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.
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 is difficult to achieve resilience in a chronically low growth environment.
As we seek to remediate the current state of affairs, there are some important structural issues with the Bahamian economy that must be addressed Let us be clear, the government does not have the capacity to borrow enough to solve the current issues without further hurting the economy. As we argued in a previous piece, the recent downgrade and the general global crisis will result in increased cost for borrowing. The recent statements by Mike Maura in relation to the cost of raising funds for the new port development is indicative of the seriousness of the current state of affairs. Despite being an unsecured bond, a price point of 8%, demonstrates the level of risk the market has priced into local debt. Interestingly, prior to the downgrade existing Bahamian government bonds were showing indicative pricing in this same ballpark. At the date of writing, we are reliably informed that the number is much higher than this. Borrowing will not be a comfortable undertaking for the country. This was why we proposed in our earlier writings that the government should get out of the gate quickly to secure as much borrowing as analysis showed was needed and the country could afford. We do acknowledge that the speed at which this could happen comes into question, given the current shuttered environment globally.
Given limited public resources, a major underlying principle of the remediation effort must be to create the environment that allows the private sector (local and international players) to drive economic growth. One of the greatest advantage policy makers have, is its ability to be facilitative. Flattening approval levels and streamlining the processes will position the country to benefit from deeper private sector input, especially in areas that are traditionally the focus of government. Public private partnerships is therefore likely to loom large as a policy position emanating from the budget and as part of the work of the Economic Recovery Committee appointed by the Prime Minister.
The Bahamian economy lacks diversification. Unfortunately, the issue of diversification has become a divisive one. Those who are against the idea tend to make the argument that this is a useless point. The question regularly asked is, “What will we diversify to?” Their argument then quickly continues to say, we know tourism, this is what we do, and this is where our fortunes lie. However, it is a weak argument primarily because it assumes a shift away from the core national competency. Anyone who makes or proposes any such wholesale shift posits a flawed position.
Diversification should be approached from a position of strength. The call for diversification should not be seen as an argument to abandon existing industries or ignore national core competencies. The policy positions should be designed to facilitate a broadening of the tourism product across the archipelago. The Bahamas has the unique advantage of presenting unique flavours of the tourism offering, based on the different islands, by location. Each island should be exploited to the max and every other element of tourism should be explored including leveraging historical events and locations to reigniting the inner cities as entertainment and historic centers to “real life” re-enactments of historically significant events. Working from this position of strength, policy position would leverage natural linkages across industries. Re-enactments is an example of tourism interacting with the orange economy, creating a more diversified tourist product. Using tourism as a key driver, other strategic sectors such as agriculture should become the impetus for driving local economy.
For example, a policy of minimum purchases by hotels and restaurants from the local agro-sector should be geared at creating more secure markets. With greater certainty for output and revenue flows, strategic focus will then be placed on how be to build capacity within those sectors. Of course, there will be clearly delineated standards to be met by farmers/vendors. To take this further, tourism provides critical mass (5 – 7 million tourist each year), which is not present in local internal markets and should be leveraged to more actively prime businesses for export opportunities. This could be achieved by facilitating entrepreneurs’ ability to move up the value chain in certain sectors, for example packaged products from marine sector, sauces and condiments. Like the Jamaican brands such as Grace, Eve, Walkerswood, it is time for a few Bahamian brand to grace the shelves of the world. In a country of limited scope this cannot be achieve on the steam of the entrepreneur only. All relevant organs of government must be primed to make these happen. The creation of expanded export potential immediately diversifies the foreign exchange earning capacity of the country.
Diversification conducted along these lines will be invaluable for the country. As we have argued before, a point that is readily understood by many, the two dominant sectors are no longer sufficient to drive the economic fortunes of The Bahamas, a country with a growing population with ever changing demands. The statements by the Prime Minister, from the two speeches cited above, underlines the criticality of where we are. According to the Prime Minister, “Our economy is based on tourism. The world has closed its borders. We have closed our borders…With no tourist coming to our shores now and into the foreseeable future, tough times are here and ahead of us. This is one of the greatest challenges to the world economy in most of our lifetimes. We don’t know how long this would last. But we do know that we will overcome this virus. My government will have to make major changes to our economy”. Taken contextually, an important aspect of this major change must be shifts to mitigate this observed vulnerability. The Bahamas should leverage tourism to its fullest, exploring all opportunities for diversification within that sector. However, we must look actively at other industries and opportunities to create new ones, expand existing ones and further develop others. We think the argument has been made! For any one still not convinced, the questions to be asked are, “why are you not convinced?” “Who stands to lose should your thinking becomes entrenched national view?” “Where will the country be in the next twenty years should if no action is taken today?”
