A MATTER OF LIFE OR DEBT
Written By: Hubert Edwards
THE CRISIS WILL END
There is every expectation that the current economic state of The Bahamas, which was created as a direct result of the prevailing pandemic and the attendant economic crisis will end, these things always do. What is not as clear is when and how the underlying crisis of a weakened economy with less than desirable levels of resilience will be corrected. At what stage will the structural deficiencies of the county be addressed, placing it on path for improved economic growth when compared to our pre-pandemic experience of about 1% annually, on average. Why is this important? The pandemic will leave the country with an elevated level of debt as evidenced by the most recent budget predictions. The debt stock that for the first time is seeing a fundamental shift in its historical proportioning as it relates to foreign vs domestic debt will exert serious influence on every economic decision henceforth. Darla Dukharan, the leading regional economist, in her 2021/2022 analysis of the budget locked in on this as an important issue in her analysis; “there has also been a shift from Domestic to External Debt, which creates balance of payment pressures over time. External debt accounted for roughly 43% of total central government debt in December 2020. This compares to 21% at the end of FY2010/11”. The external debt stands just over $4B with the internal debt of $5.5B with contingent liabilities of $421MM.
The balance of payment issue is one that does not often get much attention from many commentators. Economist Rupert Pinder highlights this very often. Effectively, the concern is the country having sufficient foreign currency to meet its obligations. Clearly the higher the external debt the more revenue is needed in currency to meet these payments. The reality though is that as dire as that may sound it is the opportunities that must be focused on. The opportunity to change the narrative. The opportunity to focus on fixing the fundamental long left undone. The opportunities to galvanize the three main sectors, public, private and social, around the cause of redefining what the future will be. The opportunity to wrest back the productive capacity of the country that has been and will continue to be eroded by debt until there is a marked reduction in debt or significant increase in growth or more ideally a combination of the two. Until either of these happen, every fiscal decision made by the government could come down to a matter of life or debt.
That the crisis as we know it will end is certain but its effects will linger and morph. We must therefore continue to pay close attention to what is happening. The crisis will continue to have an impact on global output, supply chains and therefore the availability and price of input material. As a largely importing country, we are definitely going to importing higher inflation. This has implication for businesses and individuals alike. As we contemplate the country’s ongoing recovery there must be a readiness for flexibility. What will be on display in a real way is the robustness of the various elements of the country’s economic arrangement. The pandemic will end but its effects will test our resources, put pressure on our purchasing power, it may ask questions about our external reserves, it will demand answers on how aggressive we will be in managing the debt and finding new revenue sources, and it will uncompromisingly question our ability to work together to find solutions. The crisis therefore has the potential to influence new self-imposed crises should we not work diligently to effectively solve the challenges faced. In all this though, the greatest crisis we could face is one created by the simplest of means, being comforted by the initial round of early pent up demand, assuming that things will come back to normal, as we knew them to be, and acting accordingly. Just for the purpose of contemplation, how much of government revenue is earned, say via VAT, during the hours after what has now become normalized curfew hours and how many persons have now settled into a practice which will see them at home before 10:00 PM? What level of change has happened where persons now enjoy home cooking and will significantly reduce eating out? What behavioral changes has occurred which will adversely affect some business while positively affecting others but with a potential net effect of lost revenue? Yes the crisis of today will end but it will bring changes, some readily predictable, others unknown and therefore increased uncertainty in anything which may be benchmarked against the pre-covid-19 period. This is why bold and game changing decision-making, sound reasoning and a new type of narrative must become the defining features of the road to recovery.
BAHAMAS IS ROARING BACK
I recently saw a Facebook post where the writer lamented the point that there are persons who are disappointed with the improvement in the economy. It is difficult to imagine why anyone would do so. Such individuals clearly either have no interest in the success of the country or are so otherwise vested in others, such that they would rather see the economy flutter. If this were so, it would be reasonable to conclude that such persons have no idea of the economic challenges faced by the country nor fully appreciate the gravity of the impact of a prolonged period of depressed income. In a recent panel discussion, a leading financial figure stated that the country is facing an impending category 5 financial disaster. This is a very blunt and worrisome prediction. While I would not state it in the same term, it is agreeable that the country will face some very challenging times ahead. The expectation of significant activity in the tourism sector is therefore a positive, urgently needed to help normalize economic buoyancy of the country, after all, this sector is the main engine of the economy directly and indirectly responsible for upward of 75% of economic output. Tourism roaring back is an unequivocal positive.
