THE ESSENTIALS: OF DEBT RESTRUCTURE, THE IMF AND MARLA DUKHARAN



INTRODUCTION


The things that frighten us the most tend to maintain a constant presence in our consciousness and can cause great trepidation and anxieties. If those things can be bound up with a layer of emotion then discussion is quickly skewed. If it is possible to add an even greater layer of emotion by singling out personalities then it sets the scene for the complication of generally straightforward (not simple) issues, at least by some who would rather invest time in personality management than an accurate exploration of the fundamentals of the matter at hand. Recently, Caribbean Economist and Advisor Marla Dukharan stated that The Bahamas and Trinidad and Tobago are two regional countries likely to enter an IMF programme. The Jamaica Gleaner, capturing her comments stated. “…following defaults by Barbados and Suriname, The Bahamas was likely to be next, necessitating restructuring and IMF stringency in the near term”.


In 2020, she had made a more forceful statement to the effect that within one year The Bahamas would find itself in an IMF program. This has contributed much to the emotive responses. At the time, many persons, myself included, expressed our considered disagreement. Earlier this year I had a brief discussion with her, reiterated my sentiments, to which she graciously stated that she was comfortable with contrary views and gracefully expressed her delight that it had not yet happened. The Gleaner article and a recent interview I conducted with her, on The Essentials! has again drawn very close assessment, analysis, commentary and much discussion. Unfortunately, many persons have allowed themselves to be ensnared by the possibility of default that she expressed, while losing sight of the fundamental implications of the issues she has raised and eloquently discussed with consistency, openness and great professionalism. This piece is based largely on the interview I conducted with Marla Dukharan. While there may not always be attributable quotes, her responses inform many of the ideas stated here. The interview is available on www.guardiantalkradio.com


THE DEFAULT POSITION


The stated possibility of a default is genuinely tripping up many commentators or arresting their attention too much while some others have disingenuously latched on to the discussion with rabid opportunistic intentions. Dismissing the possibility of the default event, they are failing to focus on the underlying issues that the country must contend with regardless of the outcome. From my perspective, the government is in a reasonable position to defer any immediate default. The prime minister recently noted that work is afoot to extend maturities as an immediate means of staving off any such default. Let us agree there is no default. There will be no default. We do not think there will be a default. Now what? Consider why would a reasonably informed person would highlight such a possibility, over the next two years? Is she simply being mean or are her statements informed by the economic factors she has assessed?


Let us consider the following scenario. Doctor: “you have six months to live”. Patient: “not me, I am not ready to die!”. Patient reflecting on what the doctors said as self, “why did he draw that conclusion? The patient then decides, “Let me take a good look at this and try to fix it”. The doctor could have been dead wrong or right only to the extent where there is no intervention. We must therefore be very careful not to lose sight of the story behind the story. I would not ascribe unsavory motives Ms. Dukharan as some have done. No one should wish for the default of a countries debt and as stated above I do not believe that she does. My experience from the interview was that she was open, sober, and fundamental and balance. What I am more concerned about is not who is actually right or wrong today, but the narrowness of the conversations we are so far having in the public space. Fortunately, there is no such


In the first instance, what does it mean to have “no default”? The ability to repay or reschedule? Likely the latter. On rescheduling the debt, what will be the impact on interest payments? We currently budgeting 18% of expenditure for that, how much more will it increase or reduced? Once we reschedule what happens to the deficit if we are unable to secure growth initiatives and investment, which produce positive results? The conversation is bigger than that which we are having, trying to prove Marla Dukharan wrong. The ability to stave off default, while a good thing, does not immediately solve the fundamental underlying issues. For example, based on a recent interview, Dr. Pinto indicated how significantly under resourced the hospitals are. Arguably, these deficiencies have either not been budgeted for or funding has been redirected due to the crises. The deficiencies and lack are clearly not unique to the health sector, there is more that the current administration is assessing and discovering as we speak. Surely, we will need to fix them. With what, you may ask. Well we would have to borrow and that would mean higher deficit, more debt, more interest and possibly further downgrades, if there were no growth!


We can now all agree that, based on publicly available information and potential strategies that can be employed, there is a remote chance of default. There should be little to no argument here. However, the main reason there is unlikely to be a default rests on the ability to roll over the debt, to borrow and replace maturing debt, to reschedule and not a sudden positive shift in the economic fortunes of the country. Against that backdrop, to totally ignore rollover risk in the face of consistent downgrades would be a suboptimal approach to assessing the future possibilities for the country and the broader strategies that must be contemplated to secure sustainable solutions to the current debt crisis that it faces.