MACRO AND MICROECONOMIC COMPETITIVENESS ENVIRONMENT
An analysis of the draft National Development Plan (NDP) will easily highlight several well-known factors that have historically affected the competitiveness of the country. At the macro level, our focus here is on monetary and fiscal policies. According to the document, for The Bahamas, this rest on three main footings: fiscal sustainability, attracting FDI, and maintaining the 1:1 parity with the US dollar. With these being the main tenets, it should be easy to appreciate some of the challenges faced, structurally by the economy.
We do not propose that these are easy to address but considering them has to be central to the rebuild. There are important considerations such as what should be the fiscal strategies going forward? Is it possible to pursue fiscal discipline and secure growth? What role will Borrowing play in the future growth? Are there frictions that must be managed, not eliminated, in order to secure better balance? From a monetary policy perspective, is the idea that the country has extremely limited monetary scope, due to the peg, a sustainable position, having regard for the vulnerabilities that the economic structure of the country exhibit?
The microeconomic competitiveness speaks in part to the quality of the business environment. This usually is distilled in public discourse by focusing on the ease of doing business or sometimes the vexing issues of the private sector. As stated by the NDP, the economy is highly vulnerable, undiversified and underperforming. This is largely due to the quality of the facilitative environment as dictated by the following, adapted from findings of the draft NDP.
High cost of doing business. This inhibits private sector growth and suppresses its development with attendant negative impact in the cost of living. A complicated business environment that affects both small and large businesses. Complexity imposes cost of doing business and open challenges for corruption that in turn imposes further cost. This create a vicious cycle. The net impact is loss of productivity and competiveness (a factor highlighted in the document). The recovery process therefore demands reforms, which address these.
The NDP further highlights an economy that is dependent on one sector and one market. This today is as clear as crystal. The Bahamas has an economy highly dependent on tourism, and all the tourists went away. Eighty percent of the Bahamas tourist comes from the Unites States, and country is struggling to respond to the crisis event. The worldwide impact of the virus means no source for tourism. Even with an opening of the economy, there is no substantial alternative source of export revenue, from any other sectors.
Another element that is important, and has certainly taken on greater clarity and prominence, is the level of immature value chains across most sectors. In the marine sector, for example, The Bahamas still essentially operates the harvesting stage of the value chain with little value added. The impact on the economy therefore is not fully exploited. It is essentially an agrarian era operation with important industrial additions. The inability to move up the value chain results in lost potential and ultimately an industry, which will remain under developed and lacking in critical mass to notably cause a shift in GPD growth. This holds true for other sectors as well. How these gets fixed demand strategic focus and making the tough calls.
How policy makers choose to address these holds as much importance to the future quality of the economy as tourist returning from the US, in the first instance. That these must be addressed is not up for debate. We take it as a given that no one expects the “recovery” to be a linear walk back to what was. Consequently, failure to make or take the hard decisions now, which will help to nurture broad based growth in multiple sectors, will be detrimental to the recovery, the rebuild. The Prime Minister posited arguments that we think align to this point. He stated, “I recently established the Economic Recovery Committee with an expressed mandate to be bold in their thinking and innovative in their approaches…I wish to assure you that my Government understands fully the gravity of the situation that we face as a country”.
Obviously, any attempt to fix the economy will be based on an analysis of the broad cross sections of factors affecting it. One valuable reality is that except for the health element and certain nuances because of the virus, this financial crisis holds a lot of similarity to a decade ago. There was a deep economic fallout, the country was downgraded, the US was struggling and the implications for the financial sector was highly similar. One of the main difference being that the tourism sector was still performing all be it at a constrained level. There are a number of other important factors, which were observe then and still very relevant now with added significance. Here we address three broad areas, internal markets, economic and tax bases, energy cost and education.
The country has very small internal or domestic market. With a population of four hundred thousand, spread across an archipelagic nation, there is a lack of numbers to drive the level of demand leading to robust domestic commerce. This situation means that markets in the main centers will remain underdeveloped and economies in the family islands have very little chance of significant development. We are of the view that larger internal markets are needed to drive commerce and better prime the country for export capacity. This is an area in which broader public policy can have important effect. A properly crafted and implemented immigration policy can serve to achieve both economic diversification and expand internal markets. Such a policy position can attract targeted skillset, married with fiscal policy jumpstart economic clusters in targeted island, and by virtue of additional bodies and demand, drive commerce. Taking a dispassionate approach to this is critical for successful outcomes. The draft NDP refers to this as an “Unsettled immigration policy”. Our position is that this is an underexploited asset. As the architects chart the rebuild, one question that must remain at the forefront of their minds is what do we have now which we are either not exploiting or is under-exploited and have the potential to unlock value for the economy?