There is, though, still a healthy level of uncertainty brought on by the continuing covid-19 pandemic. There is an understandable desire for normalcy. On one hand the increased availability of vaccines globally, especially in the USA, has positively added to this outlook. On the other hand, the challenges and difficulties of many countries, including The Bahamas, in accessing vaccines and grappling with vaccine resisters demonstrates how precarious the realities are. The performance of the US economy is also very positive and bodes well for improvements in the country’s output. I believe though that the robust first quarter growth of 6.4% should be tempered in setting expectations. There is little doubt that the fiscal policy response of pumping trillions into that economy with payments going directly to households is driving some of the growth, being gains of what was lost since the start of the pandemic.
The tourism game is still one where disposable income drives the decision and in my opinion it's way too early to determine how well the market’s disposable income has changed or will change. One of the benefits of the pandemic is that while there was significant disruptions and curtailment of revenue for many companies, there was marked reduction in expenses to compensate. A normalization of economic and social activities will cause a reversal on the expense side that is likely to place many organizations' business models under pressure. Truth is, this pandemic will have a long tail recovery. We must therefore be mindful to not exaggerate expectations and be watchful of potential future shifts beyond the immediate bounce from pent up desire. It is my hope that the demand is sustained, given that the fortunes of tourism determine the fortunes of the country and that the seeds planted from the previous budget are still in a state of germinating.
Let us consider a recent media report, which highlighted the level of economic activity being experienced in one of the family islands, Exuma. Based on the report there are significant challenges finding rooms, everything is seemingly maxed out. This is fantastic news for that island and for the country. But here is what is most important in the context of our discussion, what is happening now is not unique. Yes, the concentration of the demand at this point, given the pent up nature, influenced by the pandemic, is high, however, Exuma has demonstrated over recent years notable performance in its economy especially as it relates to tourism. This island though clearly has a capacity issue. There is a need for improvements in health care and upgrade of infrastructure in various areas; its robustness makes a compelling argument for significant improvements in local government machinery. One consistent call by the current MP is for more of Exuma’s tax dollars to be returned to the island. The challenge is that with the economic constraints faced by the country, with the significant level of debt there is little to no chance of this happening, regardless of who is at the helm of the country. A segment of the country that is ripe with opportunities to fuel additional growth is likely to be stymied by the constraint of funding. What does this mean for us? Without additional capacity, despite any boom we are likely to return to only as good as we were with the growth imperative lost. Extrapolate that to the entire country and one will readily understand why this issue is not simply about returning to pre-Covid-19 performance. What is most important is the ability to expand productive capacity within which to leverage the momentum, positioning the county towards growth, upward of 2% annually. What is the singular most influential factor that will exert an adverse influence on this ability? The easy answer is debt. The continued servicing of the not high debt stock will progressively remove large amounts of the country’s spending power or at least discretionary spend.
As mentioned above, the pandemic has created a serious reduction in the top line revenue of many businesses. This is no different for many state owned entities (SOE) in The Bahamas. With the need for social distancing, consistent with experience elsewhere, these entities have also seen reduction in their expenses. This will change when we get back to reasonable normalcy and the changes could be dramatic. Why this is important is that many SOE have been and will continue to be cash strapped. Many SOE have their own stock of debt which, while there have been creative efforts in recent years to have them stand alone and not reflected as central government obligations, the change of environment will put pressure on those arrangements and by default the government will be the ‘default knight in shining amour’ if things go south. Of all the SOE, Bahamas Power and Light is the one of greatest concern. Its proposed rate adjustment bond is likely to be significantly imperiled by its financial performance worsened by the impact of the pandemic and general change in the finance market, rendering it a more risky proposition.
With knock-on pressure from higher unemployment and therefore likely increased receivables, they will have little choice but to look to the central government for support. There is a potential half billion dollars at play with respect to BPL. Bahamas Air, another SOE, is at a lesser level likely to be in the same position. The recent rationalization of the chairman with regard to making do may not hold, given its importance to the transportation and communication apparatus of the country linking the family islands to the capital and to each other. All this points to potential increases in debt stock. This is why it is critical to not simply look at the individual initiative of the most recent budget. Analysis at that level is important but not sufficient. In my opinion every turn, every assessment has to be filtered through the lens of growth, taking into account the impact of debt.
Given the need for growth, let us consider where we are. The most recent budget has a primary deficit of $60MM with a projected payment for interest of $512MM. Effectively the servicing of the interest on the national debt occurs only with the use of borrowed funds, this before consideration of capital payments which is outside the numbers employed to determine overall deficit/surplus. Dukharan highlighted the essence of the problem that we have here. As you consider this, bear in mind that The Bahamas’ best option out of the current circumstances lies fundamentally in its ability to generate growth. On page 6 of her report she stated, “It is important to note that up to a certain point, acquiring debt has a positive impact on GDP [growth]. According to the IMF, up to around 30% of GDP, debt has a positive impact on growth, but beyond 30%, the positive effect diminishes with each additional dollar of debt until around 56% of GDP. At this point every additional dollar of debt has a negative impact on GDP”.