It is my view that there is greater value in looking beyond a default event with a view to develop a full and accurate appreciation of the potential cause and effect of what the country faces. A debt stock of $10.5B; debt-to-GDP of over 100%; a deficit of $951M; a decade of growth of less than 1% on average; and flirtation with primary deficits; a narrow fiscal space with little or no headroom; and an economic environment which is likely to be suppressed over the next two to three years. One should be very circumspect when listening to the commentary of anyone who purports to be pro-country but readily makes arguments that are in essence dismissive of these facts and question whether they are truly invested in the long-term wellbeing of the country or rather a closely guarded set of self-interests.


The current state of affairs of the Bahamas, especially as it relates to debt, is firmly captured in a narrow vortex because of the escalation of the national debt and weakness in the economy. Following decades of anemic growth and deficit spending, with consistently widening deficits, the country finds itself in a cycle of borrow, weak performance, gets downgraded, borrows some more because performance is weak, gets downgraded because we borrowed more and our capacity to repay is being questioned because of weak performance and high level of debt. Less than 1% annual growth over the last decade has led to five separate downgrades by the rating agency Moody’s. The starting point therefore ought not to be what may have been said by an economist or anyone else but to ask fundamental questions as to why the economy is not growing and how to change the trajectory of that reality.


The Bahamian song “stop the world and let me off" aptly captures the essence of the only viable and prudent approach available to policymakers. The cycle of borrowing must be slowed and eventually broken and the only way to do so is to grow the economy. Admittedly, as a layperson there are many aspects of economics that eludes my understanding. However, in the case of the Bahamas’ national debt it is simply mathematics while keeping an eye on policy and how income is derived. If the Bahamas continues to borrow without growth at some point no one will wish to lend it at any reasonable cost and there will not be sufficient monies available to provide normal services for the country. The question is, at what point do we change this vicious cycle? Even if one argues that we are not there, how do we stop us from getting there?


It is useless to continue to argue against a default while highlighting its improbability as the end of the argument. Delaying or deferring any instance of default is critically important but is not the “success event”. The success lies in fixing the underlying fundamentals of the economy and effecting the structural changes leading to economic growth. The fact is that even with successful extension of the life of debt instruments, there is still a crisis with serious attendant issues and that is the main thing that ought to be the focus. As we bring focus to bear in the right place, let us consider the elements that are considered important going forward.


Let us broaden the conversation to where it must be. There will be no immediate default. That is the starting point. Good! Then what? What is next? There are great insights as to what is next and what needs to be done. Of that, I am highly confident. For some there appears to be a reluctance to accept the facts and the implications of what fundamentally fixing the challenges might mean. That said I am sure that information will emerge soon as to what the country is really faced with, what the policy makers are intending on doing and what has been achieved so far. We must exercise some patience and wait to see what will unfold. Interestingly if one reads Ms. Dukharan recently released Caribbean Monthly Report (September 2021) closely, the concluding statement reads “We expect a debt restructure and an IMF program in the next year or two”, two separate things. One, which as noted above will happen voluntarily without external support. The necessity of the second will be subject to the effectiveness of the first and it too would be voluntary, with the support of external agencies, primarily the IMF. In fact, default is not a requirement for latter. Consider the fact that Jamaica had two consecutive 3-years program without being in default but primarily to solve its high debt levels and to inject discipline and structure in implementing reforms that had evaded it up to that point. There was no default but a major crisis where debt-to-GDP was 147% and an overarching need to inject confidence in the credit market. Very likely, there will be no debt default for The Bahamas, but it currently has a debt crisis of notable significance. We must never lose sight of that important reality.


THE SUCCESS OF CAYMAN


During the interview with Ms. Dukharan, she highlighted the fact that the Cayman Islands, one of the best run economy in the Caribbean, had a big surplus of $600M going into the pandemic. This put it in a strong position to better effect its policy responses with greater flexibility than all other countries in the region, including the Bahamas. How did this happen? She pointed to the fact that they got two things very right, ease of doing business and great fiscal policy. Consequently, they were in a position to afford a robust treatment of counter cyclical spending. Counter cyclical fiscal policy is critical to the protection against vulnerabilities and external shocks. The effects of the current pandemic and climate events such as hurricane Dorian are examples of such vulnerabilities and external shocks. Counter cyclical fiscal policy is effectively where we save when there is money so that when there are shocks you have money to spend, the proverbial saving for a rainy day. She noted that countries with best fiscal policies are the ones likely to perform great. Cayman demonstrated this. Jamaica showed this to a lesser extent and The Bahamas voluntarily implemented important policy in this direction, no IMF or any other external bodies involved. Unfortunately in the case of the current crisis this was “good but too little too late, maybe”. While the Cayman Islands is fundamentally different from the Bahamas in many ways, there is often close comparisons due to similarities in economic structure. It is therefore not far-fetched for there to be a careful comparison of policy approaches with a view of adopting and adapting what may be beneficial for the country.