ECONOMIC AND TAX BASE
A country’s economic base and economies of scale are indicative of the potential for its economy. With a narrow base and the inability to scale up, productive endeavours plateau or at least grow at such a low rate that the overall productivity of the economy is likely to be flat over a long period. Careful observation of the Bahamian economy today, suggests that this is what is being experienced. As stated before the long-term average annual growth in GDP for the country, over more than a decade, is less than 2%, generously stated.
The country has a very limited tax base. This is an issue as there is a tension between the domestic and international side of the economy. Based on what is currently present on the domestic side there is not sufficient activities to buoy government revenue without large increases in tax rates. There is an argument therefore for the inclusion of more entities on the international side, to be brought into the tax net in a more significant way. This does have has its own set of negative implications as most of these entities are domiciled here in the first place, mainly due to the lighter tax burden. Consideration has to be given to the portion of the productive machinery of the country, which is currently excluded, and determine whether tax reform, and the type of reforms, which may be appropriate for attempting to widen the tax base. With the recent pronouncement by the EU, this becomes an interesting proposition for policy makers to grapple with. Again, we propose, especially as it relates to the financial services sector, that the question should be asked, what aspect of our current arrangement is having an adverse effect on its expansion. For example, how has the arrangement with the legal profession affected the growth of certain segments of the offshore economy? Are there reforms that could reignite interest in captive insurance market? How can, for example, the University of The Bahamas play a fundamental role in developing the Bahamas as a center of excellence in financial services through the creation of a school of banking targeted at the regions and international students. These are not definite positions but in our opinion, the mindset needed to create a fundamental broad based rebuild (recovery) of the economy.
Because of its ubiquity and impact on all economic activities, policy makers must finally arrest the high cost of energy. The inefficiencies and structural challenges of BPL has a significant effect on the cost of doing business. The proposed funding of the liquidation of its legacy debt is indicative of its pseudo taxing ability. We are aware of the measures underway currently, and the hope is that these will be successful in achieving the desired result stated. The caution here, as is one of the main theme of this piece is that at all times the intent must be to secure fundamental fixes for the long term. Cost of energy must be reduced and the entity that provides electricity power must become super-efficient providing a catalyst for spurring national growth.
The role of every ministry must take on greater prominence in the rebuilding and economic growth of the country. Every project, every plan has to be centered around the need for growth and development. Education has a dominant role to play in this regard. Every aspect of the countries growth should be anticipated, supported and facilitated by the educational system, at all levels. For example, while there is initial value in using say immigration policy as a tool for diversifying the economy it can only be sustained on the back of and effective educational system. Retooling for greater productivity across both the public and private sector, training targeted skills to support selected strategic industries, retraining the work force to be prepared for the “new normal”. Education must be seen as a strategic long-term driver of economic growth. The investment therein is not simple a social spend but must be targeted to as an important underpinning of creating the talent pool needed for growth.
“Our unemployment rate in the near term will likely exceed an unprecedented and extraordinary 30 percent. By some estimates, our economy may shrink by between 14 to 20 percent during 2020. This will represent a historic one-year decline. We will do what is necessary in the near term to preserve social and economic stability”. This is the recent pronouncement of the Prime Minister. As highlighted by the PM, such a dramatic one-year shift accurately demands near term remedial action. There is no other way to sustain such a sharp turn in the economy without bridging for the social fallout. However, as a strategy, planning will necessary be required on parallel tracks. One which address the short term ills as best as possible, and the other which recognizes that the longevity of what now requires immediate action is a function of how well the long term strategy is developed and executed. Face the situation, soften the blows as we grow, but build for long-term sustainability.
THE CONTEXT FOR PLANNING - USA
As we move through this process of reimaging the economy, at least for all near term plans, policy makers should not take their eyes off the state of the US economy. While there are local projections and speculations the US is showing signs of serious ailing over the next 12 to 18 months. There has been a 4.8% contraction in first quarter and potential double-digit contraction anticipated in the second quarter. To date there has been 33 million in jobless claims with many unable to claim due to systems issues. Supply chains are under pressure and small city USA, the core of the productive machinery is now getting their hits from the virus.
The US capital markets has bounced based on the various stimulus packages announced and positive developments in New York and California, the big cities. However, note that rural America, location of the farms, the production plants, and the wider productive engine of the country is now under pressure. Projections indicate that the USA as a collective could see up to three thousand persons per day dying at the beginning of June. This event is nowhere near over for our most significant trading partner.