According to the budget, The Bahamas Debt-to-GDP is projected to settle upward at 82%. However if calculated on the basis of the revised size of the economy of $9.5B with projected debt of $10.5B it becomes starkly clear what as a country we are faced with. If the IMF position holds, then the country has a significant amount of work to do to claw itself back to a place where deficit financing is growth generating. On the surface, the position may be arguable. The USA seems to grow significantly from time to time with a massive Debt-to-GDP. As of September 30, 2020, the US federal debt was $26.9 trillion—up $4.2 trillion from last year, due largely to the government's COVID-19 response. The total US economy is $22.7 trillion. Maybe the issue is, given the level of money pumped into that economy, whether it should not be displaying growth rivalling China and some of the other Asian Tigers. Even before reaching this critical mass, the country has generally not demonstrated the ability to secure robust growth. It is therefore unlikely to demonstrate otherwise in the face of downward pressures exerted by the level of debt on the books. The historical anemic growth must be reversed but the ability to do that just got more difficult with the potential for a worsening. I therefore continue to suggest, as I have done repeatedly for more than ten years, let us get aggressive about growing the economy, let us take some chances and make some bold moves, let us not settle for the current economic construct but work to expand and enhance whatever exists.
WHEN THE MAN IN THE ARENA SPEAKS
In the speech Citizenship in a Republic, Theodore Roosevelt stated emphatically, “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs,….who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly..." The speech more popularly known as the “Man in the Arena '' is a very powerful statement and very influential set of words that has stood the test of time and “troubled” the consciousness of many. While the message is clear and does not leave much room for debate, I believe that in the context of building a republic he erred in totally discounting the role of critics. In closing the debate on the budget, in which the current year’s budget was intrinsically tied to that of the previous year’s, the Prime Minister and Minister of Finance emphatically said, “it is vital as a government to listen and to learn from various criticisms and differing views. Yet over the past four years, and over the past year and a half especially, there are certain critics who talk plenty fool; who did not have to feed the people; who did not have to ensure benefits to keep families together and households going; who did not have to make the tough decisions about Covid; and who did not have to get the country ready for recovery. My government had to do more than talk. We bear the responsibility of governance. We had to act. And we did act! We have governed on behalf of the people. We saved lives and people's livelihoods. We do not apologize. I do not apologize for borrowing to take care of our people''. It may not be immediately evident but this very powerful statement may yet be the clearest and unequivocal one made regarding the choices that we face as a country. The Honorable Prime Minister did not fall for the deficit of discounting the critic but instead properly contextualized the potential foibles of the critic, the positive role the critic may play and the value that can be gleaned therefrom. However, it is the “man in the arena” who best appreciates the tradeoffs, the give and take, the bump and bruises leading to whatever the outcome may be. It is the man in the arena with the decision to make on who eats and who doesn’t that best appreciates the tensions, it is the man in the arena who understands the pull of opposing and competing forces and the need to strike a balance and it is the man in the arena who best appreciates the extent to which that balance has been struck.
Therefore when the man in the arena indicates the stark choice between an increasing national debt and the ability to “feed the people; ensure benefits to keep families together and households going; make the tough decisions about Covid; and get the country ready for recovery” he should not be ignored. While this may not have been the main intent, I believe that in a moment of candid, open and vulnerable disclosure, the Prime Minister gave a glimpse into the narrowness of the space between debt and survival and an appreciation of the fierceness of the undercurrent which tug at the economic options available to the government. The budget, on analysis, bears this out. The early starting point is the fact that we have a primary deficit at play. Assuming that the recurrent expenditures listed are generally the amount you would get in any given year even if you were to successfully argue for a different allocation, it crystalizes the fact that we are struggling to pay for the necessities. This however is an extremely small deficit. You will readily appreciate this when you take note of the fact that interest payments are $512MM and capital expenditure $378MM, accounting for 93.6% of the total deficit. When we consider that of the total budget, capital expenditure is one of the areas with the greatest potential impact of future growth, investment for future growth we start to develop an appreciation of how serious the issue of debt is for the country. Firstly, 53% of the deficit is totally for servicing the interest on the national debt. Secondly 39.7% of the deficit, the position with the greatest potential for facilitating improvement in the perennially anemic growth rate is all secured (or to be secured) via debt. To be fair and clear, one should not walk away with the impression that this alone is the only means of growth but it is instructive to analyze the current fight by the Biden administration in the USA to maximize spending on capital infrastructure as a means of driving and maintaining that country’s economic competitiveness.
