COVID-19 – The Great Economic Rebuilding 2020 and Beyond

THE STRATEGIC THRUST


The Bahamas economy must be rebuilt following this prevailing global financial crisis. We deliberately avoid using the word recovery because of its potential to convey the idea of going back to what was. The reality is, regardless of how the global economy normalize to approximate what existed prior in terms of numbers, we will never return to that normal. There will be significant shifts around regulations, shifts in supply chains based on national security, sustained attacks on financial services and loss of employment capacity, amongst other things. With the anticipated fallout expected to significantly affect persons of lower socio-economic groupings, there must be sharp focus on economic inclusion and equity. A rebuild designed to go back to achieve prior performance levels without real underlying strategic reforms, adjustments and innovations will fall short of responding to the call of a new “new normal”.


“We face two crises. One is the COVID-19 pandemic that has claimed tens of thousands of lives around the world and that will claim many more. The other is the economic crisis that will persist after the virus is beaten back. Joblessness is on the rise across the globe and here at home. The economic crisis is severe for The Bahamas”. These are the words of the Prime Minister of The Bahamas, Hubert Minis, in a speech delivered on April 1, 2020. It underlined the gravity of the issue faced because of the corona virus and signals in our opinion the first clear indication by the government that it was truly concerned for a longer than initially projected event. For context, based on our observation, it was around this time that the narrative of a June opening started its stage left exit. The message from the Prime Minister was loud and clear and rang consistent with our own analyses, as presented in three previous papers. There are indications that the economy will be opening soon, in limited ways, but the economic impact is already hardening.


With the country reportedly faced with a deficit of close to $1 billion and current government revenue running at approximately 50% year-over-year comparison, government’s already narrow fiscal revenue space is contracting faster than the demand for spending on social safety nets and efforts to save businesses. Affordability of social and economic programs is greatly limited. The possibility of unemployment of 30% has significant social implications and as accurately foreshadowed by the Prime Minister, must take on a high level of priority. Continued on this trajectory, government decisions will eventually be reduced to determining how we help to ensure persons have sufficient social support versus paying certain recurrent expenditure. This of course will not be unlike decisions that will be made at the household and corporate levels. With a relatively weak healthcare system, which imposes significant limitations on how quickly, the economy can be un-shuttered, with a significant reliance on a single and highly concentrated economic sector, the options are limited and the decision must necessarily be balanced and bold; measured risks will have to be taken.


Let us jump forward to May 10, 2020 and the Prime Minister’s narrative of concern deepens even further “We are in a time of heartbreak and hardship. Not since the outbreak of World War II over 70 years ago have we lived through such a devastating impact on our economy and the livelihoods of so many Bahamians”. This historical context is important, given that the Bahamian economy as we know it was largely engineered post World War II. Built fundamentally in response to the demands of the time, with important maturation over time, it has however remained largely the same, a two-pronged mechanism resting unequally on tourism and financial services.


This crisis has shown how highly vulnerable The Bahamas is and this is not limited to economics. With an economy, not unlike many in the Caribbean, which is dependent on travel and leisure, it must now wait for the return of tourists before it will realise any significant level of economic normalcy. With a virus as the backdrop to this reality, the country has significant problems. Should it fail to find viable solutions the suffering will be long, it will be hard and the economic and social fall out will be deep, much deeper than what is apparent at this time. The challenges faced in finding solutions should be viewed against the background of some existing factors that will naturally impose limitations on level flexibility policy makers will have. In no order of importance, there is (1) the pegged exchange rate, which must be actively defended. This creates the need for (2) a pool of foreign exchange reserves that must be actively maintained at a certain minimum level to give efficacy to the peg. To maintain the efficacy of these two there are (3) policy restrictions which exerts limitation of economic activities. Currently, reserves are expected to reduce significantly without inflows with comes mostly from tourism, normally. With closed borders, the natural shift would be to domestic markets; however, with (4) extremely small internal markets the options are limited. Much of what is sold locally is imported without any real capacity for import substitution in the short term. There are well known existing structural weaknesses, together with (5) known policy deficiencies, that have remained un-resolved for a long time. All these will have to be addressed as we build the path for the way forward.


