By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A governance reformer yesterday said he was “confident” some tax increases will be unveiled in tomorrow’s Budget, which he branded as the “most important” in Bahamian history to-date.

Hubert Edwards, the Organisation for Responsible Governance’s (ORG) economic development committee head, told Tribune Business there was “absolutely no way” to increase government revenues to 25 percent of gross domestic product (GDP) - the Davis administration’s target - without implementing new and/or higher taxes.

And, given The Bahamas’ post-COVID situation with multiple challenges confronting it, he argued that the 2022-2023 Budget is the most pivotal yet as “the country could languish below its potential for some time to come if we don’t get this right” on the short, medium and long-term reforms needed to direct it back on a sustainable economic and fiscal path.

Mr Edwards argued that The Bahamas was in uncharted territory with a $10.5bn-plus national debt that was increasing towards $11bn; underlying economic fundamentals that were “overturned” by the COVID-19 pandemic; and bonds that continue to trade at significant discounts to their face value - and yields between 12-14 percent - on the international market.

Besides these difficulties, the Government and Bahamian people are also presently dealing with a cost of living crisis sparked by global inflationary pressures that will likely force an increase in social security spending and other measures - such as targeted tariff cuts - to mitigate the impact on society’s most vulnerable in the upcoming 2022-2023 fiscal year.

Yet the Government also needs to earn sufficient revenues, and cut spending, to restore fiscal sustainability while ensuring there is sufficient investor, consumer and creditor confidence such that the economy will grow its way out of the hole created by Hurricane Dorian, COVID-19 and recent cost of living pressures. As a result, Mr Edwards acknowledged that the Government faces a delicate “balancing act” with the Budget given multiple competing objectives.

Noting that the elevated national debt “will likely remain an uncomfortable Achilles heel” for The Bahamas, the ORG executive added: “Due mainly to the debt stock and the effects of the pandemic, this Budget might be the single most important in the life of the country.

“It must therefore pave the path, and lengthen the runway, to the future by taking positions which allow for recent changes to effectively mature while laying the foundation and establishing the initiatives that will crystalise in the long term.”

Asked by this newspaper to justify his assertion that tomorrow’s Budget, which will lay out the Government’s fiscal strategies, spending plans and policy priorities for the next 12 months and beyond, is likely the most critical in Bahamian history to-date, Mr Edwards said: “It is the first time that we have had this concentration of debt. The country has a significant amount of debt, and we have never been here before.

“The underlying fundamentals of the economy have been overturned because of the COVID-19 crisis. I don’t think we have ever been here before, and the treatment and response seen from the credit market in terms of the way our bonds are being treated, we have not seen this over such a long and extended period that we are experiencing now.”

The Bahamas’ $825m bond, which has an 8.95 percent interest coupon and is set to mature in 2032, closed yesterday’s trading on the Frankfurt stock exchange at a more than 25 percent discount to its face value. The yield demanded by investors was just over 14 percent, indicating that the global capital markets still view The Bahamas as ‘high risk’ and would demand double digit interest rates in return for investing in any new debt issues.

It is a similar story with the $300m bond, carrying a 6.95 percent interest coupon, that is set to mature in 2029. It, too, closed at a 25 percent discount to face value with the yield set at slightly over 12.5 percent. “I really believe this Budget has to fix the fundamentals and right this thing for the future,” Mr Edwards told Tribune Business.  

“If we don’t get this right, and set the credit back on the right path to have a conversation with the credit markets to create options and opportunities for new growth, the country could languish below its potential for some time to come, which is why I view this Budget as one of the most important announcements...

“There are some hard decisions which need to be made, and made in a fundamental way. Making these decisions comes with balancing a number of issues. They’re not so easy. The fact the administration has so many balls to juggle all over makes it a very difficult scenario, but underlies the importance of getting it right, changing the path, changing the trajectory, making changes to the plan and the reforms that are going to create a different set of outcomes.”

With an “over cooling” and recession in major economies upon which The Bahamas depends a very real danger, as interest hikes are implemented to fight inflation, Mr Edwards said: “It’s the inter-play between these different things which is why I believe we’re at an historical, critical moment.”

Senator Michael Halkitis, minister of economic affairs, has promised several times that tomorrow’s Budget will include no new and/or increased taxes. He has indicated that some fees associated with government services may be raised to cover the cost of providing them, but has repeatedly asserted that the Government is focused on The Bahamas growing its way back to economic and fiscal health.

The Davis administration’s public stance has been that new/increased taxes would only set back the economy’s post-COVID rebound, while deterring new employment hirings and undermining business and investor confidence. Ultimately, its position has been that it is far too early to implement such measures, although it has paved the way for new revenue streams such as carbon credits should they materialise in the future.

However, many have questioned how the Government plans to raise revenues from the equivalent of 18.2 percent of GDP, as projected for the 2021-2022 fiscal year, to a 25 percent ratio by 2025-2026 without new and/or increased taxes. As outlined by its Fiscal Strategy Report, this would require a $1.3bn revenue increase over the next four fiscal years - a jump of 55.7 percent - to achieve a Budget surplus of $71.9m by the 2024-2025 fiscal year.

Based on ORG’s recent pre-Budget roundtable, at which Mr Halkitis was a panellist, Mr Edwards forecast an increase in an existing tax/taxes was likely in the upcoming Budget based on the minister’s response to one of his questions. The ORG chief said he asked Mr Halkitis to say ‘yes’ or ‘no’ to the question of whether tomorrow’s Budget will start The Bahamas on the path to a 25 percent revenue-to-GDP ratio, and the minister responded in the affirmative.

“I’m confident there will be,” Mr Edwards said of tax rises, due to the minister’s response, although he ruled out new levies. “I interpreted that as if there will be some increase. There’s absolutely no way to shift from 18 percent to 25 percent by keeping the same taxes and fees and there being no increase. It’s not possible.”

The Davis administration faces having to keep multiple audiences, each with their own competing objectives, needs and desires, happy through tomorrow’s Budget. For starters, it will have to protect the most vulnerable Bahamians from the cost of living crunch, while doing what it can to mitigate inflation despite having relatively little room for manoevere.

It will have to ensure critical public services are still delivered, while balancing this with the need to foster and improve investor and business confidence so that the Bahamian economy continues to grow its way out from COVID-19 and deliver the necessary jobs and employment opportunities.

These goals have to be met while accounting for the external audience of IMF, World Bank, rating agencies and other lenders and creditors, all of whom want to see The Bahamas return to fiscal sustainability as quickly as possible through increased tax revenues and reduced government spending that eliminate the annual fiscal deficits. They will be seeking a realistic plan on the way forward that lays out measurable benchmarks and goals for The Bahamas to achieve.