In analyzing the budget, commenting on any aspect of public life, how does one truly appreciate the pressures faced by those at the helm? As in a previous article, I raised the questions: what are the things you would be insisting on having and not having in the budget this year? What trade offs would you be open to making? Taking into account the following factors: revenue, growth, expenditure, deficit, debt, reserves, the pegged exchange rate and taxes, which aspect would you wish to be either aggressive or conservative with or put at risk? Considering you are faced with high unemployment, disrupted economy, high debt, low revenue, what would your trade offs be? Should there be an increase in taxes to secure a reasonable amount of revenue but at the risk that such a move at this time could potentially cause further harm to the economy? How would this affect potential recovery and affect an already stretched private sector and the general populace, at least at this time, in the midst of a global financial crisis? Would you overlook the state of your medical infrastructure, which Covid-19 has shown to be significantly weak? Would you overlook the private sector, which stands as an option for absorbing some unemployment?
Would you be minded to not inject foreign currency into the economy to preserve the external reserves and continue protecting the pegged exchange rate? What about social sector support? Would you not make allocations to support struggling households and potential continuing high unemployment?
I believe that again, while we may argue for the expenditure budget to be differently allocated, in the end there are some important areas that most reasonable persons would cover, as was done in the current year budget. In the face of limited resources, the choices cannot be easy. If this argument of limited room to maneuver, limited resource and high-pressure demand hold true it would seem that the major debate to be had rests outside the numbers. Based on my early analysis I believe that the deficit should have been larger, possibly beyond the prior year deficit of $1.3B. If historical performance holds true and revenues terminates with a bank of 75-80%, all things else being equal, the deficit could end at approximately $1.4B. Before we are carried away, the latter statement is not very accurate. If all things are held truly equal based on historical behaviour, the capital budget will be curtailed to restrict the extent of the deficit. Against the backdrop of what has been said up to this point, the import of this latter statement should not escape us. In order to maintain our deficit from within a certain subjective band it has been the practice for successive administrations to restrict capital spending, capital investment. The Bahamas has for a while been the throes of a debt cycle with all the elements necessary to be dangerously vicious and critical mass and that has emerged over the last two fiscal periods.
OUTSIDE THE LINES OF THE BUDGET
The resolution for the current state of affairs and the real issues faced by The Bahamas sit outside of the four corners of the budget and the budgeting process. There is no salvation in the budgeting process until there is an acknowledgement and appreciation that $2B in revenue and $3B in expenditure over multiple years is not a sustainable approach. It is however one that will arrest us in a state where, for example, the need to maintain a resilient social sector, as part of the effort for maintaining a resilient economy, is an unequivocal decision to borrow. The recent development in the tourism sector is heartwarming and much needed. There is every indication that a high level of economic activity will be churning across that sector starting now. However, let us consider that even if the Bahamas were to experience its historical best year in revenue, $2.4B, we would still be running a deficit of over $700MM. What does this tell us? Fixing the state that we are in can come by only one means and that is economic growth. Further, having regard for the state of the economic enablers there is no single budget cycle, unless there is a massive but unlikely windfall in revenue, the country will remain in this state for multiple fiscal cycles to come. Even if we were to get back to our a pre-covid-19 economy of approximately $13B, projected debt of $10.5B, the country needs clear revenue of well over $3B annually to even start making a dent in the debt stock. As long as debt remains elevated, there will be challenges. This is one of the reasons I have consistently highlighted the initiative to develop InvestBahamas as being so important to the future of The Bahamas. Where the country is currently, it cannot change its fate on the steam of local investors nor at the current cadence of FDI. Unless we secure significant successes in attracting heighten levels of direct investments (foreign or domestic ownership), create a highly facilitative supporting infrastructure for economic growth, ramp up national productivity and develop a more diversified economy, leading to sustained and higher than historical norm growth, the country will struggle to escape the clutches of its current debt burden.
Reminding ourselves of the example provided by Exuma earlier, it is reasonable to state that while the country prepares for the “bounce back” it must also now seriously focus on its ability to “bounce higher” than pre-Covid-19. To this point, I believe I have made the case that simply going back to normal is always going to be suboptimal. While pandemic imposed issues have been highly distracting, we must always be mindful of the challenges which existed, amongst other things challenges to the ease of doing business, weakness in the facilitative environment, challenges with energy, threats to the value proposition of the financial services industry. To enhance our “bounce higher” ability the country must seriously focus on its ability to diversify the economy. This is where listening to the “man in the arena” is most critical. The prime minister clearly indicated that the budget 2020/21 and 2021/22 are Siamese twins. To fully flesh out any analysis, therefore it demands going back to the previous year.
