Thursday, February 13, 2020
By NEIL HARTNELL
Tribune Business Editor
Bahamian taxpayers face a $50m post-Dorian hike in debt servicing costs that a former finance minister yesterday described as “very troubling” for fiscal sustainability.
James Smith, pictured, who held the post under the first Christie administration, told Tribune Business that the revised budget estimates show the government is spending more to service its debt than on each of the “essential public services” provided to those who pay its taxes.
His comments came after this newspaper’s research revealed the impact of Hurricane Dorian’s deficit and national debt blow-out on what the government pays just to service the interest on a direct debt mountain that is projected to hit $8.204bn by end-June 2020 and still continue climbing.
The forecasts published by the government in the May 2019-2020 udget projected that its debt servicing (interest) costs would be placed on a declining trend, falling from $381.351m in 2018-2019 to $371.552m this fiscal year. That momentum was to continue with further falls to $345.338m in 2020-2021, and $327.552m in 2021-2022.
However, the recovery and restoration costs associated with Dorian have totally reversed this picture based on the estimates contained in the supplementary Budget presented to the House of Assembly in late January.
While debt servicing costs are forecast to increase by a modest $5.5m on the initial 2019-2020 projection to $377m, the impact of the $540.5m deficit increase post-Dorian only starts to be properly felt in coming Budget years.
Instead of dropping to $345.338m in 2020-2021, the government’s interest bill is instead forecast to surge to $381.238m. And, for 2021-2022, instead of dropping to $327.552m it is projected to increase to $377.852m - a jump of more than $50m compared to pre-Dorian.
Debt servicing costs are forecast to increase further in the 2022-2023 fiscal year to $397.8m, placing them almost equivalent to the $400m in Dorian-related expenses and losses cited by K Peter Turnquest, deputy prime minister, in the House of Assembly yesterday.
Mr Smith told Tribune Business that such data showed The Bahamas “faces some rough seas ahead” from a fiscal and economic standpoint unless it can generate the significantly higher gross domestic product (GDP) growth rates that have eluded it since the 2008-2009 recession more than a decade ago.
Arguing that economic growth was likely the only option available to The Bahamas in seeking to head-off spiralling debt, the former finance minister and ex-Central Bank governor said there appeared “nothing on the horizon” to give the stimulus this nation needs with the world economy’s growth rates also projected to be relatively lacklustre.
“That’s not comforting,” Mr Smith said of this newspaper’s debt servicing comparisons. “That could be troubling on a number of fronts. This first thing is whenever your interest bill has become the largest item of recurrent expenditure, it means you’re in a pretty fragile position.
“It means that out of every dollar spent, more is going on interest than each of health, education, law enforcement and social services. It can tell you precisely where the emphasis is in terms of placing taxpayer funds. It was travelling like that for the last 10 years, and reaching that position means it has been on a very dangerous trend where you’re paying more to service debt than people.
“It’s very troubling. It really means we’re more focused on spending more to service the debt than on providing services to the population from which you’re taking the tax proceeds to pay it.”
The Government’s interest bill is already the single largest line item in its recurrent, or fixed-cost Budget, dwarfing all other agencies. The closest to it is the Ministry of Health with its revised $324.544m allocation for 2019-2020. Yet, even when its projected budget is combined with that of Education for 2022-2023, they only just exceed that year’s near-$400m debt servicing costs.
Mr Smith, meanwhile, also questioned what increases The Bahamas’ interest bill might suffer if developed countries end the quantitative easing that has artificially kept global interest rates low for a sustained period. Any increase in benchmark rates such as LIBOR, the London Inter-Bank Offer Rate, would automatically produce a rise in variable rate Bahamas foreign currency debt whose interest rate (price) is linked to this.
The Government’s supplementary budget shows that some $157.936m of debt interest payments in 2019-2020 will be made to foreign investors, representing around 42 percent of the total interest outlay.
Mr Smith added that any increase in The Bahamas’ foreign currency debt created further concerns because “foreign creditors are not very forgiving”, even agencies such as the International Monetary Fund (IMF), should it become necessary for the country to reschedule its liabilities.
“The take away from all of this is that we have to get debt servicing costs under control,” he told Tribune Business. “The only way we’ve got left is growing the economy, because the tax base will then increase proportionally to the interest bill. It seems logical and the best way to do it; grow the economy and the tax base. I don’t think we’ve got much room to negotiate our debt servicing.
“We’ll have to find some way to grow ourselves out of this. The global economy is moving rather slowly itself, 2 percent or less, and they’re projecting for us probably something flat or negative in the short term.
“We need some extraordinary injection to provide growth and that’s very difficult at this stage as there’s nothing on the horizon. We’ve still got high levels of unemployment, which automatically means you’ve got a decreasing tax base from the domestic market. We have some headwinds with foreign direct investment, not least because of Dorian, and there’s no let-up in financial services contraction.”
Rick Lowe, a fiscal ‘hawk’ with the Nassau Institute think-tank, told Tribune Business of the debt servicing increase: “It just shows that the spiral continues. Incredible. There doesn’t seem to be any possibility to deal with it without a serious contraction in government spending.
“It should raise the question as to how much bigger they want to make the Government, and couple that with the ease of doing business. It just seems that they are not able to pull it off; they are unable to do it or lack the political will to do it.
“They have done some excellent work, but is Dorian a convenient excuse or are their legitimate costs? Yes, raising taxes would be the wrong thing to do, but they can’t continue the debt spiral and have to consider the options for increasing business.”