The US ailing is not great news for tourism but it is certainly not time to panic or get scared. It is time to figure how we will live with a virus and an ill economy for the next 12 to 18 months at least. That demands is critically asking ourselves important questions. What does a two-year adjustment for the virus look like to the local economy? What will commerce in the new business and social environment look like? How will COVID-19 change the competitive landscape? Which sectors or businesses are likely to be amongst the losers and how do we help them not to lose their shirts? We must take a bit of well-considered risk and “do what is necessary in the near term to preserve social and economic stability”
A BROADER CONTEXT – THE CARIBBEAN
In our opinion, just like the Bahamas the wider Caribbean is at a tipping point. One question to be asked and answered is, “Do we have the will to do what is required to fix our economies? Not recover, fix. If our desire is to get back to how, to get back the approximate 50% inflow of forex, to secure our 15% of GDP and repopulate the significant employment it creates, we need not do a single thing other than bring back the tourist with their US dollar in hand.
However, if this event has shown us some weaknesses and uncovered some fragile under bellies, then it's time to go to work and reimagine what the new paradigm demands. Better yet, imagine the new paradigm we wish to create. The takers in the new normal will be the losers. The USA will be unsettled for a while, because it is ill from the realization of how supply chain dependencies have weakened its position in the global economic space. It will remain unsettled for a while because its production capacity is highly dependent on components from a dominant 18-percenter of world exports, China. Therefore, what was normal will not likely persist as geopolitics forcefully meets economics, thereby causing disruptions. Sitting and waiting to take is not an option. Looking to do only what it takes to get back to our average 1 to 2 percent GDP growth will be a losing proposition in an environment where an ailing USA may not be able to provide the normal buoyancy for the region. In an environment where China may be actively adjusting to lesser than normal annual growth (5-6%) and potentially significant relocation of supply chains.
The Caribbean does not have enough money to buy its way out of the crisis. It does not have the health infrastructure to take risks either. Therefore, the dilemma of opening the economy is deeper than most would wish to admit. No country in the region has the capacity to deal with hospitalization of say 200 COVID-19 patients. Consequently, all talk of opening must be extremely measured. On the other hand, no country can afford to shutter its economy for much longer. June is for many, in our opinion, D-day. Beyond that point, the hemorrhaging will become extremely violent.
The debt trap of the region is ubiquitous and important. Consistent commentary from Barbados PM Mia Motley about vulnerabilities of the region are sound and has great reason to its rhyme. The region, or at least some players, is seeking to appeal to the sensibility of the developed world to look at its debts or how funding is provided, and it make sense largely. However, in a post COVID-19 world, we should expect no such sympathies beyond token overtures. The entire world will be sneezing and we will catch a major cold if we fail to fix our economies by pursuing growth. We must come to understand the ability to create and build resources offers us the greatest insulation against the extraordinary events that will consistently beset us.
THE REBUILD APPROACH
According to the Governor of the Central Bank, John Rolle, the economy is expected to contract in the high teens. This was a careful statement and in fact never proffered an actual number. We are going to take a bold guess here. The basis of this is the USA economy shrinking the first quarter of the year, up to March, by 4.8% and economists projecting the second quarter to contract by as much as 30%. Unless there is a clear uptick in tourism (significant) in the second quarter, and the virus is contained, with the emergence of an extremely positive news on a vaccine or a proven cocktail of treatment we anticipate a much steeper contraction.
This is why for The Bahamas, diversification makes sense and must become central to the rebuilding. The nature of tourism in the face of pandemics of this sort, or crisis displaying similar characteristics is a “no income” proposition; the entire revenue stream disappears, totally. To counter balance this, we need industries that may display some level of insulation to such type of crisis and we need an economy with the capacity to look within, over the short term, to maintain the momentum of the business sector. An economy built with too shallow internal markets will struggle every time we have challenges such as these.
In projecting what is takes to get back to even kilter and outlining the impact it is our view that we must be as aggressive as possible but prudent. We must tailor our planning for the recovery of certain sectors while laying out blue prints for the building of others. In totality, the overall effort should not be one of recovery but a full re-imagining of the economy. Areas of the economy which prior to now got little of no attention must be placed under the microscope and the strategic stance must be that we will squeeze every ounce of existing value from each and set up each for future expansion.
As a starter, the general structure of the economy, which shows contribution to GDP from agriculture: 2.1%, industry: 7.1%, services: 90.8% needs to change. We do not expect to see dramatic shift of say services down to 50%. That would be impractical. However, agriculture is ripe for growth; industry can become a larger contributor to GDP with careful policy positions and management. Analysis of the employment by sector gives an idea of the possibilities. Agriculture 5%, industry 5%, tourism 50%, other services 40%. This is against the backdrop of a perennially high unemployment rate, which stood at approximately 10%, pre-COVID-19, and is expected to increase much higher even after the environment starts to normalize.
