IMF calls for harsher Bahamian austerity

* Gov't plan won't hit 50% debt-to-GDP by 2030

* Hints at new/increased taxes, spending cuts

* Says public must be informed so can ready

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday warned that the Government must impose harsher austerity measures on the Bahamian people to hit its 50 percent debt-to-GDP target by 2030.

Unveiling its statement on recent Article IV discussions with the Government and private sector elements, the Fund argued that the Government's medium-term fiscal framework was inadequate to bring its finances back in line with the goals set out by the Fiscal Responsibility Act.

That law requires the Government to bring the debt-to-GDP ratio, which measures the amount it owes as a percentage of the Bahamian economy's size, to a maximum of 50 percent and maintain it there. However, the combined fall-out from COVID-19 and Hurricane Dorian has sent this ratio racing off in the opposite direction, with the IMF forecasting it will exceed 85 percent this fiscal year.

This backs Tribune Business's article earlier this week, as calculations suggest debt-to-GDP is already "upwards of 90 percent" due to the economy's COVID-induced contraction, and the IMF - using heavily coded language - said the Government needed to go further with austerity plans once The Bahamas has rebounded from the pandemic to bring order to its own finances.

This would inevitably involve new and/or increased taxes, spending cuts or a combination of both to bring the annual fiscal deficit down from the $1.327bn projected for 2020-2021 and thus slow, then reverse, the persistent increase in a national debt that has soared by $1.5bn over the past 12 months.

Warning of grim times ahead for Bahamian households and businesses, the IMF said: "Achieving the Fiscal Responsibility Act targets over the medium term will require additional fiscal effort......

"Given the significant increase in public debt, postponing the achievement of the debt target by another two years in response to the pandemic would be appropriate. However, achieving the debt target of 50 percent of GDP by the beginning of the next decade will require significant additional fiscal effort compared to what is planned in the medium-term budget framework."

The IMF, whose "significant additional fiscal effort" phrase effectively means greater austerity than that planned by the Government, also urged that a road map be developed and released publicly so that Bahamian businesses and households can prepare themselves for what could be especially harsh measures.

"It is advisable to start preparing measures now, and communicate a timetable to implement them as soon as the pandemic-related uncertainty subsides," the Fund added, as it urged the Ministry of Finance to immediately activate its planned debt management office given the sudden increase in the Government's liabilities.

"The Bahamas would benefit from a robust financing strategy," the IMF said. "Central government debt is projected to increase to over 85 percent of GDP this fiscal year. Financing needs will decline only gradually over the medium-term, resulting in elevated risks of debt distress.

"A robust, multi-year government financing strategy should also aim to support the overall foreign exchange position. The new debt management office within the Ministry of Finance should be fully operationalised without delay."

To generate increased revenues, the IMF urged the Government to phase-out all Dorian and COVID-19 related support at the earliest opportunity. "The authorities are encouraged to phase out the broad set of hurricane and pandemic-related tax waivers at the first legislative opportunity as there are more effective and targeted measures to support the vulnerable," it added.

"Given the substantial uncertainty about the outlook, a detailed and explicit contingency plan should be developed.... The withdrawal of fiscal support is expected to start next fiscal year as the various pandemic and hurricane-related measures phase out."

This would mean that, in addition to the tax credit/deferral initiative targeted at all VAT registrants, and the Business Recovery Loan targeted at micro, small and medium-sized businesses (MSMEs), the IMF is essentially advising the Government to discontinue all tax breaks providing relief to the Dorian reconstruction effort in Abaco and Grand Bahama.

This was met with immediate push back yesterday by Ken Hutton, Abaco's Chamber of Commerce president, who said of the IMF's advice: "It's wonderful that an institution like that, which has no idea what is going on here, is able to tell us what to do from on high.

"They are an institution that has never seen a tax they don't like. I think we have a serious difference of opinion with their assessment primarily because I would like to see a single study from anywhere on the planet showing where increased taxation results in increased economic activity. Just show me one.

"I just hope the Bahamas government takes their role as a sovereign nation, and a sovereign government, seriously, which I think they do." Nevertheless, facing a 50 percent year-over-year reduction in revenues for the 2020-2021 first quarter, the Government will be eager to make up the shortfall wherever it can.

