I have consistently argued that policymakers have to move urgently to implement structural reforms in order to influence the economic fortunes of the country.
In part one I noted that, “The government and SOEs must pay greater attention to effective governance as a means of unlocking critical value for citizens and taxpayers.” The march to economic resiliency requires all strategies on deck. Economic consolidation alone will be insufficient.
According to a recent white paper - “Resilience for Sustainable, Inclusive Growth” by the World Economic Forum and McKinsey, “leading [international] organizations estimate that a significant share of annual GDP growth will depend on the degree to which organizations and societies develop resilience… sufficient investment and new capabilities are required to build a new 'resilience muscle'… Resilience is the strategic stance for achieving long-term, sustainable and inclusive growth”. The observed efforts in the Ministry of Tourism aligns with this thinking.
While one cannot expect every initiative to be successful, the focus on broadening and deepening opportunities, beyond prior levels, is what developing resiliency muscles is about. I believe that the Ministry of Agriculture, especially, has similar opportunities.
THE GOVERNOR'S SPEECH
Reforms are critical to achieving resiliency and the recently delivered speech by the governor of the Central Bank underlines this. It was a very insightful speech providing important perspectives on the economic state of the country together with the decisions and actions required. His declaration that the country’s debt is not in distress has emerged as the major news item from the speech.
While it is an important statement to hear from the governor, given prevailing discussions, on careful analysis, it is a matter of much less importance when compared to the multiplicity of intricately connected policy and structural matters outlined or alluded.
State-owned enterprises (SOEs), which attract allocation of approximately 15 percent of the record revenue for fiscal year 2021/2022, must be unmistakable candidates in the process of building the required resiliency.
From the governor’s speech, in my opinion, there are a number of critical points that policymakers and the public should take careful cognizance. National debt is expected to settle in the “high 80 percent range”, and holds serious implications for public finance reforms. The discussions around tax reforms are more complex than the discourse up to now has suggested and maybe a more nuanced matter that we have so far accepted.
The speech provided clarification that the prior USD borrowings were necessary to shore up reserves while noting that the current historic level of the reserves now positions the government well to pursue borrowings domestically. The levels of reserves and economic consolidation are good but prudently only sufficient to facilitate administrative liberalization of exchange controls.
All this is happening in an environment where banks prefer short-term lending to government, private credit is not growing and high liquidity, all with important implications for financial stability. The important take-away is that the country is in a great position to start making bolder moves for long-term benefit.
However, we must be mindful that we are still not fully out of the woods and a comprehensive approach that recognizes and acknowledges the headwinds and structural weaknesses, undergirded by prudence and reasonable expectations must be the order of the day. We will return to the speech for a deeper analysis later.
THE GOVERNANCE EFFECT
Successive administrations have outlined the need to reform SOEs. Over the last five years, budgeted expenditure averaged slightly above $400 million. Under the previous administration, there was a stated strategy to reduce support by $100 million over four years. The emergence of the global pandemic and consequent weakening of the local economy has arguably created the need for greater support at this point.
It is likely that until the economy is back to sustainable levels, cutting allocations may not be optimal for the country. With limited resources and the prevailing economic state, the call to shift focus to how to make these organizations work more effectively remains a viable one. Therefore, the call for shifting corporate discipline to secure more effective and efficiently managed SOEs, and consequently starting the process of reduced reliance on central government for financial support, is critical and an important starting place for unlocking economic value.
This aligns with the thinking from the paper cited above: “Resilience pertains to public and private sector organizations, as well as to whole economies and societies”. The reality is that the country cannot achieve economic resiliency without the same being evident in all sectors.
“The resilient stance for organizations must be forward-looking, anticipating disruption rather than simply reacting, but continuously learning and amending based on experience”. This is what effective corporate governance facilitates – sound risk culture, robust strategic management and planning, effective risk management, extraordinary transparency, accountability, and value creation.
One of the major challenges in the 2022/2023 fiscal cycle is that while things are improving resources will remain limited; borrowing cadence is expected to be constrained. Home runs will therefore be hard to come by and progress will demand creative work and reforms to secure real value. The extent to which these entities can truly be reformed to operate at best in class levels must start with the quality of the corporate governance oversight.
THE END GAME
Ultimately, the desired output is to reduce dependency and maximize utility and facilitation. Where the entity is operating well, even with support, the use of that resource becomes more effective as the output is creating tangible value and reducing dependency on central government.
With improved performance, the ability to "tax" through these entities by better aligning fees with market value becomes a more viable possibility. It will simply be easier to convince users of value proposition that today is a near impossibility, given the state and performance of these agencies and corporations.
Whether contributions are reduced or not the above outcome is fundamental. Improving the state of SOEs is fundamental to rescuing the economy given their general mandate for facilitating productive activities and influencing the ease of doing business, which in turn holds critical implications for national growth.
The objective here is about creating resilience in all SOEs, readying them for the next economic shock by developing sound institutional capabilities. The World Economic Forum “emphasizes the long-term ability of organizations and economies to create the capabilities needed to deal with disruptions, withstand the shocks, and continuously adapt as disruptions and crises arise over time”.
Policy makers should bear in mind the concluding remarks of the governor, “the growth outlook is expected to reduce back into line with The Bahamas’ medium and longer-term potential”. He clinically noted that, “the policy challenge is to improve the medium-term growth potential”. Improving corporate governance, building organizational competency, reducing wastage of resources will all be necessary elements of the playbook in achieving his latter point. To borrow a phrase from the white paper, “It is the strategic prerequisite for long-term, sustainable, and inclusive growth”.
To secure and maximize economic value, policymakers should acknowledge long-standing corporate governance weaknesses, move to fix them by causing fundamental changes to eliminate unacceptable practices and create transformative shifts in the culture of transparency, accountability, performance and strategic oversight in SOEs and the wider public sector.
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.