That doesn't mean everything changes; it simply means that hard questions are asked and answered and the solutions are dictated by the answers and the overall objective we desire to achieve; that is building a better, more robust and resilient economy which is more inclusive, demonstrate greater equity and fairness, and domestic centric. The possibility of the USA contracting by 30% in one quarter holds huge implications for the tourism sector that depends highly on disposable income. The Bahamas must look carefully and respect the possibilities.
The plan for the future starts with questions. Questions designed to examine and challenge the status quo and shift the thinking. Questions designed to create discomfort and confront the obvious positions. That this is an approach, which can significantly move the needle. Every step, every contemplation, every decision contextualized by the potential dire future we face, we should not act or behave as if the situations call for business as usual efforts. We are anticipating that only what is in the best interest of country will be pursued, the stakes are excessively high for it to be otherwise.
Approaching this very important matter of rebuilding, reviving or recovering the economy of the country, we proposed here a suite of questions that must be distilled around the strategic tables. These questions should be raised, asked repeatedly, debated, argued, and the pros and cons confronted. The environment in which these are done should be charged with an openness for disagreements, without any overt need to be correct. The focus is to find the best answers, those answers, which advances the state of affairs. No time should be spared in cowardice or accommodative discussions, the stakes are too high for this. Every attempt should be made to be brutally honest and open to ideas and suggestions. In our opinion, every effort should be filtered through the funnel of “what is in the best interest of the Bahamas for now and the long term”.
What do we want The Bahamas economy to look like after COVID 19? What will tourism look like? What will the financial services look like? 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?
Which sector 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?
What exactly should the tax regime of the Bahamas 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 economies in family islands?
What is the role of UB in creating a centre of excellence? How would a financial services sector thrive in an environment with a recognized school of banking? How do we create a more vibrant capital market? How do we create a more vibrant funding machinery for businesses?
What are the opportunities in CARICOM? How can we leverage the Caribbean to improve domestic economy? How can the region be used a first step to greater food security? What opportunities are there for inter region trade that benefits the Bahamas Maritime industry?
What is our targeted GDP in 10 or 15 years - $20B, $25B? How do we get there? What industries are primed to help us do that? Are we too focused on GDP? What about GNP? What policies we have which causes our GNP to not be significant? Will changing any of these policies imperil the country? What reforms are needed to unlock economic value? How do we achieve them? By when can reach our GDP target?
COVID -19 has created significant problems for the country. The economy faces an uphill climb to get back to some semblance of normalcy. The road back will be hard but this event presents us with great opportunities to take a focused look at how we can adjust for the future. This is an interesting and exciting time. It calls for bold decisions, bold leadership and bold decisions. We have seen many offerings of ideas and suggestions. We are convinced that the collective genus of the country, including its diaspora, is more than capable of creating the rebuild and revival of the economy. However, as we have shown here by undertaking an analysis of the NDP, once the issues are identified there must be follow through; implementation is imperative.
Against this backdrop, we anticipate that the budget communication slated for May 27, 2020 will rich with very potent policy positions. Given the ongoing work of the ERC, these may necessarily have to be stated in a high-level fashion, in the first instance. This though represents the first concrete opportunity the government will have to communicate the vision and strategies for the way forward. The role of every ministry must take on greater prominence toward the rebuilding and drive for economic growth. A holistic approach with all hands on deck. We anticipate storylines to emerge showing The Bahamas pivoting to become an entrepreneurial paradise; efficient government; highly facilitative environment; all setting up the private sector to take the lead role! With the deficit expected to be high we anticipate PPPs will get more prominence, greater liberalization around the Abaco and Grand Bahamas rebuilding and financial services to become the squeaky wheel due to the EU threat and the implication that that holds for the existing tax regime. Our next piece will delve into these matters.
The focus of this piece is on The Bahamas, however, many of the issues raised here are applicable for the rest of Caribbean. We continue to argue that in the new normal, cooperation across the region holds great value for the growth of individual economies. For the first time in the life of the region, there is a common event affecting every single country. Common impact makes it easier to find common ground. This moment should not be squandered.
We look forward to seeing the output of the efforts and hope for all persons, citizens and residents alike, engaging their minds towards finding viable solutions and ready to work for successful execution. Policy makers and leaders from all sectors of national life are faced with responding to a defining moment. Effective leadership, diligence, urgency and discipline will be necessary elements that must be actively at play. We anticipate success. The welfare of the country demands it!