By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government needs "a massive debt reduction" to hit one of its key goals for returning The Bahamas to 'investment grade' status by 2028-2029, a senior banker has warned.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the Davis administration's strategy and road map for achieving its ambition to cut the the Government's debt servicing costs as a percentage of gross domestic product (GDP) by 50 percent come 2028-2029 has yet to be fully laid out or "articulated".

Speaking after the Prime Minister set reducing interest expense - from 20 percent of GDP in 2023-2024 to 10 percent in three years time' - as one of the goals to achieve if The Bahamas is to escape s-called 'junk' status with Moody's and Standard & Poor's (S&P), he warned that a cut of such magnitude will not be easy to achieve and requires a "contraction" in the $11.7bn national debt.

"To say we will decrease it from 20 percent to 10 percent, there must be a massive debt reduction which has not been articulated," Mr Bowe told this newspaper. "It means there must be a contraction in the debt to get interest costs down. 

"Is it achievable? Yes. It is easily achievable? No. There must be plans, but not only plans but specific steps and measurements to ensure we achieve that outcome." The 2025-2026 Budget's breakdown shows the Government's interest, or debt servicing costs, are projected at $689.546m for the upcoming fiscal year that ends on June 30, 2026, representing a more than $13m year-over-year jump.

This remains a greater expense than any of the spending allocations granted to any of the Government's ministries, departments and agencies for the upcoming fiscal year. As a comparison, it exceeds the combined $477.5m allocated to the Ministry of Health and Wellness, Department of Public Health and Department of Environmental Health Services by more than $200m.

And it is also far greater than the total $353.4m allocation to the Ministry of Education and Technical and Vocational Training, and Department of Public Education, standing at some $336m greater or almost double. The $198m allocated to the two main law enforcement agencies, the Royal Bahamas Defence Force and Royal Bahamas Police Force, almost pales in comparison.

The Government, though, is forecasting a near-$103m reduction in its debt servicing (interest) bill over the next two years through to 2027-2028 in line with the Prime Minister's pledge to slash these expenses to just 10 percent of economic output and thus free-up spending resources to boost critical public services such as health, education, social services and the security services.

Interest payments on The Bahamas' national debt are forecast to fall to $624.175m in 2026-2027, before falling further to $586.552m in the 2027-2028 fiscal year - the latter representing a 15 percent decline compared to this year. However, besides refinancing existing debt at cheaper rates, the Government has yet to set out how it will achieve such a major reduction.

Matt Aubry, the Organisation for Responsible Governance's (ORG) executive director, told Tribune Business that close to one out of every $5 in the Government's $3.445bn recurrent spending Budget for the 2025-2026 fiscal year will be used to make interest payments to lenders and investors that hold The Bahamas' domestic and foreign currency debt.

"It's more than education, it's more than health," he added. "It's a very large number because we have a certain level of borrowing that we have to fund. When we think just about the cost of shouldering that debt and managing it, it's almost 20 cents of every dollar that we're paying in taxes is going to service those debts.

"That's money that we will not be using to invest in the workforce, renewable energy and new initiatives coming forward. All these things we are looking to invest in could benefit from additional revenues. If we're burdened by high debt levels and are continuing to grow, we're not seeing growth in GDP and the shrinking of debt levels, we're seeing growth in GDP and growth in debt. It just may be being better managed."

The Government's own Budget documents show that 19.4 percent of recurrent spending is devoted to debt servicing, and is second only to its $807.458m civil service wage bill which is consuming 23.4 percent of fixed-cost expenditure - the highest amount based on what these dollars are being used for.

Mr Bowe, meanwhile, reiterated that he is having difficulty in understanding how the Government will achieve its 25 percent revenue-to-GDP target in the absence of tougher measures such as new and/or increased taxes.  "When we keep advocating no new and/or increased taxes I struggle to understand how we will get to 25 percent revenue-to-GDP on the revenue side," he added.

The Fidelity Bank (Bahamas) chief argued that, rather than focus on ratios such as GDP per capita, this nation needs to concentrate on increasing the actual dollar figure for economic output and lowering the one for debt. "GDP per capita I'm less focused on," Mr Bowe said. "We need to have a clear understanding of the initiatives by the Government to grow GDP as opposed to GDP per capita."

Mr Davis last week set out several economic indicators that the Government is targeting to achieve its ambition of returning The Bahamas to ‘investment grade’ status with the international credit rating agencies, Moody’s, Standard & Poor’s (S&P) and Fitch, within three years by the 2028-2029 fiscal year.

These include a 13.1 percent, or $5,100, increase in Bahamian per capita gross domestic product (GDP) to $44,000 by 2029, plus a more than 50 percent reduction - in percentage terms - in the Government’s debt interest expense as a percentage of GDP within the same timeframe.

Mr Davis, adding that the Government also expects to be “near” its 50 percent debt-to-GDP target by the 2028-2029 fiscal year, some two years ahead of its 2030-2031 goal, said: “This administration remains resolute in its commitment to securing an investment grade credit rating within the next three years, starting in the upcoming fiscal year, 2025-2026.

“Achieving this milestone by fiscal year 2028-2029 is not merely symbolic; it is a strategic imperative that will unlock greater economic opportunity, reduce borrowing costs and enhance investor confidence in our nation’s future....

“With our GDP projections expected to fully capture economic activity within the next three years, we have confidently set the following targets to reach ‘investment grade’ status. GDP per capita has risen by 27.7 percent, increasing from $30,400 in 2021 to $38,900 in 2024. On a year-over-year basis, it grew by 2.7 percent, up from $37,900 in 2023,” he added.

“Based on regional benchmarks, long-term growth prospects and the current economic environment, we are targeting an annual GDP per capita of approximately $44,000 by 2029.” The Bahamas is presently some four notches below ‘investment grade’ status with the rating agencies, having been marooned in ‘junk’ status for some years.

Mr Davis, identifying the Government’s revenue-to-GDP ratio, or its percentage of economic output, as another targeted indicator, said: “Revenue-to-GDP has also improved significantly, rising from 17 percent in fiscal year 2020-2021 to 19.7 percent in fiscal year 2023-2024. For the current fiscal year, as previously planned, we had set a target of 22.1 percent.

“To meet the requirements of an investment grade rating we must continue to enhance our revenue mobilisation efforts. Accordingly, we project that total revenue will reach 23.5 percent of GDP in fiscal year 2025-2026 and increase to 25 percent thereafter.”

The Prime Minister added that “international best practices” showed a country’s debt should not exceed half its economic output or GDP. The Bahamas’ debt-to-GDP ratio stood at 72.4 percent at end-June 2024, and Mr Davis added: “The Fiscal Strategy Report 2025 outlines our commitment to reducing the central government debt-to-GDP ratio to 50 percent by fiscal year 2030-2031.

“Based on internal estimates and expected policy changes, we expect to be near this target by fiscal year 2028-2029. In addition to reducing the size of our debt, we are also focusing on reducing the cost of carrying it.

“In fiscal year 2020-2021, interest expense accounted for approximately 22.1 percent of total government revenue, decreasing to 20 percent in fiscal year 2023-2024. Our objective is to further reduce this ratio to 10 percent by fiscal year 2028-2029.”