A PERILOUS STATE OF AFFAIRS – PART II
In early January, “long” before the first explosions in Ukraine, we were looking at the economic reset of the country with constrained optimism. On January 28, the government released the Fiscal Strategy Report and Medium-Term Debt Management accompanied by this most sobering statement, “the nation’s fiscal health is in a perilous state”. By early February, we had additional cause to embrace greater optimism as the evidence of a waning pandemic became clearer. However, just under two weeks ago, the first shot was fired and peril took on a longer-term persona. This could lengthen our national recovery and further unsettle our economic challenges.
The economics around spate of sanctions being levied against Russia will adversely affect inflation but maybe even more seriously, the pressure on energy could become frightening. Imagine oil at $150 or more per barrel, a significant increase over the last two years of pandemic. The US reluctance to ban Russian import of oil seems to be fracturing. This will likely send us into the inflationary stratosphere. US fiscal policies will likely respond with upward shift in interest rates. The implications for the country and the region are very serious.
Some of the more potent issues surrounding this war are the extent to which Ukraine and Russia impact the global food supply especially as it relates to their collective grain exports, 30% of world trade. Russia’s dominance in oil and gas export and Europe’s reliance thereon. Coupled with the ubiquity of these products in world commerce these push the risk of hyperinflation to a high level. The knock-on effect of such a reality for countries with fossil dependent energy system cannot be understated. At the time of writing, a barrel of oil was trending at above $125 having already flirted with levels above $130. For the Bahamas and the region, the nascent economic recovery could take a hit. The war may be many miles away but the impact is almost immediate and extremely disruptive, adding to an already highly uncertain environment.
The impetus needed for growth could be imperiled from the global inflationary state of affairs. This will result in additional cost as countries, for us mainly the USA, continues their effort to tame inflation by feeding it increased interest rates. This will have a direct impact on foreign currency debt. There is though the sliver of possibility for an upside where capital could shift from near the war zone looking for new “safer” homes. Shifts in strategic focus and our usual sphere of prospecting could make this a real possibility. In risk management terms, this is seeking to exploit possible upsides of the event. A significant part of our response to the ongoing crisis begs the questions, how must we start to think about the next 6 to 12 months? What are our views and outlook for the next 2 to 5 years? What paradigm shifts and transformations will we pursue over the next 5 to 20 years?
Why is this train of thinking important? We have clear evidence that the resiliency and robustness of the economy is below what we desire. We must accept that and respond expeditiously to short-term priorities while preparing ourselves for the mid-term toiling and making those shifts that will better position us to contend with similar shocks in the future, the long-term future. It is my considered view that the current conversations are too "normal" in response to very abnormal, rapidly shifting circumstances, filled with uncharacteristic levels of uncertainties.
Why is this so? The Bahamas has proven itself very resilient in spirit. The country has faced many crises and bounced back creditably. This includes OPEC oil crisis; Middle East war; impact following 9-11; and the 2008 global financial crisis. However, it is useful to reflect on the fact that the country has never faced a crisis in as weakened a position as it is currently. We are recovering from a significant revenue downturn. The debt stock of the country has reached levels where it is arguably imprudent to borrow heavily in the international market, despite facing an extending period of unfunded deficit and borrowing needs. Additionally, significant losses in Abaco and Grand Bahama resulting in substantial portions of their economies becoming unproductive and delayed in rebuilding.
The emergence of the Russian-Ukrainian war is an unwelcome bother for the country and the region. It is likely to add time to the appearance of “green shoots” from initiatives recently underway and cause lag in the economic turnaround. The conversations must necessarily become broader, more strategic, informed by realities, and more focused on solutions. The conversations must move beyond analysis of what is to contemplating seriously, where do we go from here and how. On balance the “where” is much easier to answer and agree on. The “how”, fairly assessed, is likely to come with measures of pain and uncomfortable choices. Success though lies firmly on other side of these choices. Consider how the recent news has been rich with examples of challenges. Depending on how closely you follow these issues and your willingness to analyse, you might very well be able to tease out unspoken information and themes. Often the analysis of these stories, reducing perceived abstractness, can produce greater value than the headlines or the quotes and the immediate focus of the stories may convey.
