Consequences of High and Growing Nat'l Debt on the Growth and Development of the Economy – Part III



In Part II we considered the sustainability of the debt and looked at the challenges faced from a Caribbean context. We are days from the reading of the budget for fiscal year 2022/23. In my view the critical output from the presentation should be fundamental reforms in SOEs and civil services; updates on tax reforms and increased taxes, triggering the momentum to 25% revenue to GDP; structural impediments reforms especially regarding the energy sector; increase funding the social sector funding; strategy adjustments for health care and education; a clear delineation of growth strategies and initiatives; and very importantly, adjustments to the debt management strategy. Debt is and will likely remain an uncomfortable Achilles heel to the way forward.


THE DEBT TRAP


The country finds itself in somewhat of a debt trap. $10B in debt, the last budgeted interest cost of $512M representing 23% of revenue and 18% of total expenditure and indicative of the significant impact of the debt burden. Given the current realities and ongoing borrowing needs, this cost is likely increase. The debt is one of the most critical issues to be addressed during this budget cycle. When $500M of a $3B budget goes to interest on debt it is beyond the time to start taking close notice and time for real action. The Bahamas, struggles with two important challenges, low growth and high debt. Fixing both, concurrently, is fundamental to an improved economic state.


To contextualize the challenges faced, consider that in the last budget the country had a primary deficit. What this means is that we are actually borrowing to pay interest obligations. This is not broken cycle will consistently tighten like a noose around the economic neck of the country. Escaping this trap by making some hard decisions and taking definitive actions is critical. There is no need to reinvent the wheel. Case studies abound in the region and The Bahamas should look to those who have suffered this path before for insight, at least in what to avoid.


We have seen this in other places and observed the impact of remedial action. Barbados and Jamaica provide potent lessons as to what is at risk and the potential upside of definitive actions and strategies. Jamaica struggled with the burden of debt to GDP of over 140%. Over the stretch of two IMF programs debt was reduced to below 100% for the first time in many years. The programs have been hailed as successes seeing Jamaica unlocking important resources, plunging it back into its economy, especially in the area of infrastructural development. Barbados, with great similarity in size of economy is experiencing one such crisis and while struggling, it is being supported by the IMF which enhances the likelihood of getting things right thereby setting the country on a better socio-economic path. In a recent Article IV report the IMF stated :“While Barbados has been making good progress in implementing its Economic Recovery and Transformation (BERT) plan to restore fiscal and debt sustainability, rebuild reserves, and increase growth, it continues to face major challenges owing to the global pandemic. The outlook remains highly uncertain, and risks are elevated”


What are the main lessons here? First and most obvious is that a country is unlikely to progress with debt at current levels. However, there are other finer points. In a state of significant debt, there is a need for reforms and discipline. Left unaddressed, drastic action will be required. Even with focused efforts it will require time and at the cost of great uncertainty before the country emerge from the woods. Debt-to-GDP is expected to remain in the 80% range for the near term with borrowing needs anticipated. Together with detailing strategies for growth this budget cycle must be unequivocal that the country is caught in a debt trap and send crystal clear signals of commitment to improving its credit worthiness.


CONSEQUENCES


Part I outlined a number of consequences. I wish to consider a few others here. There is no doubt that increased debt levels can result in an increase in poverty. Having regard for what we discussed before, the impact of debt on private investments could lead to increased unemployment; the impact on national safety nets will lead to the vulnerable segment of the population becoming more disadvantaged. Factors such as these leads to economic scaring, especially following episodes of crisis, translating to generational disparity in wealth and increased numbers in poverty.


High debt results in reduction in national savings rate and affects the ability to create buffers for shocks, at the micro and macro levels. One formula for national resiliency is to invest for growth, secure growth and carve out savings for counter cyclical spending or “saving for the rainy day”. It’s a formula which we recently observe at play in neighbours such as Cayman and both Trinidad and Jamaica to lesser extents. The Bahamas is unable to achieve this effectively with its debt burden and low growth, apt evidence of how high debt affects the performance of the economy resulting in a lack of resiliency.


