IMF’s bitter pill - find extra $240m


Tribune Business Editor

The Bahamas needs a further $240m “adjustment” to hit its Fiscal Responsibility targets, the IMF warned yesterday, as it called for more “trimming” of the civil service wage bill.

The International Monetary Fund (IMF), in its newly-released Article IV report, suggested that further sacrifice was required for the Government to hit its fiscal consolidation goals even though its 2017-2018 targets were “within reach”.

The Fund “urged” the Minnis administration to further cut recurrent spending, which goes on fixed costs such as civil service salaries and rents, and avoid “an undue squeeze” on capital spending on essential infrastructure - the very method by which it has narrowed the 2017-2018 deficit.

The Government’s Fiscal Responsibility Bill, unveiled yesterday, seeks to cut the fiscal deficit to 0.5 per cent of gross domestic product (GDP) within three years. But the IMF warned it might miss this target without its recommended Budgetary ‘adjustment’.

“The fiscal target for fiscal year 2018 is within reach, despite the unbudgeted purchase of [Bahamas] Resolve promissory notes, although at the expense of lower-than-budgeted capital spending,” the IMF said.

“Staff recommended an additional adjustment of 2.25 per cent of GDP to bring the deficit to 0.5 per cent of GDP by fiscal year 2021- the medium-term target under the proposed fiscal rule - to put the public debt-to-GDP ratio on a firmly downward trajectory.

“Staff urged the authorities to identify measures to undertake this adjustment, with a strong focus on reducing current spending and avoid an undue compression of capital spending.”

The Fiscal Responsibility Bill’s key targets require the Government to slash the fiscal deficit to 0.5 per cent from 2020-2021 onwards, slashing it from a sum equivalent to 5.8 per cent of GDP in the 2016-2017 Budget year.

The Bill’s ‘first schedule’ sets out a ‘glide path’ or ‘road map’ for achieving this, acknowledging - as the IMF stated - that “significant fiscal adjustments” are needed over the next two Budget years to hit this objective.

To enable the public sector and wider Bahamian economy “to achieve the fiscal objective in an orderly manner”, and avoid unnecessary shocks, the Bill calls for 2018-2019 and 2019-2020 deficits that “shall not exceed” 1.8 per cent and 1 per cent of GDP, respectively.

K P Turnquest, Deputy Prime Minister, last night indicated to Tribune Business that achieving these “fiscal balance” targets would not be painless. “We’re going to do our best to meet the targets,” he confirmed. “It’s going to require some reconciliation and some adjustment, but that [a 0.5 per cent deficit[] is our goal.”

The Bill also sets out a “long-term” target of reducing the Government’s direct debt-to-GDP ratio from the current 58 per cent to “no more than 50 per cent”. The year by which this target is to be achieved has to be set out in the Government’s ‘fiscal strategy report’, which must be submitted to Parliament no later than the third week of November each year.

“It’s difficult to say at this particular point,” Mr Turnquest replied, when asked to specify when the 50 per cent debt-to-GDP target will be achieved. “But we are planning for a balanced Budget in 2019-2020; 2020-2021 at the latest, at which point we expect to start the claw back depending on GDP growth.

“This is about putting in the framework that will help us start this process” of fiscal consolidation. The Bill also permits a “compliance margin” equal to 0.5 per cent of GDP in assessing whether the Government has hit its targets, and ‘caps’ recurrent spending growth at the “estimated” long-run nominal GDP growth rate once “fiscal balance” is achieved.

The Article IV report, unveiled yesterday, shows the Government has followed the IMF’s recommendations ‘to the letter’, given that the targets set out in the Bill mirror those suggested by the Fund.

“The fiscal rule should include a permanent ceiling on the fiscal deficit no larger than 1 per cent of GDP, with annual deficit targets set at 0.5 per cent of GDP to allow space for automatic stabilizers to operate,” the IMF said.

“These targets, binding from fiscal year 2021 on, would allow space to accumulate savings in the proposed natural disasters fund. To further avoid procyclicality, the rule should also cap the growth rate of current expenditure at the estimated long-run growth of nominal GDP; and include exceptional circumstances clauses to be triggered only when confronted with significant negative shocks.”

Such shocks would include major hurricanes, and Tribune Business reported earlier this year on the IMF’s call for the Bahamas to build-up a ‘disaster relief’ fund equivalent to 2-4 per cent of GDP to mitigate the financial effects of such disasters.

The IMF’s Article IV report called for central government debt to become the Bahamas’ fiscal responsibility ‘anchor’, which the Bill also incorporates. “A natural anchor is the central government debt ratio, which helps guide expectations and (if prudently calibrated) ensures the sustainability of public finances,” the IMF said.

“Debt anchors need to be complemented with operational targets, such as deficit and spending ceilings, that guide fiscal policy towards the medium-term fiscal anchor.”

The long-term 50 per cent debt-to-GDP target was also recommended by the IMF, together with a ‘deficit ceiling’ equal to 1 per cent of GDP and a recurrent spending ‘cap’ at 3 per cent. The Fund said the 0.5 per cent annual deficit target, which the Government has also agreed to, will create space to set aside funding for the ‘disaster relief fund’.

The IMF also yesterday reiterated its call, first made last year, for the Government to gradually reduce the public sector’s size - but only once the private sector was able to pick up the job creation ‘slack’, and absorb persons released from the civil service.

It recommended “trimming the wage bill through a gradual rationalisation of public sector jobs - as private sector job creation strengthens - and wage restraint”. The Minnis administration’s termination of temporary workers, many of whom were hired just before last year’s general election, once their contracts have ended has already caused political controversy.

The Government, though, is arguing that it has little choice but to bring the civil service’s $733 million wage bill under control, and relieve the burden on hard-pressed Bahamian taxpayers from a public sector that has become too big.

The IMF’s Article IV report yesterday said of the Government: “They are taking steps to gradually trim the wage bill, and have asked state-owned enterprises (SOEs) to prepare plans to become self-sufficient. They also acknowledged the need to reform the pension system.

“The authorities highlighted that the reduction in capital spending is temporary, and in response to their ongoing efforts to identify priorities. In addition, they expect to rely more on Public Private Partnership (PPP) in the future to fund infrastructure investment.”

The Fund’s report also revealed that the Government is mulling whether to treat some food products as ‘zero-rated’ for Value-Added Tax (VAT) purposes, in the belief this will be more effective than increased social security spending to alleviate the tax burden on lower income Bahamians.

This would fulfill a 2017 election campaign promise, but the IMF warned: “The administration has announced fiscal austerity measures and intends to table fiscal responsibility legislation. However, Dr Minnis has also promised introducing a zero-rate VAT for some food items, which would have to be weighed against fiscal sustainability objectives.

“They [the Government] are carefully reviewing the potential impact of a zero-VAT rate on some food items, and noted that this option may be easier to administer than conditional cash transfer programmes, which have been difficult to manage in the past.”