A cursory review will show that in contrast to the current budget, the prior year is much richer in discussions around diversification and the development or growth of new/fledgling industries. The then Minister of Finance highlighted a number of important focus areas for growth or expenditure management. Transformation of State Owned Enterprises; Enhancing the Ease of Doing Business; Renewable Energy and Solar Power Initiatives; Addressing Critical Public Infrastructure Needs; Reviewing and Assessing the Adequacy of Current Tax Concessionary Regime. These together with the then stated intention of growing agriculture to a targeted 10% of GDP, within ten years, evidence the seeds spoken of by the prime minister this year. The main point here is that if we are going to be ok economically, we must not lose sight of these identified deficiencies; we must become wedded to the idea that these are imperatives for seasoning future growth. The Minister of Finance, in outlining the vision going forward stated. “At the foundation is our commitment to: expand support for Bahamian entrepreneurs and small businesses; increase [improve] the Ease of Doing Business; build 21st century infrastructure as a new foundation for growth; invest in education to break the cycle of poverty; invest in renewable energy to create a sustainable future; and lead the digital transformation to a modern government”.
The preceding initiatives clearly lay out in principle a road map for a more diversified economy. Emanating from this must be discussion around forward and horizontal integration as the country seeks to maximize gains from its mature industries especially tourism and domicile more of the export earnings. The focus on agriculture last year was clearly, and still remains, one of the most viable paths to new foreign currency revenue with the ability to leverage spill overs and linkages from the tourism sector. Growth is resident in our ability to create innovation especially across the private sector. Within the context of innovation we must consistently ask and answer “what are the problems to be solved?” ability to scale up companies and operations, access to larger markets, expanding capacity to facilitate exports. To secure growth we must be willing to make uncomfortable policy adjustments and democratize the treatment of the concessionary regime as foreshadowed in the current budget. Of critical importance the country must find more significant means of deploying capital investments designed to fix the “critical infrastructure needs” of the country. With the realities as they currently are, there are two main means for this to materialize, direct investments and public private partnerships. As it stands, the government will be constrained for a long time to “independently” fund the level of input needed to change the fortunes of the country. If you take careful note, you will see that I just tied the two budgets together in a significant way towards solving the main challenges the country faces. I am not proposing that these are the totality of the solutions and that they will not require further and deeper thinking. What I seek to show here is as stated above, the solutions the country needs lies outside the four corners of any single budget presentation. Immediately therefore this argues for a continuity of effective initiatives and recalibration of others suitable for the desired outcome but divergent in execution.
FISCAL RESPONSIBILITY AND DEBT STRATEGY
One of the most pointed critiques of this year’s budget was the lack of a clear strategy for debt management. Dukharan stated in her analysis “while there is some cause for cautious optimism based on a few growth-oriented initiatives and the revival of the US economy, the fundamentals still point to a need to restructure re-existing unsustainable debt load and implement reforms to solidly place The Bahamas on a sustainable growth path”. This is crucial. Ms. Dukharan last year posited her belief that The Bahamas would in one year be in the embrace of an IMF fiscal adjustment program. We are delighted that her prediction did not hold true. I spoke to her recently, very briefly before an event we were both presenting at, she was very forthright and open and expressed that she too was pleased at the outcome but very professionally admonished the exercise of caution, a position with which I am most agreeable.
The Minis administration is undoubtedly of the same belief and the reason it brought to parliament and passed the new Public Debt Management Act, which came into force on July 1, 2021. According to the act the “Public debt management objectives [are to]:
(a) Ensuring that financing needs and the payment obligations of the Government are met in a timely manner at the lowest possible cost over the medium to long term, consistent with a prudent degree of risk;
(b) Promoting the development and efficient functioning of the domestic Government securities market, and
(c) Ensuring that the public debt is managed consistent with the general principles of responsible fiscal management, the fiscal responsibility principles…”
The question that looms large now is exactly what will be done and at what cost will this be achieved. Will the administration employ a strategy of restructuring the debt or re-profiling? To fully understand what the country will be faced with and gain insight on the potential strategies or measures we must necessarily deconstruct the targets against which the government proposes to operate. Consider the pronouncements of the Minister of state for Finance on presentation of the 2020 Fiscal Strategy Report. The Minister in summarizing earlier points on the current state of affairs stated, “The upshot of the revenue and expenditure measures is to ensure that at the end of the day that the government is able to meet its fiscal deficit target of 0.5% by 2024/25, which is unchanged from the 2019 Fiscal Adjustment Plan”. The current budget projection holds GDP in 2023/24 at $14B and a deficit of 1.1% with reduced interest payments and a reduced level of capital expenditure compared to the current year. This may suggest that we intend to either achieve debt capital reduction and save on interest cost or restructure debt to reduce interest. If the arguments made earlier on the drain of productive capacity because of debt holds, then it is clear that The Bahamas is in for at least a decade long hard slug to normalizing its economic affairs.
