The Bahamas is currently in the midst of a very debilitating but somewhat improving economic and health crisis. This is after suffering one of the most destructive shock, caused by a climate event that destroyed a significant portion of the country’s GDP. These events taken together have ushered in one of the most disruptive economic states the country has ever faced. The impact has been revealing, showing some worrying fissures in the economic arrangement of the country. The crisis is uncomfortably unsettling, creating such significant disruption resulting in sufferings and pain at personal, business and national levels. It is financially stressful creating great uncertainties and carries the potential for a slow, long drawn-out recovery period. Hurricane Dorian and COVID-19 are both significant incapacitating events. Despite this, and the gravity of their effects just mentioned, the most significant challenge the country faces is a phenomenon that has lingered for decades - the failure to implement well-known and much needed reforms.
“The lingering financial impacts of Hurricane Dorian and the COVID-19 pandemic have considerably reduced The Bahamas' fiscal flexibility and its capacity to address future shocks. The failure of successive governments to implement timely and effective reforms has weakened public finances, created a high debt burden, and increased funding pressures. The stable outlook reflects our view that an improving economy will bolster government revenues even in the absence of meaningful fiscal reforms.” With these three sentences, S &P Global unequivocally laid out its reasoning for downgrading The Bahamas from BB - to B+. This in my opinion is a very clinical and honest diagnosis of the true state of affair of the country. Effectively it delineates the fact that the country has been confronted by deep internal and external shocks, eroding economic strength and that there is a need for sound reforms to facilitate resiliency. The fact that five months after the budget was presented the country has yet to fund a significant portion of its borrowing requirement provides important context for the seriousness of both this latest downgrade and the criticality of the conclusions drawn by the rating agency.
The extent of the impact of any economic shocks is highly influenced by the state of the economy, the time of the shock and importantly the efficacy of structure in place to facilitate and support recovery. Buoyancy, nimbleness and ultimately resilience cannot be secured with inefficient and ineffective processes. Growth is always a mid to long-term adventure. Growth has to be strategized and nurtured, and even then, it is hard to secure. There are many who hold the view that the return of tourism will be the solution to the country’s problems. While I actively wish for economic rebound, I am convinced that the trajectory changing, and sustainable shift needed to positively affect the economic fortunes of the country firmly lies in a serious treatment of across-the-board reforms. Anything less, in my opinion, has serious and long lasting implications with the potential of advancing a quickly crystalizing vicious cycle of poor growth, ineffectual and strangling debt levels.
Recently I had the privileged of speaking with a member of the current administration. I expressed my agreement to a statement made acknowledging that the challenges are great but the individual would rather see them as opportunities. I quickly expressed my view that this administration had been “gifted” with a most wonderful opportunity to change the path of the country. I continued outlining my view that should it fail within the currency of the next five years, the price to be paid by the country, for a potentially uncomfortable long time, will be high. It is not so much about the administration but rather that they are in place at a critical and crucial time in the economic life of the country. Their decisions today can either secure great dividends or impose significant cost in the future. The precariousness of record debt burden, a global financial crisis and a government system under-prepared to cope with the vagaries of those realities must guide the approach taken. Serious and sound reforms must become the hallmark and legacy of the current administration.
This is supported by long standing call for reforms. In a 2019 report, Oxford Economics advised, “the best outcome for the Bahamian economy would be for policymakers to pursue WTO Ascension within a broader policy reform agenda aimed at improving the local business environment”. At the time, the issue of ascension to WTO was extremely controversial and faced serious local headwinds. While the effort was eventually, ‘delayed’ there was clear and broad-based agreement on the reforms called for in the report. In what is tantamount to a repeat with a twist the report further stated, “In order to achieve a sustainable acceleration of growth, policy makers need to embark on a more ambitious and broad-based reform agenda to improve the domestic local environment”. It is this idea of being “more ambitious” that policy makers are faced with today and must grapple with. The process will be challenging, however, there is also no question that failing to move in this direction will not be in the best interest of the country.
In its December 2020 Article IV Mission report, the IMF highlighted the following, “The Bahamas faces long-standing structural impediments, and COVID-19 brought them to the fore. Reform priorities, many of which are listed in the recent report by the Economic Recovery Committee, include modernizing administrative services and rationalizing regulatory requirements for starting a business; enhancing the operational efficiencies of utility SOEs; and reducing frictions in the job matching process.” These reforms are well known, well documented and are inescapable. The pandemic and attendant economic crisis have been used to explain the recent problems of the country and while there is some justification in this, it is an incomplete explanation. What is more important though is that failing to accept this fact and act accordingly is likely to imperil the recovery of the economy where the country could fail to see real growth, beyond the anticipated rebound. Interestingly there are headwinds of serious supply chain disruptions, imported inflation and increased cost of living demands an urgent but deliberate approach to reforms and policy adjustments.
