By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas faces a “high risk of sovereign [debt] stress” as it continues to reject proposed International Monetary Fund (IMF) reforms such as imposing a personal income tax on the top 10 percent of earners.

The Washington D. C-based Fund, unveiling its full 2024 Article IV report on the Bahamian economy, estimated its suggested package of taxation and spending adjustments could generate a net revenue increase for the Public Treasury of close to 2 percent of gross domestic product (GDP) - around $300m per year - if fully enacted.

For while again hailing The Bahamas’ “remarkable” economic and tourism rebound from the devastation inflicted by Hurricane Dorian and COVID-19, the Fund pointed out that growth is “expected to slow” to this nation’s historical average of around 1.5 percent “as capacity constraints in the tourism sector become binding”. That refers to the lack of new hotel rooms under construction, with supply unable to meet demand.

And, while describing The Bahamas’ ambitions to achieve a 50 percent debt-to-GDP ratio by 2030-2031 as a useful “anchor” or target for fiscal policy, the IMF report again voiced scepticism that this will be achieved purely by tax enforcement/compliance alone and in the absence of further measures that would include new and/or increased taxes.

The Fund warned especially that “public debt and gross financing needs” of the Government remain high, and it is still exposed to so-called ‘rollover risk’, meaning the possibility that a major institutional investor may elect not to accept refinancing of its existing debt and demand that it be paid out all the principal owed.

The Article IV report noted that 40 percent of the Government’s Bahamian dollar is due to be refinanced this year, and added that this nation remains highly exposed to Dorian-type hurricanes that have the ability to blow a hole in any fiscal year Budget.

However, the IMF also forecast that “spreads” on The Bahamas’ external foreign currency bond debt, meaning the difference between the interest rates this nation has to pay overseas investors holding those notes and what the US Treasury pays on its bonds, could narrow by up to 2.4 percentage points come 2029 if this nation can improve its credit rating via “sustained and credible” fiscal consolidation efforts.

The Government, though, is under no obligation or pressure to accept or adopt the IMF’s recommendations. A number are likely to prove unpalatable, especially any increase in the VAT rate or other new and/or increased taxes, given the Prime Minister’s focus on reducing the cost of living and how his administration touted its reduction immediately after they took office.

And many observers would argue that implementing any IMF reform package in full comes at great cost to the living standards and livelihoods enjoyed by a country’s people given that they invariably involve some form of austerity measures based on theory rather than the practical impact of their implementation.

And the Davis administration, in response to the IMF’s Article IV assessment, again reiterated its long-standing position against any new and/or increased taxes by holding to the faith that improved tax administration, enforcement and compliance methods will enable it to hit the 25 percent revenue-to-GDP target set for 2025-2026 along with other deficit and related fiscal goals.

“The authorities expect that the implementation of these measures will result in an improvement in the Budgetary balance to a surplus of 2.8 percent of GDP in fiscal year 2025-26 and a further reduction in the debt-to-GDP ratio below 65 percent of GDP by fiscal year 2026-2027,” said a report to the IMF’s executive Board meeting on January 13, 2025.

“The authorities [The Bahamas] remain firmly committed to achieving their fiscal and debt targets. Encouraged by the revenue generated from recent administrative and compliance efforts, they are optimistic about reaching their medium-term revenue targets without additional policy measures.

“On expenditure, the authorities agree with the need for additional spending in priority areas, including to support climate adaptation efforts. They are confident that planned reforms - including to the civil service pension system - will help to achieve expenditure targets.”

However, the IMF itself is less optimistic than the Government, although the latter has proven it wrong before including on the 2023-2024 deficit outcome. Referring to its proposals, the Fund said: “Under current policies, the risk of sovereign stress remains high with both public debt and gross financing needs high and vulnerable to adverse shocks.

“The recommended fiscal adjustment is, though, feasible and would put debt and gross financing needs on firm downward trajectories.” The IMF forecast that The Bahamas could generate extra revenues, equivalent to 1.5 percent of GDP in 2025-2026 and rising to 3.6 percent in 2028-2029, through a combination of corporate and personal income tax, reducing real property tax breaks and cutting other tax exemptions.

Besides yielding revenues estimated as equivalent to 0.1 percent of GDP by eliminating the $60,000 real property ‘cap’ on high-end homes, the Fund also suggested it could gain double this sum or 0.2 percent of economic output by ending the VAT exemption for web shops.

And it recommended “replacing the Business Licence fee with a 15 percent profits tax on large domestic firms, while allowing for the full expensing of investment and an unlimited carry over of losses”, as this “could raise revenues without disincentivising new investments. It could be expected to yield an additional 1.25 percent of GDP in revenue by fiscal year 2019.

“A new personal income tax with a top marginal rate similar to that of the corporate income tax could be applied on the top 10 percent of the income distribution which would help reduce incentives to reclassify profits as labour income. Such a tax would yield 2 percent of GDP in revenues over the medium-term,” the IMF added.

Acknowledging that such proposals could be politically difficult to implement with a general election near, as an alternative the Fund recommended raising the VAT rate in line with the Caribbean regional average of 15 percent. While that is estimated to generate a revenue rise equal to 2 percent of GDP, it would probably prove just as unpopular.

“The introduction of corporate and personal income tax regimes would require broad public support and should be complemented with enhancements to administrative and institutional capacity, including training of public sector officials and supporting domestic firms on the transition to profit-based taxation, the IMF added.

“Should these reforms prove difficult to implement, the Government could (as a substitute) raise the VAT rate to 15 percent along with targeted social transfers to compensate the poor.” All these measures have been soundly rejected by the Davis administration already.

However, the Fund said some of these revenue gains also permit public spending increases in “key areas”. For example, expenditure on primary and secondary education could be increased by a sum equal to 0.3 percent of GDP “to train and hire additional teachers including to expand technical and vocational offers, improve student retention rates, and conduct a national learning assessment”.

Other areas that the IMF recommended for spending increases was a 0.3 percent of GDP rise in resources allocated to social services to help “the most vulnerable, including for training and internships of at-risk youth.

And it called for an outlay equal to 1.5 percent of GDP on climate resilient infrastructure “to build more resilient roads, bridges, public buildings and public housing to address rising demand for housing in New Providence and housing shortages in Grand Bahama and the Family Islands that were exacerbated by Hurricane Dorian”.

“[The] proposed fiscal adjustment and implementation of various supply side reforms would reduce debt to 50 percent of GDP by fiscal year 2030-2031 This would reduce sovereign spreads, ease financing conditions and increase the likelihood of a rating upgrade,” the IMF said.

“While real GDP growth would initially slow due to the near-term fiscal consolidation, per capita incomes would be around 1 percent higher than under staff’s baseline by fiscal year 2030-2031. Extending consolidation efforts beyond fiscal year 2030-2031 could unlock additional resources for climate adaptation while keeping central government debt below 50 percent of GDP. “