This is evidenced in Minister Thompson's statement as he continued his explanation above “The path to this objective has the overall balance moving from a high of 11.6% of GDP in 2020/21 to 7.8% in 2021/22, and then tapering off in the remaining years of the medium-term forecast. Even with this renewed momentum towards fiscal sustainability, the target debt to GDP ratio of 50.0% will not be achieved within the medium-term horizon. The ratio is expected to grow from 66.0% in 2019/20 and peak at 85.0% in 2021/22 before declining to 73.7% by 2024/25. Based on this trajectory, the Government now envisages attaining the 50.0% debt target by 2030/2031, which is an additional two years beyond the timeframe set in the 2019 FSR”. Analysis suggests that at this stage less than a year later these numbers may be too low. If every additional dollar of debt after 58% Debt-to GDP has a negative effect, there are only two real prudent options available: pushing aggressively for robust growth and significantly reducing borrowings. With a projected fiscal deficit (2023/24) of well under $200MM and GDP of $14B these would certainly be achieved. What remains unclear, despite noted initiatives, is how exactly the growth will be generated to see if the country can secure revenues approaching that ideal number of $3B ($2.8B projected) per annum. This demands some thinking but I am unable to shake the idea of “where is the pain point?” in this whole process and “what will be the price paid?” to achieve the improvements. There is no question in my mind that something must give. We can, like Jamaica did in its two structural adjustment programs, achieve gains through the reduction of debt at the cost of growth or do otherwise and go for growth with debt with the objective of reducing the Debt-to-GDP ratio. In the current global economic climate, outside of a structural plan with the influence of an international organization (the IMF) The Bahamas will not be able to fundamentally shift its debt burden through negotiation. Extending the maturities yes but otherwise, the gains are limited. This possibility has to also be contextualized against any possible further downgrade the country may experience. Such an occurrence will make debt more expensive and add greater uncertainty to the recovery process.
To reiterate one last time for clarity, the solutions to The Bahamas problems are not resident in any one place. Unlike some persons who propose that the solutions are unknown, I propose that they are simply historically disjointed and begs for greater coordination. From the 2020 FSR the Minister of state for Finance in discussing the structural reforms needed, stated, “We must embrace Technology and Innovation. The full restoration of Grand Bahama is key to the full recovery of the Bahamas. Supporting the development of Micro, Small and Medium Sized Businesses (MSMEs) Small Business Development is a must. Promoting domestic and foreign investment - the Investment Process must be easier and faster. Investment in Skill and Education Building - the Government is committed to investing in skills and education to boost labour productivity and secure more inclusive growth for Bahamians. Expanding Potential Financial Sector Opportunities - we must embrace new Technology Industries. Energy Reform through the use of renewables - the government is committed to the use of more efficient and environmentally friendly energy sources, as a means of improving energy security and cost”.
There can be little argument on these points. Either we give life to what needs to be done in these various categories or be prepared to be further crushed by a burgeoning debt load. This takes us back to one of the underlying messages of this piece. The discussion to be had cannot be focused myopically on debt and its reduction. The level of debt we experience is and will continue to be a function of the country’s performance, growth. If we therefore aggressively solve for growth with a clear strategic focus the debt situation will eventually resolve itself. It is in this process that our fiscal responsibility apparatus and principles will have the greatest potency. Through commitment to accountability, transparency, real public sector financial reform and anti-corruption the country will position itself to the optimal use of its resources. By becoming seriously committed to a clear strategic path, it is my view that the country will thrive. This commitment though is akin to the maintenance of an airport landing strip. Because it is a matter of life and death, anything and everything that takes away from or puts at risk the safe landing of the craft must be removed and consistently guarded against. Cleary the realities are a bit more complex than the analogy but the outcome is as important to the life of its people.
TIME FOR FOCUSED ACTION
The government recently released the first Annual Borrowing Plan 2021/22 (ABA), a very useful analysis of the approach it will take to financing the funding needs for the current fiscal year. This, a requirement of the Public Debt Management Act 2021, is a step in the right direction and represents excellent work. This approach will undoubtedly be one of the legacies of the current administration; it brings a new level of transparency and clarity to the debt management effort. It shows the need for $1.85B driven largely by the deficit of $951MM and debt redemption of $899.7MM (both domestic and external). With $512 MM embedded in the deficit, this means that our total borrowings to manage our borrowings is $1.41B! the ABA states that “Given the scale of the budgetary financing required, and the observed absorption constraints in the domestic market, the government will continue to leverage foreign currency borrowing opportunities, although not with the explicit strategic objective of supporting the countries’ external reserves”. The latter statement is an interesting one which taking into account all the facts of the impacts of the current pandemic is challenging to accept but may be indicative of the pressures involved. The government will borrow $959MM (or 51%) in foreign currency debt. This therefore continues the trend of the erosion of the difference between local and external det. The document details maturing domestic bonds ($484.1MM), analyzes the issuances in foreign currency instruments and loans and provide an overall clear understanding of the strategy and intention of the administration. This in my opinion should bring greater understanding and appreciation of where the country stands. One weakness I believe of this document is a lack of analysis of the total debt burden. Such a broader assessment would provide greater context for analysis. It is however, a very positive start with stark underlying message, unless we grow or get austere; we will be borrowing for a while yet.