As noted, there are a number of areas in which reforms are needed. Public financial management is one that must face a rigorous suite of reforms that take the country from the current state achieved by the previous administration to a level that facilitates a richer reality of transparency, accountability, effectiveness and efficiency of systems and save cost and encourage growth. In addition to the stated legislative agenda of the administration that directly affects some legislation, there must be a deeper look and wider net cast. This should be geared at minimizing leakages in and wastage of government resources, reforming internal processes that drives planning and decision making, improve effectiveness of programs and initiatives, thereby securing greater value for every taxpayer dollar spent.
Another big-ticket item for reforms is the energy sector. The current Prime Minister who was the then Deputy PM and Minister of Works stated in the 2013-2033 Bahamas National Energy Policy document, “an energy policy that will not only diversify the economy and guarantee the full development of all available energy resource potentials in the country while protecting and preserving the quality of the environment. The energy sector policy is intended: To enhance energy security in the nation through diversifying the energy supply mix; to increase energy access especially in New Providence and in the Family Islands; to facilitate employment creation and empowerment; to protect the environment and mitigate climate change; and promotion of best practices in efficient energy use and conservation of energy”. Every aspect of this remains valid today and needed today with a greater sense of urgency given the rapidly evolving threats from climate change. Will the reforms needed to secure these important goals now come to the fore or will they continue to linger in abeyance.
While admittedly not the easiest of things to contemplate, having regard for all the realities faced by any administration, it is beyond question that there is a need to reform the public services. According to the 2018 report, Building State Capacity in the Caribbean, “The State of the Civil Service in The Bahamas based on the results of the assessment, the most impactful interventions are likely to be associated with augmenting the planning, strategic alignment and management information systems. In tandem with these areas of focus, the government would benefit significantly from strengthening the centralized human resource management agencies. This strengthening should include human capital, financial resources as well as policies and procedures.” Finding authoritative examples with stated need for reforms is such an easy adventure that no rightful thinking person would doubt or argue against its urgency.
I have often stated that the country’s approach to policy and reform, at least in discussions, is like trying to solve a mathematical problem but having an inflexible requirement to hold too many elements of the formula fixed. One could not be blamed if they were to form the impression that there is a level of fear in accepting the harsh realities facing the country and making the changes necessary to respond to them. Insight into this predilection may be gained from the discussions around taxation. While there has always been an acceptance of the need to expand the government tax revenue this is without any fundamental changes. Consider the IMF’s 2013 study Tax Reforms for Increased Buoyancy that stated, “The Bahamas has a low tax effort due to limited tax handles and underutilization of available ones. The current issues to be addressed are: (1) Lack of buoyancy of the tax system; (2) dependence on fees and levies (94 fees) that are distortionary and cascading; (3) narrow tax bases through exemptions and concessions; (4) decline in collection efforts in property taxation; (5) over-taxation of goods relative to services; and (6) lack of adaptation to changing market conditions.” Despite the obvious need for action, nothing significant has changed.
In recent times, the Prime Minister has expressed a desire to achieve a 25% revenue-to-GDP, an average 6% increase and a position forcefully pushed back against by Moody’s with a general conceding response from the relevant minister. Despite this perceived desire for change, the discussion of whether there should be a continuation of a regressive tax system and whether such a system has the inherent potency to solve the revenue problems of the country is not happening, as it should. The demonstrated reluctance to come to terms with a full assessment of a more progressive taxation system not only underline the complexities at play but, given the depth of the economic challenges, is indicative of how critical the hard changes, the reforms, are for the future.
The country is at a tipping point. The extent to which the government unleash a sound, strategic and well considered suite of reform is the extent to which the future economic resilience will be secured. The truth of this is captured by S&P’s downside scenario – “We could lower the ratings …if the government's inability to close budget deficits leads to fiscal deficits remaining elevated for a prolonged period, or if it weakens the sovereign's ability to obtain funding.” And the upside scenario – “… we could raise the ratings…if the government establishes a track record of enacting meaningful financial reform, demonstrating an ability to raise revenues and leading to sustained near-balanced financial results and improved economic prospects.” The more secure future we desire lies within our hands!
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© Hubert Edwards 2021
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. This and other articles are available at www.nlsolutionsbahamas.com.