In most regional economies, the government is the largest economic actor with significant influence on local commerce, employment and imports. Fiscal policy therefore becomes the most important policy in an administration’s quiver. It is critical therefore, that it gets its fiscal policy right. There is no way in which any country can consistently spend more than earned and maintain a stable economic state of affairs. Cayman’s ease of doing business and its effort in working with the private sector to lead growth strategies forms the foundation for the favourable position outlined above. The Bahamas must take a page from its book helping to facilitate a thriving private sector. Over Reliance on government for job creation is unsustainable as the government will generally only tax in order to do so. Government’s role is to create a great facilitative environment, allowing the private sector to run with it.


LESSONS FROM THE REGION


Over the course of our interview Ms. Dukharan highlighted sister countries which have defaulted in recent times. Surinam defaulted after trying to manage their credit problem on their own, failing and eventually experienced a balance of payment crisis and initiated negotiating with the IMF. Belize too tried to manage the restructuring problem on its own without the IMF and has become a serial defaulter like Argentina. Trinidad and Tobago, which was also fingered for default, is facing serious problems, with its reserves all but gone. Interestingly, Trinidad has benefitted immensely from its sovereign wealth fund. Over the years successive governments invested to the tune of $2.6B in the fund. This investment earned significantly taking the fund up to approximately $8B. This has allowed the country to be able to draw down from it to address its current crisis. This latter point signals a very critical issue where The Bahamas is extremely deficient and is highly instructive of the way forward. Without buffers, whatever the form, the country must urgently move to create counter cyclical savings. This point takes us back to the important point stated earlier, we must get to the point of earning sufficiently to be able to save. This naturally extends to the fact that without growth the only means of facilitating counter cyclical spending is to implement austere measures.


Jamaica provides an interesting study for analysis of where the Bahamas is and the basis for assessment of any proximate dance with the IMF. Importantly it provides clues for remedial policy positions that will make such a dance even more unlikely. This was an example that Ms. Dukharan stressed during our discussion. While challenged, Jamaica stands as a good example of what could happen if the dance were to happen. Two programs with the IMF, over 6 years, allowed the country to realise consecutive 20 quarters of surpluses prior to the pandemic. The outcome of these programs allowed the country to reduce its debt-to-GDP ratio from over 135% to below 100%, for the first time in many decades. Consequently, it was able to more effectively create some buffers and was very effective in its early response to the crisis. Important developments coming out of the IMF program include the creation of a Fiscal Council, an Economic Program Oversight Committee (EPOC) and an Economic Growth Council all designed to improve help to drive reforms in the areas of ease of doing business, domestic debt restructure and provide oversight and accountability for the reforms. The programs positively affected social spending resulting in reduced poverty and increased employment (best results in decades). One important issue, which was dominant in the conversation, was the fact that Jamaica, together with the Dominican Republic, are the most diversified economies in the region. Jamaica in addition to tourism has mining, agriculture, manufacturing and remittance inflows, in addition to other sectors, and this made a fundamental difference in how it has fared thus far in coping with this pandemic crisis. The lesson here as the country looks forward is to pay close attention to opportunities for diversification. This is one area we must shift our gaze to and redirect energy from arguing against the pronouncement of others to preparing the country such that the possibility of a default never arises.


The reality is that The Bahamas is in the most comfortable place at this time given the critical mass of debt and the fact that at this stage, we are experiencing primary deficits. A primary deficit occurs where recurrent revenue is insufficient to cover recurrent expenditure before taking into account the cost of financing. This is where the country is at this time, albeit not extremely large. The existence of primary deficits evidences the vicious cycle we are in laying bare the fact that we are borrowing to finance our borrowings. The central bank's most recent report of Debt to GDP shows that it currently stands at 104%. This provides the backdrop for appreciating an important issue of the impact of debt on the economy that was carefully laid out by Ms. Dukharan. Subject to how funds are spent, with a Debt-to-GDP of up to 30%, for every dollar borrowed it has a generally consistent positive effect on the economy. Between 30% up to 56% the effect remains positive but with declining utility. Over 56% for every dollar borrowed, the effect is generally negative.