The path between here and where we desire– Debt-to-GPD of 50%; Revenue-to-GDP of 25%, a balanced budget; growth and resiliency – will require focused, strategic efforts and significant reforms. The path is perilous largely because of what has transpired up to now, the circumstances are abnormal and not being in the best position to do what is necessary. There is no other path to walk. How do we do this? How do we heighten focus on the adjustments needed? How do we plant now for tomorrow, informed by the many instances of missed sowing that would have made us stronger today? What strategic shifts are needed to better prepare us for the future? Where are the pitfalls with which we must contend? But more importantly, what are the opportunities to be pursued? Without being too philosophical, “the obstacle is the path”! There is no easy way to skirt that fact and doing so would be ill-advised. Why? COVID-19 cruelly gifted us the most comprehensive risk assessment for a greater understanding of the areas of weakness of the economy. We therefore well empowered in knowing what needs to be fixed and why.
In important ways, the wars for the future are raging right now. How we fit into these battles and what spoils we intend to take from them is maybe the most important thesis to be explored. Objective analysis would suggest near term pain. However, taking a strategic and risk management approach, the current realities would suggest we start from the points of weakness and build for the future. Address the structural weaknesses long left languishing. Create the type of facilitative environment that will produce an economy that is more robust. Implement the reforms that are necessary to create a more facilitative environment that leads to a more robust economy. The process of getting to this desired future, and the efforts needed, is the way we will pay for the past lunches we had...on credit. We must be smart and learn from history. Dependence on the vibrancy of the USA is not as prudent a strategy some persons like to espouse. While its might be true that “when the US sneeze, we catch a cold”, it does not always follow that when it “stops sniffling” our cold will also go away, to the same extent. Post 2008 global financial crisis The Bahamas never recovered well, consistently realizing growth rates of less than 2%. This happened firstly because we failed to adjust and take greater risks for growth and latterly because we were “forced” into fiscal consolidation and maybe went too deep too quickly. This happened during a buoyant growth window for the US. To make progress we cannot afford to repeat the failings of the past.
We often look far afield for guidance. In this instance, I would recommend a careful study of Jamaica and how as a colleague puts it, “it is emerging from the economic doldrums”. The study though should be properly contextualized for differences between the two countries. What lessons are there to be learned from what some may consider a lesser performing country. Mainly that discipline and commitment to sensible reforms has the ability to fundamentally improve the economic circumstances of the country. The fact is that the “emergence” that my colleague might be observing was realised because of what was “imposed” on the country through the vehicle of two successive IMF adjustment programs. The “emergence” is the result of a suite of reforms, fiscal and structural adjustments that led to a “freeing up” expenditure, mainly from reduction in national debt levels, facilitating investment in the economy. The outcomes are the “green shoots” and “new growths” being seen today. I believe that the earlier this path is taken the more effective it will be for The Bahamas.
The Minister of Economic Affairs, in a recent interview with Marla Dukharan, alluded to employing some approaches as we have seen in Jamaica such has having a private sector advisory body. He was “encourage” to look at Jamaica’s Economic Growth Council and its efforts. While there is value for the engagement of private sector committees, the rubber will meet the road where the will to effect reforms become evident or otherwise. Here I use reforms very broadly to cover not only legislative and policy changes but also behavioral changes necessary to facilitate and undergird effective governance.
We are at a critical point in the life of our nation. The nation’s fiscal health is in a perilous state and this war will not make it any easier. The need for action is clear. I am convinced that we have the competency at the level of national governance to navigate this perilous course but it will require taking tough decisions. Our collective progress rests on quality, productive and principled actions. The way forward will require real commitment. The success of The Bahamas from this point forward is going to be through the greatest suite of reform that the country has ever seen. The level and quality of governance is the critical x-factor, “the thing” that will be the difference maker.
© Hubert Edwards 2021
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at email@example.com. Hubert specializes in governance, risk and compliance (GRC), Accounting and Finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.