The time for focused action is now. I recently read a meme which stated that “Don’t be afraid to start over again. This time you are not starting from scratch, you are starting from experience”. The country is certainly not starting over or from scratch but for show as we seek to claw ourselves forward to economic resiliency and greater stability, we have deep experiences and insights of a global pandemic and financial crisis to lean on. Even if there have been missed opportunities up to now we cannot afford to lose the lessons. In my previous article, I ended by stating that one of the important things that must be done is that there needs to be an unequivocal growth strategy promulgated coupled with a necessary treatment of dreaming, and aspirational reaching, stretching ourselves beyond the points where our economic realities suggest is impossible now. It is worth repeating and there is no other way out than to think and strategize ourselves to success. The recent budget exercise has provided us with deep insights into the challenges of the future and I believe that the remedial actions necessary must be tied to the growth of the economy.
As part of this process, there must be a firm commitment on the part of the government to address and improve its facilitative capacity enabling and “incentivizing” the private sector to become more innovative in driving the growth. As stated herein, the current debt situation demands a broader discussion beyond reduction. As we move forward, there are questions I believe we must contemplate in the process. In the midst of covid-19 shutdown, I raised some of these questions but I believe they remain relevant and can provide guidance. What do we want the country to look like over the next decade? When we get to 2031 and the national debt is back to reasonable levels, how well placed will the country be to build on its new economic strength? Given the uncertainty around tourism, what will it look like and how can we secure greater diversification in that sector? Beyond tourism itself, how will we add greater diversity to the economy?
While seemingly, there is a level of resistance to engage on the matter, one of the important questions going forward is what exactly should the tax regime of the Bahamas look like? This must be considered in the context of what regime provides the greatest future value for the country. On proper analysis this is an assessment of “what adds the most value” and “what may create the greatest level of destruction to the country’s overall value proposition” then making decisions in favour of the country. As we seek to secure growth, the government must actively consider sectors that are ripe for policy support and move expeditiously to season them for growth. In the process the approach should not be “home-run or nothing” but a deliberate and intentional approach with the ability to seamlessly cross over from one administration to the next. Applying the idea of a clear and consensus-buoyed strategy the runway must always be clear and primed for the most comfortable and safest takeoff and landing for the country with a willingness to endure the inevitable turbulences. I believe that there is value in rethinking the uses of our fiscal policies linked to taxation in driving growth in the family islands, not based on a broad-brush policy but one that clinically exploits differential allowances dependent on desired outcome for each island.
The pandemic has shown what is at risk when there is a significant downturn. The well-being of the entire country is in peril. This is a natural result given the level of dependency and I do not believe that we can have any better scenario analysis than what we are currently enduring. It therefore makes the argument not only for diversification of tourism but paying attention to the wider economy. What will the financial services look like over the next two to five years? How will it thrive in a post implementation environment? Will the developments around a global minimum corporation tax hurt the industry or create sufficient disruption to demand strategic shift and reengineering of offerings? As the second underpinning of a largely two industry economy these are important questions. In the quest for the growth needed the country must leverage every bit of opportunity it has at its disposal. Grow tourism, grow financial services, grow agriculture, develop new industries and where there may be sacred cows determine how they will be treated and the extent to which we are willing to sacrifice benefits for the greater good for narrower interests, again there is a choice between breathing life into the economy and debt.
As an example, I have noted and assessed a number of reports, news articles and analyses on the rankings and state of the offshore financial services arena. In each of these recent instance The Bahamas does not feature highly. On impulsive reaction, one may conclude that this is a good thing as they generally points to countries with the greatest impact on onshore countries tax revenue. However, in my opinion they are not. The fact is it demonstrates an exclusion from lucrative aspects of the financial arena, a critical leg of the country’s national competence. Consistently countries such as Cayman leads the way, with the BVI and Bermuda consistently in the play. As we seek solutions for growing the economy this reality suggests opportunities. It is clear that there are greater options for participating and therefore growing the offshore financial sector.