Asked about the IMF's call for greater austerity measures, Marlon Johnson, the Ministry of Finance's acting financial secretary, said the Government would set out its own strategy, estimates and fiscal recovery road map when the Fiscal Strategy Report is likely tabled next week.

"The Government will speak to that a bit more in the context of the Fiscal Strategy Report, and provide government's perspective on measures that need to happen for the Government to stay aligned with what we're projecting going forward and the timeline for getting back to that level of fiscal balance," he told Tribune Business.

"They [the IMF] have their view. What you'll see is the Government's perspective on what needs to happen." The IMF, meanwhile, called for "a reprioritisation of public spending" that "would promote inclusive and resilient medium-term growth".

It urged: "Savings could be achieved through containing administrative costs and improving the operational efficiency of state-owned enterprises to facilitate a reduction in subsidies. The planned comprehensive spending review should be used to identify areas offering scope for savings, and to develop a guiding framework to rank outlays by their medium-term effects on growth and resilience."

Rick Lowe, an executive with the Nassau Institute, who has been sounding the alarm over The Bahamas' exploding debt for almost two decades, yesterday also interpreted the IMF's language as a call for harsher austerity measures and higher taxes than those planned by the Government if the state is to right its fiscal ship.

"I'm worried. I really am," he told Tribune Business. "I can't quite put my finger on it but it's very disconcerting. It's a hell of a long suffering road if we want to reach a 50 percent debt-to-GDP ratio by 2030. They'd better start loosening up price control and this regulatory burden. The regulations just keep piling on and piling on and piling on.

Mr Lowe added that the debt figures currently do not include the $2bn in estimated unfunded civil service pension liabilities, and said: "It's been a long time coming, but the political class always knew best how to tax and spend. The writing's been on the wall for a couple of decades now."

Comments

The_Oracle says...

The People of the Commonwealth of the Bahamas are currently suffering severe austerity caused by Covid most recently and Horrible National fiscal mismanagement for Decades.
The Political class still think they are serving up the sweetest pie ever made.
Probably is pretty sweet, for them.

Posted 3 December 2020, 2:39 p.m. Suggest removal

Dawes says...

**"This would inevitably involve new and/or increased taxes, spending cuts or a combination of both to bring the annual fiscal deficit down "** Well we all know what our Governments will choose. Brace for increase taxes, as each Government can never not stop spending so that is not going to happen. Hopefully the straw that breaks our back happens soon.

Posted 3 December 2020, 3:58 p.m. Suggest removal

skeptic says...

The Bahamas spends about 18 percent of its GDP in government spending. This is about the lowest percentage on earth. You will certainly be hard pressed to find anything close if you actually look up the facts. FYI, the world average is about 40 percent. This goes for developed and developing countries, Asian ones, Caribbean ones, European ones and the US of A (between 38 and 43 percent for the last two decades).

On the other hand (almost uniquely on earth) it has no tax on income, capital gains or even multimillion dollar corporate profits and it goes out of its way to tax foreign property owners VERY lightly and does not take and resell their property if they do not pay. Instead, all of its taxes are on the poor and middle class (consumption taxes).

And you think the problem is too much spending (on the poor, who need it, and pay all the taxes), rather than the wealthy having to pay their fair share as they do everywhere else on earth? Wow. Ignorance is going to kill this country!

Posted 3 December 2020, 5:24 p.m. Suggest removal

rodentos says...

who says what the other countries are doing is the right way to do?

Posted 3 December 2020, 6:53 p.m. Suggest removal

C2B says...

Someone who made millions in their home Country, paid taxes there, and now resides in the Bahamas, owes Bahamians a fair share of their wealth?
News flash for you: there are hardly any wealthy Bahamians. The rich you refer to are mostly foreigners who chose the Bahamas, and can choose to leave also. If you like government spending so much, North Korea is near 100% GDP Government spending. BTW didn't see any government officials take a pay cut to share the pain of the Pandemic with the people. On the contrary, they are issuing bonds at 9+ points to pay their salaries. This is the government spending you tout so highly.

Posted 3 December 2020, 10:47 p.m. Suggest removal

Porcupine says...