As a result, the productive capacity of the country is significantly impacted. Consider the amount we budget for capital expenditure on an ongoing basis and its consistent reduction over many years. Debt can have an adverse effect on growth, long-term viability and human development. As Ms. Dukharan pointed out there are only two ways in which a country can secure growth, investments and exports. Primary deficits are firm signals that the growth needed is not in evidence, it also further means that resources needed for investing in facilitative initiatives and programs to improve infrastructure, attract investments and nurture industries for exports is non-existent.

Having said all that let us look at what The Bahamas would encounter if it were to enter into an IMF program. Against the backdrop of the strong sentiments in The Bahamas against the IMF, Ms. Dukharan quickly pointed out the fact that the IMF is sometimes demonized, something it earned as a result of its policies during the 1980s which were generally destructive and challenging. These policies were not designed for developing economies and did damage. However, the IMF has changed and undergone great institutional changes, with Jamaica and Grenada standing as great examples and success stories of those changes and reforms. A balance of payment crisis is by no means fatal. Barbados, with great similarity in size of economy is experiencing one such crisis and while struggling, it is being supported by the IMF which enhances the likelihood of getting things right thereby setting the country on a better socio-economic path.


The reality is that should there be challenges the IMF’s participation means that the country is more likely to be successful. It is beyond question that the Bahamas is able to reorganize its economic affairs. The country has already signaled its ability and willingness to do so without the intervention of any external parties. An important point raised during the interview is the extent to which we have to look back historically and assess the policy choices made and question the extent to which our failure to implement real and timely reforms in the past may suggest a pedestrian approach in doing so now. As confirmed by Ms. Dukharan, credibility is a big issue due to downgrades. Investors or more likely to lend given an IMF program with clear reform agenda and technical support. Such a program provides greater accountability, transparency and addresses the risk that going alone could eventually lead to default.


There is no question that The Bahamas needs greater efficiencies in the public sector, the development and expansion of e-government will bear significant value, create cost saving, and especially positively influence the ease of doing business. One point that Ms. Dukharan pointed out during our interview was that The Bahamas with its digital currency is well placed to fully exploit the possibilities in this regard. Ultimately, the search is for improvements and growth and efficiency could lead to the elusive growth, which is much needed. The bottom line therefore is that while the country must do all in its power to avoid default and any dance with the IMF, there are some fundamental things that must be done to inject the level of discipline needed to turn around the fortunes of the country and its economic state of affairs.


Let us be clear, there is an instinctive understanding by even “the man on the street” that a default potentially leads to pain. As human beings, we are naturally wired to avoid pain and therefore it is reasonable that many would wish to rationalize the arguments and create a settled position once it has concluded that default is not evident. Without seeking to be an alarmist and in the absolute best interest of the country, the truth is that there is a price to be paid and that price, while reducible, is inevitable. There are no cheap ways out of the current credit dilemma and the only way out is with the impetus of real economic growth. Currently government revenue is very limited,


VAT REDUCTION


The proposed reduction of VAT has become an especial sore point for many. However, what is the core issue at play when it was stated that without some other compensating revenue measure renders the proposal a questionable policy position. Recognizing the value of the reduction to the populace and understanding that the proposal was coined before the downgrade, this simply asks where will the difference be made up. There must be some alternate ways of securing growth. Ms. Dukharan took pains to point out that unless there are other revenue measures then this is not a viable move as a revenue negative policy position will lead to increased deficit. This is really the crux of the challenges faced by the country and the stressful position the new administration will find itself in.


Every single policy position needs to be measured carefully against the impact of the deficit and the level of borrowing. Following a record deficit of $1.3B in 2020/21, the current fiscal year is projected to have a turnout of the second largest deficit in the history of the country, $951M. Every decision which increases that number must be of concern and how this affects the continued credit worthiness of the country, in the context of extremely limited economic growth. This reiterates the importance of paying attention to roll over risk and to take into account how every policy position will influence the level of the debt. When there is risk of increasing debt there is a greater chance of investors indicating they want their money back because the risk of holding debt becomes too much for them to accept. The more you borrow, the more you have to pay, the bigger the deficit and the greater the chances for a downgrade again, the vicious cycle we discussed.


