In Part I we considered some of the consequences of high and growing national debt. With debt expected to remain above 80% over the midterm the question that dominates the mind is the extent to which this is sustainable. The IMF recently concluded that it is. We are however aware of the national strategy to get this down to 50% by actually reducing debt. You might ask, if the debt is sustainable why is the IMF arguing for tax increases and other reforms geared at reducing the cost of debt? Based on the current fiscal arrangements, growth trajectory of the country and taking into account the implications of the debt circumstances, it is unsustainable. However, the IMF anticipates changes to underlying fiscal arrangements and reforms to support government projections.
HIGH vs SUSTAINABLE DEBT
For decades, the IMF promulgated the idea that a Debt-to-GDP ratio of 60% and fiscal deficit of 3% are optimal levels for a country. This argument rests on the theory that acquiring debt generally has a positive impact on GDP. In other words, borrowing leads to growth, all things being equal. According to the IMF, up to approximately 30% of GDP, debt has a positive impact on growth. Beyond this 30% mark, the positive effect diminishes, with each additional dollar of debt until around 56% of GDP. At the 56% threshold, every additional dollar of debt has a negative impact on GDP.
Based on this argument, The Bahamas is well within the red zone and borrowing is largely a negative adventure. How do we reconcile this with empirical evidence that suggests something completely different? Recent data shows that average general government debt in advanced economies is 122% of GDP compared to 64% for emerging markets. For many advanced economies, the level of debt is staggeringly high! For those same economies, growth rates are comparatively higher than those enjoyed by The Bahamas and the wider Caribbean; development is in greater evidence and the challenges we face to generate growth appears not to be amongst their greatest challenges. A recent graph captured countries with the highest level of debt. Japan at 257%, Italy - 159%; USA -130%; Singapore - 130%; France - 116%; Spain - 120%; UK - 117%; Canada -110%; Brazil - 91%. And in our region Jamaica at 98%, The Bahamas - 103% (now lower) and Barbados - 138%.
A few important issue immediately comes to fore. Why these countries with high debt burdens are thriving when The Bahamas and other small island states are not? Is it appropriate to limit lack of growth to the incidence of debt? What other factors may be driving the inertia, in our case, and the vibrancy in the case of developed nations? There is evidence that even the IMF is rethinking the benchmarks above. Observed performance of countries with debts well beyond 60% of GDP gives us reasons to pause and rethink not only outcomes but also cause, the cause and effect of high debt and the existence and impact of other factors which contribute to national performance. In fact, I propose that performance is multi-dimensional and complex, with a multiplicity of factors affecting actual outcomes. Having considered these other countries, The Bahamas unfortunately falls in the grouping where the effects of high debt seem to have greater adverse implications for growth.
Objectively assessed, the high debt level faced by The Bahamas is very challenging. This is normally the case for many small developing states. However, I believe it is important that we disabuse ourselves of the idea that it is the incidence of high debt alone which is adverse to growth. While instinctively this may seem like an accurate and elegant proposition, evidence suggest that there is much more to the relationship of high debt and economic performance.
Ultimately, it is a matter of sustainability and not simply the amount. Let us ask ourselves two questions based on our topic. Firstly, “What are the consequences of high and growing national debt on the growth and development of the Bahamian economy?” If we were to base our answer on the performance of developed states, it would be reasonable to conclude that The Bahamas could fare well and in fact realise vibrant growth as some of these states do. On the other hand if the second question is styled “What are the consequences of unsustainable and growing national debt on the growth and development of the Bahamian economy?” the responses would take on a very different perspective. Naturally, we would not be so concerned with the level of the debt, in absolute terms, but rather asking at what level is debt sustainable for The Bahamas.
Based on economic performance, plans initiatives and strategies for growth; based on effective and prudent fiscal management; based on profitable investing and utilization of borrowed funds; and based on sustained growth, what is the level of debt that is sustainable for the Bahamas? Clearly, the answer to this is not $10B and therefore as the question currently stands it is without doubt that the country will not grow and develop with debt at the current level, a level that is expected to increase in the near term. This reframing however bring us closer to a new realization and starts to set us on the path of decomposing the fundamentals of the debt problem faced by the country.
