* In the finale of a four-part series, Hubert Edwards warns that the Bahamas has reached a “debt trap” tipping point that will require a collective effort to address it. . .

One of the biggest complaints following the budget communication is that there was no strategy to deal with the national debt. This is not correct. A strategy has been outlined. Essentially, this required sinking fund arrangements to repay $ 775 million; contain interest charges by borrowing at lower interest rates from multilateral financial institutions; take advantage of fixed interest rate debt in a low interest rate environment; and the creation of an appropriate mix between domestic debt and foreign currency debt. This will be reinforced by the additional transparency produced by the Public Debt Management Law 2021, which comes into force on July 1 and requires that a debt management strategy be published for all to see.

The question here is whether the strategy is adequate and how well it will hold up in reality. The sinking fund will take some time to build up and is subject to various public revenue inflows. This problem is highlighted by the lack of contributions to the sinking fund during the current fiscal year due to the fallout from the COVID-19 pandemic. The other aspect to consider is the extent to which loans from multilateral financial institutions will be sufficient. They are available at higher rates than the free market, but the amount of debt needed to finance the deficit will always see a significant portion of it in the form of higher cost borrowing. The increase of more than $ 100 million in the government’s debt service costs, to some $ 512 million in the 2021-2022 budget, is indicative of the increase in the debt burden. Interest charges now represent 23% of revenue and 18% of total expenditure, compared to 18% and 15.5% respectively. This is important and, with the uncertainty surrounding economic performance, could become more so.

One of the most critical issues to face in this budget cycle and beyond is outstanding debt. Within the context of Gladwell’s definition of “tipping point”, debt in the Bahamas has reached such a “critical mass” that it must be dealt with quickly, seriously and given focused attention. The total debt burden is expected to exceed $ 10 billion. Of every dollar earned, it is projected that 23 cents will be used to pay interest on this debt. The debt-to-GDP ratio is just under 100%. All of this flies in the face of the blatant reality that government accounts are on a cash basis. This is expected to change soon with public finance reforms, but these accounts currently do not show future spending commitments and contingencies, and the potential impact that public enterprise debt (SOE) will have. This situation has the ability to significantly erode the productive capacity of the county’s finances.

To put the situation in context, consider the fact that the annual budget deficit for the past seven years has generally been higher than the interest / debt service charges. This means that the Bahamas are in fact borrowing to pay off their interest obligations. It will continue to tighten like a noose around the country’s economic neck. It is essential to escape this trap by scoring some tough decisions and taking definitive action. There is no need to reinvent the wheel. Case studies abound in the region, and the Bahamas should look to those who have been through this path before for some insight.

Barbados and Jamaica provide powerful lessons on what is at risk and the potential benefits of definitive actions and strategies. Jamaica struggled with a debt-to-GDP ratio of over 140%. In two IMF programs, this percentage was reduced to less than 100% for the first time in many years. This success, however, came at a significant cost. Consider the fact that the results were achieved without any noticeable economic growth, effectively winning at the expense of deep sacrifice on the part of the citizens. However, also consider the reforms that have been achieved, which arguably protected Jamaica from a deeper disaster during COVID-19. This shows both the risk and the potential for the Bahamas. Continuing on its current trajectory, the country is heading into a debt trap where there is a vicious cycle of borrowing and paying more, and where the power of public spending is drastically blunted by interest payment obligations. This has the potential to negatively impact Bahamians as it will be necessary to raise taxes, introduce new taxes and implement austerity measures or risk entering some form of IMF adjustment program.

If economic growth is weak and revenues do not improve, the government must raise taxes. If income growth cannot be guaranteed, expenses must be reduced. The fixed exchange rate is maintained by foreign currency reserves. If the inputs are not robust, foreign currency loans must be guaranteed to keep the Bahamian dollar parity with the US dollar. Yes, we are clearly at a tipping point, and debt is one of the factors that will exert the most pressure in the future. However, debt is largely a function of all other factors. When we look at the other factors in this “formula” it becomes clear that if, as a country, we fail to achieve comprehensive solutions, the impact could be long lasting with the potential to create sweeping changes in the world. living standards.

Call to action

These are starting points for a strategic perspective on the way forward.

  • The most important issue to be addressed is the path of economic growth and an ever-changing destination for that growth. In the process of considering this, there must necessarily be some dreaming, an aspiration beyond the points that all realities suggest is impossible now. So we have to change to start asking ourselves how we can get there, how can we achieve that desire and commit to facing the barriers that lie between where we are now and where we desire to be.

  • The budget gave real insight into the challenges of the future. No matter who will rule the country after May 2022, the tasks will be difficult. Conventional wisdom suggests that, as far as we think we know now, it might be more important. It requires a non-partisan merger around a national plan. Partisan approaches have left the country’s performance sub-optimal. There is a lesson to be learned from Jamaica in the continued implementation of its national development plan across multiple jurisdictions.

  • Confront the issue of taxation and its potential implications for the Bahamas, both in its onshore and offshore sectors. It is important to note the budget statement to undertake an in-depth study of the tax system. I think there is an urgency, or at least a set of realities, that can shorten the time frame for doing so. It is undeniable that this is a difficult question. It strikes at the heart of the current value proposition. However, it is important not to miss the global change.

  • The current debt situation demands a broader discussion beyond reduction. Corrective measures must be linked to growth, which is linked to the fortunes of financial services and domestic investors. There should be a clear and broader discussion on debt management, taking into account the interests of all relevant stakeholders. This discussion should serve both as a platform to create a better appreciation of the situation in The Bahamas and to serve to rally the collective interests of the country. Everyone has a role to play and this must become very clear.

● Finally, a commitment to carefully consider the environment conducive to investment. The InvestBahamas initiative is a step in this direction. However, there are many other aspects that have the potential to unleash national value.

Conclusion

What jobs did the budget have to solve and did it solve? Are there clear solutions or preparations for future growth? How favorable are this budget or the initiatives announced? Regardless of your answers, I believe this budget has good things right now and longer term impact. There is no doubt that the budget sought to address some pressing issues, such as health infrastructure and unemployment. The current context in which the budget is being set raises a number of questions as to whether it has at least begun to answer questions, which must be addressed for the future prosperity of the Bahamas while also addressing current issues.

We are at a tipping point. The task is to look at the realities and ask ourselves how we can safely come back from the threshold of those things that limit growth. How can we effectively manage these issues which may have, or are approaching, a boiling point and have a significant influence on social and economic resilience? The challenges loom in large part as an ominous dark cloud, with the potential to cover up any burst of sunlight that emerges. The difficulties suggest that we are at an important moment when the collective holds a great influence on future fortunes. Now is the time to mix minds, thoughts and ideas. Now is the time to accept things as they are and work to change fortunes where they are inconsistent with our desires. Now is the time for the Bahamas to start actively thinking about how they can tip all the scales in their favor and embark on the journey of consistent, sustained, above average growth. Anything less will bring with it increased pain. The choice is yours. I ask only one thing: let us not fight only to win but to build consensus, in the interest of the country, so that together we can all grow and prosper. Ubuntu!



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