C2B, you are using apples and oranges. Start with this question first. Is it right to place the majority of the tax burden on the poorest? Is the type of regressive taxation we have in The Bahamas fair, Christian, sustainable? Should there be a fair tax on those who made their millions in their home Country and then want to live in a small Paradise? Absolutely. The other Country does not contribute to our economy. Want to go visit Disney World? It ain't cheap. And, they don't lower the price because of the country you came from. Raise the property taxes on the higher end properties. If the owners don't like it, and don't pay, sell the property like they do in every other civilized country. Time for us to start looking out for the majority of Bahamians. Not just wealthy people. In our short history, we haven't tried that yet.

Posted 4 December 2020, 6:57 a.m. Suggest removal

Dawes says...

All good, though we all know the civil service is overly bloated. So imagine what they could do if they reduced that and then used the savings on providing better service (maybe NHI with good hospitals and clinics, maybe better schools, maybe ensuring no-one goes hungry, hopefully all). This way the tax rate would not need to go up. But if we just increase it as we are so low the level of service would remain the same. Has anyone seen any great change since VAT was introduced?

Posted 4 December 2020, 10:40 a.m. Suggest removal

OMG says...

Play the political card all you like the fact is PLP FNM or any other governing party would have been subjected to the terrible series of consequences that have happened of late. Yes assistance is required but bear in mind running a country and its finances are just a larger scaled up version of domestic finances. Simple truth is you can only spend what you earn and only borrow what you can repay. In simple terms if an individual maxes out their credit they either have to cut back on personal expenditure and or take a second source of income. Every country is facing huge deficits including the UK which has already told the population to prepare for tax increases. The Bahamas with its reliance on tourism, small population is of course in a very difficult position. That being said prior to this and after hurricane Dorian the government paid out a bonus to every teacher of $1500. Why when the countries finances are already in a dangerous state.

Posted 4 December 2020, 7:10 a.m. Suggest removal

Porcupine says...

Sorry OMG, the mistake that "running a country and its finances are just a larger scaled up version of domestic finances." is one made by every so-called businessperson who enters into government thinking. The two are diametrically opposed. A household, along with business, is only to look out for their own. Bankers have convinced us that we could not live without their dictates, their worldview, their laws. A quick look at who has gotten richer and richer during these times of crisis should be a key to this understanding. The complete decoupling of the world of finance and the real economy is a clear indication of the problem. The stock market is doing well. The rich are doing just fine, and getting richer. While the vast majority of the world's population is suffering. So, we want our politicians to continue doing the same thing? Just more of it. Sorry, we need a complete revolution in our thinking. The innovators are there. They just cannot get a word in edgewise due to the status quo in who presently holds the power. We have allowed the rich to educate our people. Those who rise to the top are part of the system that is oppressing the world's people. That is why it is clear we have so few leaders on the world stage. We have been educated to think only of ourselves. Could this not be more evident?
Why are there rich bankers. What exactly do the banks produce? Read the history of the banks and their mode of operating. "The people" have absolutely no say in matters of banking. None. It is a secret cabal of white men who control the world. Conspiracy? Hardly.

Posted 4 December 2020, 8:31 a.m. Suggest removal

sheeprunner12 says...

NO Bahamian Government (political elite) has the BALLS to change the present system of taxation ........ it suits themselves, friends, family & lovers (aka special interests)

Posted 4 December 2020, 9:47 a.m. Suggest removal

JokeyJack says...

We need a bankruptcy act, so that people can be freed from all debt every 7 years just like in the USA. To do that, you have to have no assets and near zero income. It is a tough standard to meet. You can't just "claim" be poor and destitute, you actually have to be.

This would help raise up our brothers and sisters out of poverty and also send a message to predatory banks and lenders to stop taking advantage of the poor. Don't give loans to people who can't pay and then haul them to court.

Of course, so many bankers and lawyers and MPs are cut from the same cloth and benefit from the status quo, that this would never happen. The poor can still be targeted by placing cars in the mall and putting balloons on them. Also, the rich love to propagate the myth that it is better to buy a home than to rent. Oh yeah. Sure it is - LOL. Anything to get you into debt so you become a puppet on their strings.

Posted 4 December 2020, 1:05 p.m. Suggest removal

sheeprunner12 says...

The Bahamas is not set up to benefit 90% of its citizens ........... Just look at how the Government is reacting to Covid & reopening for the tourists.

The economic machinery of this country is predatory and myopic ....... the top 10% live their best lives and the rest are now scrapping to survive ...... Dorian & Covid laid this bare for everyone to see.

Posted 4 December 2020, 1:57 p.m. Suggest removal

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