NATIONAL DEBT AND WAYS OF TACKLING IT - SPEECH TO ROTARY CLUB
The Bahamas is experiencing a heightened level of national debt that if not managed effectively could affect the potential for future growth.
The national debt currently stands at approximately $10.5B and is expected to increase to over $11B based in projected deficits. The current fiscal – 2021/22 – is expected to terminate with a deficit of $758M. 2022/23 – the budget being debated – a deficit of $564M to be followed in 2023/24 with a much smaller deficit of $125M before changing to a surplus in 2024/25 - $278M. That is effectively three years away and given uncertainty and risks we cannot be sure that a surplus will be achieved.
We trust that this is the case; as such, a shift is much needed to change our fiscal fortunes and stem the tide in the growth of the national debt. The expectation for the next fiscal is that we will need $1.8B in borrowings. $589M of which is to finance the cost of debt and the remainder for liquidating maturing debt. Just in case you missed it, we are effectively borrowing to pay the interest on our national debt. For the near future, we will be borrowing!
The buildup of debt puts the country is in a challenging and precarious position. Let us consider the current budget. According to Moody’s three critical risks exist.
First, there is the risk of not collecting sufficient revenue based solely on a strategy of enforcement and collections – potentially extending the deficit.
Secondly, there is the risk that the cost of debt captured in the projections could be overstated given global conditions - extending the deficit. Thirdly, there is the risk that holding spending in line with projections could harm growth – this will also affect the debt.
While the debt is now around 87% Debt-to-GDP and is expected to fall to around 80%. The question that looms large is whether this is sustainable. My view is that given the current levels of government revenue it is not. With and annual expenditure of $3.3B and revenue now projected at $2.8B deficits are to be expected.
The Fiscal Strategy Report of the government indicates a desire to reduce debt to 50% of GDP in ten years, more in line with the 60% benchmark popularly recommended by the IMF. Without growth, I do not think this is a viable position.
Without serious reforms is do not believe, it will be achievable while maintaining the current standard of living. However, it is the stated target and as such, we must bear it in mind, whenever we assess the fiscal affairs of the country.
Just for the fun of it, GDP is projected to be $12.7.8B in 2023. With a growth rate of say 3% (higher than our historical growth of 2% or less), our GDP would be $17.1B in 2031. Consider how we will reduce debt to $8B without growth.
Nevertheless, the target is important. According to the IMF, up to approximately 30% of GDP, debt has a positive impact on growth. Beyond this 30% mark, the positive effect diminishes, with each additional dollar of debt until around 56% of GDP. At the 56% threshold, every additional dollar of debt has a negative impact on GDP. Consider the Bahamas position therefore at over 80%.7
The main solution for the Bahamas in fixing its debt is growth. However as indicated before the country has in the past more than a decade now only seen growth of 2% or less. There are some other approaches we can discuss as to how the country might tackle its debt situation.
1. Changing the profile of the debt to have a largest proportion denominated in domestic currency. Currently 47% of the national debt is external. This is a dramatic changed compared to the past. Expanding the domestic share to become more favourable would be positive for the country from a cost perspective, and given that interest payments will largely remain in country is a major positive.
2. Finding cheaper debt is an imperative. The domestic switch will achieve this to some extent but there are also international alternatives that must be more aggressively explored. We must remain mindful though that the current economic and fiscal performance of the country is critical to achieving this. In the current state the country’s credit worthiness is in question as evidenced by the high yield certain Bahamian issues debt is attracting on the international market. Special arrangements through multilateral agencies or organization alone will not suffice and therefore getting our economic house in order is necessary.
3. While not a very exciting proposition nor one that will be welcomed enthusiastically, there is the option of increasing taxes. Let me explain. It is not that the country cannot afford to pay its debt. To the contrary, it is very much able to do so in absolute terms. However, the issue at play is that the based on the country’s current economic and fiscal arrangements it is struggling to do so. Here is why and the reason we should appreciate the need for reforms across the board.
a. In Moody’s most recent ratings of the Bahamas, it was downgraded to Ba3 – speculative risk or as some like to say junk bond. However, if you look at the components leading to this conclusion you will get a clearer picture.
b. Economic strength was rated Ba3 and this plus Institutional and Government Strength (Ba2) give us Economic Resiliency, which attracted a relatively good rating of Ba1.
c. Economic Resiliency is then combined with Fiscal Strength witch attract a very low rating of Ca2, to determine Government Financial Strength, It is the combination of all this that gives us a Ba3 rating. Note that the weakest element in all of this is the country’s Fiscal Strength. This is our Achilles heel and it is driven by the extent to which government revenue is sufficient to meet its obligations.
We therefore need to grow the economy. This is the best and safest way to get to a lower Debt-to-GDP. We must remain mindful of the need to grow and how spending restraints can affect growth.
We must engage in a serious, sound and broad base set of reforms bearing in mind the effect that inefficiencies have on deficits. Energy, State Owned Enterprises, ease of doing business, the concession regime, investment approvals – all the areas that are critical to growth, including the public service.
We must grow existing and new sectors. Agriculture is a prime candidate to do more by itself and a conduit to take more from tourism and other export sectors…much much more.
The national debt is the single most important impediment to the government plans and should be seen and treated as such.
The main risks to realizing the projections of the new budget are largely connected to debt either by the resources it attracts or by the limitation it places on certain decisions.
However, it will not disappear overnight and therefore masterful planning and execution is required. An effective debt management strategy is an imperative. Discipline in spending and boldness in making productive moves to secure growth a necessity.
Remember, debt in and of itself is not bad and it not a problem. The use and management thereof decide its impact. Positive or negative effects are always a function of how the economy is managed.
Remember this debt is simply an accumulation of deficits.
The forces, which affect us, may be largely external but the choices and responses are internal and totally up to us.
© Hubert Edwards 2022
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reachedat firstname.lastname@example.org. 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.