additional debt during its five-year term in office, despite enjoying a net $750m VAT windfall during the tax's first two years, as result of spending increases outpacing income.
The Fund yesterday said the proposed Bill, and its targets, will provide the "anchor" and discipline to prevent a reoccurrence of such practices - but warned that cross-party "political will" still remains essential to placing The Bahamas' finances back on a sustainable path.
Pointing out that the Government's average deficit has more than tripled over the past decade, hitting 3.8 per cent of GDP between 2008-2017, compared to 1.1 per cent over the previous 10 years, the IMF said: "The sharp increase in the deficit led central government debt to double in size over the past 10 years, growing also more rapidly than the average for its Caribbean peers.
"While the deteriorating fiscal situation was in part the result of weak economic activity, it also followed from rapid increases in spending. The successful introduction of the VAT in 2015 and revenue administration reforms helped boost tax revenues by 4.4 per cent of GDP between fiscal year 2014 and fiscal year 2017.
"Consequently, total revenue increased by 2.6 per cent of GDP on average over 2008-2017 relative to the period of 1998-2007. However, current spending rose at a more rapid pace, keeping fiscal deficits high."
While acknowledging that Hurricane Matthew restoration costs had contributed to 2016-2017's 5.8 per cent fiscal deficit, the IMF again confirmed that "lax spending control in the run-up to the general elections" was also responsible.
"The lack of an effective fiscal framework and anchor allowed rapid increases in spending, and to repeated misses of targets set in the Budget," it added. "The occurrence of natural disasters over the past decade often led to unplanned increases in spending and borrowing. However, budget deficit targets were often missed even in years when there were no significant budgetary consequences from external shocks.
"Designing and implementing an effective fiscal framework would fill an important gap in the Bahamas' policy framework. A well-designed fiscal framework should help increase fiscal discipline, transparency and accountability. But political will would remain a critical ingredient in the pursue of fiscal sustainability."
The draft Fiscal Responsibility Bill, released yesterday, binds the Government to a 50 per cent direct debt-to-GDP ratio as its core long-term objective, as opposed to the current 58 per cent ratio. The Bill requires that the Government state the year when this will be achieved in its 'Fiscal Strategy' report, which must be released to Parliament no later than the third week in November.
With the Bill giving the Government a three-year 'transition window' to reduce the annual fiscal deficit to a sum equal to 0.5 per cent of GDP, the IMF said adhering to this ratio from 2021 onwards "would ensure convergence to the debt anchor [of 50 per cent] by fiscal year 2028".
Rick Lowe, an executive with the Nassau Institute 'think tank, yesterday expressed concern that the targeted debt ratio did not appear to include the Government's 'contingent liabilities' in this calculation.
The IMF yesterday revealed that, with the inclusion of the promissory notes issued to Bank of the Bahamas by Bahamas Resolve, these liabilities - including debt guaranteed by the Government on behalf of the public corporations - now stood at 14 per cent of GDP.
This places the Bahamas' current total debt-to-GDP ratio at 72 per cent, but Marlon Johnson, the Ministry of Finance's acting financial secretary, said the Government had been advised to focus solely on direct debt as this was the main drain on its tax revenues.
"Direct government debt is a direct call on your tax revenues," he told Tribune Business. "I accept the argument that there are contingent liabilities, but the key concern is managing the direct call on the public purse."