Increase in taxes. As more money is borrowed, more resources are needed for servicing and more and more will be taken away from other normal allocations. This is never a sustainable approach. At some point, there will be a need for increased overall revenue to the government coffers. Consequently, this will result in increased taxation. This is where the country is today. The government has laid out its intent to increase revenue up to 25% of GDP by employing a number of reforms and adjustments. There should be every expectations therefore that in this cycle there will be some areas of marked changes with a foreshadowing on more to come for the 2023/24 fiscal. There is no other “painless” path to a fiscal surplus.


The final consequence I want to share is this. A country with high and growing levels of unsustainable debt that fails to find internal solutions will ultimately have to look to external partners for assistance. I want to be very clear; I do not believe that The Bahamas is anywhere near having the need for a structural adjustment program with any external parties. I believe that there are many options available to the government at this time to make such “local adjustments”. However, what I seek to do here is to state as objectively as possible, and in general support of the revenue trajectory projected by the government, that increased deficit spending without reforms in multiple areas of the economy and government policy will definitely increase the possibilities of finding ourselves in that unenviable position.


SEARCHING FOR SOLUTIONS


There is no value in a discussing without exploring solutions. I do not claim to have the answers but some broad themes exist. The Bahamas must diversify its economy; it must implement greater reforms to facilitate effective Public Financial Management and Governance; it must reduce national debt to more sustainable levels (this does not automatically translates to 50 or 60% debt to GDP); it must address structural impediments to economic growth. While the budget is narrowly focused, permit me to raise some questions to which answers needed to carve a path to economic and fiscal sustainability and resilience.


What do we want The Bahamas economy to look like? What will tourism look like? What will the financial services look like especially with digital assets? What do we want to see in agriculture in the next five years? What sectors are ripe for policy support? What legislations and policies we have languishing which if repurposed, can add value? How does governance impede economic growth? Is there value in devolution and local government? This budget should bring these all together.


Which sectors of the economy is causing a drag on others? What are the unexplored pockets of value we have ignored because of entrenched thinking? How can we add greater diversity to the economy? How can we diversify tourism? How might these impact tourism and other sectors? What values are locked-up in “Historical Bahamas”? Are there social assets such as diversity of culture that we can take advantage of? How do you diversify without broader skillset? Does immigration hold any value in diversification? How do we influence greater trade? How do we restate a policy of Bahamianization for 22nd century based on fairness and empowerment, economic inclusion and social equity? The diversification question looms large and should be answered clearly.


Unequivocally, what exactly will the tax regime look like? What tax regime would provide the greatest future value for the country? How can our fiscal policies (tax/concessions) be exploited differentially to drive Family Islands economies?


How do we create a more vibrant capital market? How do we create a more vibrant funding machinery for businesses? What is the role of UB, and academia in general, in creating centers of excellence? How would a financial services sector thrive in an environment with a recognized school of banking?


Are there opportunities in CARICOM? How can we leverage the Caribbean to improve the domestic economy? How can the region be used a first step to greater food security and exports? What opportunities are there for intra-regional trade? What is our targeted GDP in 10/15 years? How do we get there? What industries are primed to help us do that? What reforms are needed to unlock economic value? How do we achieve them?


I believe that we have the capacity to face all our challenges; the ability to answer the questions, contextualized the answers and act in the best interest of the county. However, we must all be mindful that this is not simply a task for government. We all have a role to play in this process. Every segment of the society must actively participate in furthering the efforts for greater economic development and resiliency. Take time understand the issues, support positive developments and proffer suggestions where they are otherwise. Due mainly to the debt stock and the pandemic, this budget might be the single most important in the life of the country. It must pave the path and lengthen the runway to the future. It must be clinically focused on the decisions to be taken today that will lead to a better tomorrow.


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.

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