Studying these analyses raises some interesting questions. It is clear that with recent developments in global corporation taxes there will be some disruptions, given that we are not a big player in the corporate headquartering segment. Most recent Tax Justice Reports, have shown The Bahamas as being well outside top “performers” in certain very lucrative segments. Why is this so? Are there opportunities to reengineer The Bahamas offerings to grab advantage from regional competitors? Is there any potential for diversification within the sector, akin to developments of homeporting in tourism sector? I believe that we must step back and take a careful strategic look at the current state of things. Why are all these companies headquartered in Cayman? Is it just for taxes? Given the similarities in the tax regimes of both countries, it is challenging to accept that. Therefore, are there aspect of the Caymanian regime, as an example, which indicate were and how we can adjust and innovate for gain? If no then why are they there and not here? There is clearly a competitive arena in which we do not actively participate as an IFC, why would that happen if we are in the business of expanding the economy. Is this a case of The Bahamas being overly niched? Regardless of the answers, it is clear that opportunities exists. Given the need to grow the economy and given that there is significant national competencies in financial services should we not now look at how, with this minimum taxation disruption (potentially), to make have new forays into "nontraditional" areas of the competitive space? If the playing field from a tax perspective is expected to be level and the clear regional leader, Cayman, has signed on to the Biden minimum tax agreement, should we not be looking to see how we can leverage this to capitalize on the value that exist or is it outside our realm of possibilities? Like most persons, I like to see when The Bahamas is in the “good books”, no blacklisting, grey listing, negative narrative or threats. However, I believe that there are too many “good reports” that the country is not on, most indicative of where the biggest tax planning facilitations are for multinational corporates. I make no presence to understand it all but these reports appears to be indicative of opportunities not pursued, as we seek greater resilience the hard questions are, will these be pursued or, very unlikely, are we incapable of pursuing them. I strongly believe that the country is capable. I strongly believe that the sector has a desire. I also believe that if we take a careful strategic approach to this potential “Biden gift” which has been handed there is potential for gains; after all, there is a significant segment of the offshore arena being disrupted of which we are insignificant player at best. This discussion carries an instructive principle for application in other sectors, facilitating the growth needed to wrestle with our national debt situation.
Fixing the debt challenges requires that we move into action and solve for growth. In this recovery effort, we must be broad in our thinking and be willing to grapple with the uncomfortable questions. Which sector of the economy is causing a drag on others? How do you diversify without a broader skill set? Are there social assets such as diversity of cultures that we can take advantage of? Does immigration hold any value in diversification? What are the opportunities in CARICOM and how can we leverage the Caribbean to improve the domestic economy? What opportunities are there for inter region trade that benefits the Bahamas maritime industry? How do we restate the idea of Bahamianization for the 22nd century based on fairness, economic equity and empowerment? How does centralized governance adversely affect economic growth and is there value for greater devolution to local government?
The road back to economic vibrancy, being different from vibrant commerce, for The Bahamas will not be easy. The great news is that after failures, it is not possible to start from scratch. The starting point may be without all the tangible resources desired, but think again, there is always more when we dig deeper. Having experienced the challenges; we are better prepared for the next moves, or ought to be because there are many lessons to be learnt. If we adequately absorbed the lessons, then moving forward should be better and easier in many ways. It is most important that we are bold, not to be afraid to face the realities, and to believe we have the capacity for great achievements. We are now resourced with ideas, awareness of what worked and what did not work, and we should have clearer thoughts of what is needed and how to make the necessary adjustments. It is time therefore to step out in search of the missing pieces of the puzzle, finding and placing them in the right places. It may take us a while to get back to where we were, however, the tentativeness, anxieties and uncertainties that bothered us should now be firmly placed in the past. It is time for new considerations, new thinking that is more informed and therefore new worries. We have the ability to grow, to grow again, but it starts by thinking that we can, and being committed to finding the how!
© Hubert Edwards 2021
Hubert Edwards is the Principal of Next Level Solutions Limited. Hubert specializes in finance; internal controls; enterprise risk management; governance, risk and compliance (GRC), with over twenty years of experience in corporate governance, policy and procedures development, enterprise risk management, regulatory consulting, anti-money laundering and strategic planning.
Former Chief Business Development and Strategic Planning Officer at financial institution. Senior Manager Audit and Regulatory Consulting with a Big Four firm. He holds a MBA and LLB, with honours. He has lectures and trains on topics such as anti-money laundering and compliance; internal controls; corporate governance; and risk management.
Edwards is the Founder of HubertEdwardsGlobal and Success Summit. He a radio and television host and is the producer and host of the radio show The Essentials! in addition, he is a regular radio and television commentator on economic and financial issues.
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