The assessment of the debt stock of The Bahamas should answer one main important question. Is it at a sustainable level and not whether it meets some widely used benchmark of debt-GDP of no more than 60% and deficit of 3% or less? On March 14, 2022 I delivered a keynote on the caption, at the opening of the University of The Bahamas’ Business Week. While the actual words and emphasis delivered will in differ instances this is the general text of the speech with very limited addition and edits.
I will share this as a three part presentation. Firstly we will consider some the real consequences of a high national debt. We will then explore the idea of high debt vs sustainable debt. Finally we will consider the “debt trap”, explore some other consequences and look in the direction of how we will find solutions. In the end there is no one coming to save us. We must solve our issues ourselves and those solutions start with us understanding and accepting exactly where we are and what needs to be done. In the end we are all in this together.
INTRODUCTION
Good evening. It is an absolute pleasure to be here with you. I am humbled to have been asked to contribute to this very important week of events. I want to thank the leadership of the University of The Bahamas for facilitating discussions such as these, which are immensely important to the growth and development of the country.
The theme “The Bahamian Economy at the Crossroads of Development: Diversify to Survive” is a powerful statement which I believe correctly captures both the current state of The Bahamas and the exacting action needed to correct the challenges – a state of transition (crossroads) and a need to take action to broaden economic activities (diversify).
It is interesting to note that up to this point, the Bahamian economy has done reasonably well for many, not all. Up to this point, the Bahamian economy has been able to survive many of the underlying weaknesses that has been evident for many years. Up to now, the performance of tourism has buoyed efforts to bounce back from many crises without there being any true fix of the weakened fundamentals of the economy. Largely “some success” seems to have been the enemy of “great success”.
The question that this begs therefore is whether we are now at a point where the ease of bounce back is no longer that easy. Is the existing and sustained levels of debt choking off growth? Will increased debt levels further stifle growth and development? Is debt in and of itself that is the main culprit? Is it the failure to diversify the economy; failure to institute structural reforms and failure to adopt effective systems for Public Financial Management that are posing the threat to national growth and development? After all, what is debt other than accumulated past deficits?
I thank you for having me here this evening and I trust that the time spent will be a valuable investment of your energy and attention.
THE THESIS
It is accurate, I believe, to posit that the economy is at the crossroads of development. It is my belief that what we do from here going forward will be the greatest determinant as to how the country will progress into the future, secure growth and develop resiliency. There is not much room for getting it wrong over the next few years. The corollary to this is that the things we fail to do now will give great potency to the stalling of progress, exacerbate current realities and potentially spiral the country into a vicious cycle of debt, undermine development resulting in serious challenges for the populace. You might be tempted to ask, “Why is this so when The Bahamas has proven itself very resilient in spirit and the country has faced and bounced back creditably from many crises?”
It is useful to reflect on the fact that the country has never faced a crisis in as weakened an economic position as it is currently, due largely to the existence of significant levels of debt which increased rapidly over recent administrations. The country is recovering from a significant revenue downturn and projected to continue to running deficits for the near term. The debt stock of the country has reached levels where it is arguably imprudent to borrow heavily in the international market, despite facing an extended period of unfunded deficit and borrowing needs. Additionally, it has suffered significant losses in Abaco and Grand Bahama resulting in substantial portions of those economies becoming unproductive and delayed in rebuilding. For the first time in its history, the country faces the daunting reality of having debt to GDP well beyond that “safe zone” of 60%. We will return to this later.
The consequences of a high and growing national debt on growth can be significant. Debt has the potential to rob the country of investment capacity for infrastructure and therefore a weakened facilitative environment; weaken social systems, affect the provision of educational opportunities; slow economic growth and cause financial distress and poverty, with the usual debilitating attendant effects leading to underdeveloped human capacity and therefore adversely affect current and future national productivity.
THE MAIN CONSEQUENCES
Let us look at some of the effects of a high and growing national debt on the growth and development of The Bahamian economy. I will share some with you now and the rest later in the discussion (what follows includes research material)
· There is the reality of reduced public investment. As the debt increases there is less and less resources available to invest in projects and programs and this ultimately hurts the long term growth potential of the country while at the same time adversely impacting the standard of living of its people. The Increase in debt servicing reduces allocations to other areas of the budget. The ability to build schools, road, ports and other infrastructure necessary to foster growth is reduced.
· Increased national debt has the ability to crowd out private demand and consequently there is reduced private investment. The implications are significant. Private commerce drives an economy. While in The Bahamas’ government is a dominant employer, dominant buyer and have a dominant presence in economic activities it is the extent to which the private sector is successful which determines the success of the country. Government demand for domestic debt puts private concerns at a disadvantage in accessing credit and therefore impacts the ability to invest and scale up their operation, as an example.
· This crowding out of private investments in favor of public debt ultimately result in a slowing economic growth. Slowing of economic growth results in a lowering of standard of living; insufficient tax revenue; lack of resources for public investment, increased deficits and need for additional borrowing, creating a very vicious cycle. As debt increases, there is higher interest payments. GDP potentially reduces leading to a higher Debt-to-GDP measure that places the country in a negative light potentially leading to serial downgrades. We have seen this here in The Bahamas repeatedly even with some measure of growth.
· With increased debt and the need for debt-servicing, resources available for national safety net becomes reduced or at least is placed under pressure. National safety nets are imperiled. The implications of this are significant as vulnerable citizens suffer when they are unable to secure government support and this becomes especially pronounced in the time of economic crises as we have experienced with COVID-19 and now being exacerbated by the Russian-Ukrainian war and a highly inflationary environment.
· High levels of debt leads to an increased risk of a fiscal crisis. As the debt climbs and breaches certain thresholds, lenders and investors will start to lose confidence in the government's ability to pay back borrowed funds. This will result in borrowers demanding higher rates or bonds trading at very high yields. The resulting effect is that the government is constrained in borrowing, unable to fund its deficits or meet other borrowing needs and consequently will could be forced to initiate significant spending cuts or increase taxes, employ austere measures.
· The ability to respond to emergencies is greatly reduced debt increased and the ability to borrow narrows. Carrying greater amounts of outstanding debt mean there is less scope to respond to emergencies creates a narrowing of fiscal space and therefore limits the policy response. Imagine that the COVID-19 pandemic starts picking up speed today, March 2022 as opposed to 2020. With the current level of debt how effective, would the government be in its response? How effective would be the social programs for food and unemployment benefits? How well the provision of additional health infrastructure would be effected? What kind of support would it avail to the small business sector?
What follows was not in the speech. The consequences are real and provide insights into what we must work as a country to avoid. There is clear evidence of some aspects of these already taking hold at some levels with the real potential for escalation as the global economy creates continues external shocks. The work must be focused on expanding the economy or extracting from it more efficiently as it relates to fiscal measures while playing extreme defense against the crystallization of some of the downsides mentioned above which has the ability undermine the capacity for growth. Poverty is one such element. Another is a private sector lacking in growth and innovation as a result of either not having the benefit of sound public sector facilitation or for want of reasonable funding.
"Diversify to Survive” should remain a constant reminder for us all. As an example in recent times there has been an understandable energy with flourishing discussions about the possibilities of new businesses but with a seeming disconnect to the unchanged underlying economic arrangements of the country and therefore the capacity to positively affect debt. Diversification must impact all aspect of national economics. The job intensive benefits alone will not fundamentally solve our problems. Until and unless new growth changes government capacity to comfortably fund its obligations the cycle we are currently in will remain and likely become more entrenched.
© Hubert Edwards 2022
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.