The fact is The Bahamas has been vulnerable for a very long time. Without making light of our current circumstances, consider this. Is tourist the only thing that is currently missing from the country today? What if by some magical process, COVID-19 disappears and the tourists return with the attendant opening of the rest of the country, will we be ok? Will there be broad-based economic inclusion? Will there be greater economic and social equity? Will the cost of living and the cost of doing business improve? Will the tax base for the government expand? Will there be robust economic growth? As you read this piece, let these and simply questions occupy your mind, let them linger for a moment. Only when the answers to those are explored and the issues driving them are confronted will the statements made by the Prime Minister take on the seriousness we think it was intended to convey. In the April speech, he stated, “As a people we have to be ready to shift how we operate. We have to be ready for generational changes to the economic structure of our commonwealth”. Further, in May, “For too long we have embraced a status quo model that is not suited for the times…we must also change the way we approach how our economy functions”.


This is a defining moment where we must resist with every bit of our collective will, any temptation to gloss over the issue and to reach for suboptimal goals. This is a defining moment when the only thing which matters is where we end up as a country in the end. The global financial/health crisis presents the Bahamas with a rare opportunity to reimagine the country, its economic and social arrangements. This moment cannot be squandered, generations yet born are depending on us to get it right. Not necessarily complete, but to start charting a bold “new” path. As the Prime Minister most appropriately puts it, “We will not [cannot] sugarcoat the severity of the circumstances in which we find ourselves…Some of the decisions that we shall have to take will no doubt be uncomfortable, and indeed painful...But we cannot shirk away from making the hard decisions”.


A DEVASTATED ECONOMY?

The economy has been devastated but there are issues we must confront which existed prior to this. To achieve this there must be a willingness to shift the way we have been operating up to now. There is no possibility of understatement in saying that the status quo has remained for too long. Unfortunately, in the national discussion this term to focus on personalities, rather than on the institutionalized processes that engender inefficiency and ineffectiveness, and therefore limit the country’s ability to grow. While COVID-19 has caused a dramatic halt to commerce, as we move to rebuild, the entrenched issues that existed before, cannot be ignored. The overarching point here is simply this; a “recovered” economy will not have optimal impact. Based on where we are today, getting back to pre-COVID levels will definitely be a positive. While that must be a part of the thought process and an imperative, it is not sufficient for the long term. The structural matters, which have been perennially lamented by commentators, consecutive administrations, pressure groups, and documented by multiple national planning initiatives, have to form a part of any sustainable rebuild. Let us therefore undertake a brief analysis of some of these factors, namely, growth; structural weaknesses; diversification; and macro and microeconomic competitiveness.


GROWTH

The economy needs growth; historically it has been growing too slowly. This is the case for many Caribbean countries. Jamaica, for example, prior to this economic crisis, highlighted its twenty consecutive quarters of growth but on assessment had a low annual outturn of 1.9%. Barbados on the other hand showed growth of negative .5%. For the Bahamas, our analysis shows that prior to last two years GDP was growing on average at less than 1%. In 2018, the economy grew below the projection of 2% to settle at 1.6%. Following the implementation of VAT, we saw reported GPD expanding to $12 billion. Prior to that, it fluctuated within a narrow range of just below $11 billion. While this represents a movement of around $1 billion, when looked at in real growth terms the change is not very significant. Why is this important? GDP is popularly reported in nominal or prevailing price terms, which simply means there is no adjustment for inflation and taxes. Real GDP on the other hand reflect this adjustment and represents the actual production of goods and services in the economy. Real GDP for 2018 stood at $10.76 billion. This same measure was $10.41 billion in 2014, just before the implementation of VAT, for a change of $350 million over the three years period. This level of growth is not robust enough to help build buffers and resilience in the economy. We need significant development to address the vulnerabilities we face. Some will challenge this thinking. How can we grow now may be the instinctive refrain. The answer to this is to keep an eye on the future and build for growth. The stance must be to maximize all opportunities for GDP expansion. A general policy shift to more aggressive GPD growth is required. It