The reframing also lead us to another important point. Debt to GDP of 60% is but a benchmark and in the instance where it signals sustainability it might be of great value but where it is either above or below what an objective sustainable level then it might very well be counter to growth and development. An economy that is not growing with debt at or below this 60% level is likely not investing enough. An economy that is unable to afford debt but shoot toward the upper limit of this “safe threshold” is likely to face peril. What is the main point here? We should shift our focus to measures that signal optimality of performance rather than on absolute benchmarks.
If the IMF position holds, then The Bahamas has a significant amount of work to do to claw itself back to a place where deficit financing is growth generating. The USA, our nearest neighbour and largest trading partner grows consistently with a massive Debt-to-GDP. In 2021, the US federal debt was $29.6 trillion—up $7 trillion from 2019 and is projected to grow by over 3% while on the other hand The Bahamas is expected to rapidly revert to its average growth of below 2% in the near to midterm.
Even before experiencing the current level of debt, The Bahamas did not demonstrated the ability to secure robust growth. It is therefore unlikely to do otherwise in the face of downward pressures exerted by the level of debt on the books. This is one of the major consequence of having unsustainable debt and the main reason I conclude that current situation is not sustainable. The historical anemic growth must be reversed but the ability to do so has gotten more difficult and is worsening. I have consistently suggest that we become more aggressive about growing the economy, take more chances and make bolder moves. The country should not settle for the current economic construct but must work to expand and enhance what currently exists – diversify and grow.
THE CARIBBEAN CONTEXT
Let us contextualize this issue further. According to a report done by the IDB, “Economic Institutions for a Resilient Caribbean” and quoting extensively from the chapter “Debt Management and Institutions in the Caribbean: Best Practices and Priorities for Reform”, “The history of public debt in Caribbean countries is striking. Several countries in the region have been among the most indebted in the world (measured in terms of the public-debt-to-GDP ratio) since gaining independence beginning in the 1960s. While economic and debt crises have been common throughout Latin America and the Caribbean over the past century—particularly when compared to other regions—the frequency, depth, and duration of such episodes for Caribbean countries makes it an outlier relative to the rest of the world.”
“High debt levels within a context of weak public financial management processes have held back growth, incomes, and living standards for millions of people…developing countries also tend to suffer from large and persistent public and social infrastructure deficits that act as brakes on private sector investment and productivity growth. Many of these deficits must be addressed with prudent public investment and expenditure, generally requiring governments to borrow both domestically and from abroad.”
“So why have Caribbean countries been so indebted and crisis prone? There are many reasons for these outcomes. It is clear that initial conditions mattered for many of these countries, as the group includes some of the youngest nation-states in the hemisphere, and many were severely lacking in terms of financial and technical resources after gaining independence, amplifying existing vulnerabilities to economic and other shocks. Caribbean countries are small, open, and in most cases island economies, making them particularly dependent on external demand and capital flows, as well as susceptible to related shocks from abroad. Their small size and limited economies of scale have led to narrow production bases, and in some cases outsized sectors—for example, commodity exports or tourism—that further amplify vulnerabilities to swings in external demand. Similarly, their geography makes them amongst the most vulnerable on earth to weather-related shocks, as well as the implications of climate change.”
In my opinion the takeaways from the above closely match the realities of The Bahamas: The effects of economic crises and shocks for the Caribbean last longer that rest of the world. The global financial crisis of 2008 is a useful reference point. While the world recovered The Bahamas’ economic performance lagged in many important ways. Often it is the inadequacy of the public financial management (PFM) that creates the impediment to growth not the debt in and of itself. Currently The Bahamas PFM systems are weaker than desired.
There are great needs for developments that necessitate borrowing. Development needs in the country is wide ranging and currently beyond the country’s financial capacity. And Finally, The circumstances of these countries are more significant due to lack of diversification and vulnerabilities to climatic conditions. The Bahamas is highly dependent on two industries with tourism, accounting for over 60% of GDP. Therefore, while yes it will be challenging for The Bahamas to secure national growth it is important to pay attention to not just the debt but also effective management of the country’s economics.
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.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.