IN SEARCH OF SOLUTIONS


The problems that plague The Bahamas have existed for a very long time. When one takes a careful analysis of the new administration’s platform it becomes clear that those who now occupy the halls of power are fully cognizant of the realities and have devised, in my opinion, some very sound strategies to combat this. What we must be mindful of is the fact that some of those plans must now be reconsidered and refined in response to the economic realities of the country. While Dorian has been the main impetus for the major economic loss, made significantly worse by the COVID-19 Pandemic, we must never lose sight of the fact that the country’s sovereign debt was downgraded to non-investment grade before Dorian. For well over a decade there were problems.


As my guest indicated, fiscal imprudence led to junk bond grades and got us here. These two crises made things impossible but they are not the real source of the challenges. There are serious structural weaknesses that exist and still need to be fixed. This however will only happen if we accept what the issues are and face up to the brutal facts. Only way to fix them. The policy choices going forward are therefore going to be extremely critical, especially fiscal policy. For many, this is the perspective through which public policy is assessed having regard for the longer-term effects. For others they are willing to only consider the short-term effects. The quality of the policy choices made will dictate the quality of the outcomes at all levels.


As we contemplate this future, there are some useful points to consider which could create important changes desired. According to Marla Dukharan some immediate solutions for dealing with the debt situation include effort to re-profile debt, secure debt relief in terms of principal reduction or extending maturities with the objective of reducing the amount of loan payment and reducing the cost of borrowing, causing debt to be more affordable and sustainable going forward. This is the obvious most urgent issue but there are broader considerations that must be had in order to solve the totality of the challenges before us. These generally provide a framework for the road to recovery for the country. I outline a three-prong structure, based on information gleaned during the interview. This is not to suggest that this is “the approach” or the only issues at play but rather highly influential outcomes, which must be central to our thinking.


Firstly, there needs to be a suite of clearly delineated fiscal responsibility policy with very strict adherence to the policies. This has been started by the previous administration and should be enhanced, strengthened and given effect in a manner which clinically reflects the true essence of their intent. In the context of avoiding all possible interaction with the IMF, a look at adaptable strategies employed by Jamaica as part of its two programs, and other countries in the region, could prove valuable. The idea would be to glean and learn from others and in the process take full charge of our own fate and continue to voluntarily implement the reforms and changes that will serve us well.


Secondly, the country must embark on a path of ambitious growth with strategies to boost and diversify selected sectors and the economy at large. The ultimate objective is to secure a state of consistent economic growth and resilience. Resilience is secured in varying ways but most definitely a more diversified economy displaying robust and consistent growth and facilitating the ability to save for future shocks is a formula that should occupy the focus of policy makers. Of necessity the Bahamas needs to apply a disciplined and focused treatment of reforms to correct ease of doing business, labour force and productivity reforms, public sector reforms all aimed at creating a more facilitative environment to support private sector growth and innovation. I am confident that most will agree that without a consistent treatment of growth the struggle will continue to the detriment of all.

Thirdly, the sting of the COVID-19 crisis has shown the need for having reserves, which can be drawn on in times of stress. Consequently, there is an imperative for the building buffers. This can be implemented through a sovereign wealth fund or some other forms. Importantly there must be mechanisms to facilitate counter cyclical spending in times of need. As noted before this is the big differentiator between the Cayman Islands and the rest of the region when assessing the response to the pandemic. A country with surplus is better placed to advance and sustain its own efforts for growth and development. This is part of the progression loop, if you will, which places the country in the best state to break the back of a dependency on perpetual borrowing. The current over dependence on tourism and to a lesser extent financial services demands that we find a way to save when times are good or create value with unexploited resources. The commitment of the administration to launch a properly developed sovereign wealth fund augers well in this regard.


CONCLUSION


Like most discussions, there are always deeper dimensions to consider. When taking on certain matters we tend to approach them in abstract because we are often limited in the type and quality of information we have or the level of understanding. It is therefore useful to end by reminding us that the matter of reviving The Bahamas is both difficult and complex. This reminds of the closing statement by Oxford Economics in its 2019 report, commissioned by the BCCEC, when it stated “…But it is also important to view the debate around WTO Accession within the broader context of the structural, economic, and social challenges facing The Bahamas. What is clear from our study is that WTO Accession alone will not be a panacea for the current problems facing the Bahamian economy. In order to achieve a sustainable acceleration of growth, policymakers need to embark on a more ambitious and broad-based reform agenda to improve the domestic business environment.” In the same vein what is clear is that there is no one thing which will serve as a panacea for the current problems of The Bahamas, only an ambitious and broad-based reform agenda will change the fortunes of the country and economy.



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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.



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