The IMF’s “Inconclusive” Concluding Statement – PART II



Part II concludes assessment of “The Bad” (see Part I) points in the IMF statement starting with the paradox of the recommendation for increased interest rates and then consider the “The Concerning” issues.


THE BAD


Paradoxically increased interest rates tend to have some other interesting impacts on a country. Starting with the obvious increase in borrowing cost and mortgages to a reduction in investments and reduced consumption leading to the less obvious lowering in economic growth. Given where the economy is today, why would it be considered reasonable to risk the nascent recovery? Why would the Central Bank seek to damper consumption in a largely mercantile, re-selling oriented environment? The effect that increased interest rate as a monetary policy may have on inflation is not much of a factor here in The Bahamas is almost a non-factor, so why point us in that direction. While correctly pointing out the need for focus on vulnerable segments of the population the statement seems to ignore that from a personal perspective there would be higher cost of borrowing; potentially higher interest payments on mortgages; a reduction in borrowers (or domestic investors) confidence. From a national perspective government cost would increase on domestic floating rate debt making an already bad situation worse. Coming out of the most significant financial crisis, the already high unemployment rate could be exacerbated with an increase in interest rate. On this basis, I believe that the recommendation begs for greater assessment.


From a macro perspective, taking into account all the nuances of the Bahamas in economy, what would be the most likely outcome of a rate increase? Reduced consumption. Is it therefore reasonable to speculate that the IMF is, given its concern about the risk to economic recovery, harbouring concerns regarding the robustness of the country’s reserves and balance of payment? Is the IMF, in a back handed way, suggesting that the country should cool off the demand for importing dollars as it keeps an eye on the improving but “not yet there” exporting inflows”? On the other hand, maybe The IMF did in fact say that when it stated, “If the market environment were to deteriorate markedly, consideration may need to be given to a temporary tightening of capital flow management measures.” It did this after stating very early in the document, “The tourism recovery is projected to narrow external imbalances over the medium term and thereby keep international reserves at adequate levels.” I take the view that the IMF concluding statement seem to say much less than intended. What is clear is that when we move around and examine statements, as we are doing here, they seems to take on less of a cryptic nature but still very indirect.


Policy makers are unlikely to act on the increase rate recommendation. However, the cautions stated or implied should not be ignored. The desire for fast fiscal consolidation should not drive over optimism. Plans and projections should be balanced, making clear allowances for downside effects. Attendant or supporting strategies should be clearly communicated early to facilitate private sector adjustments. All this should be done without leaning towards introducing unnecessary pessimism or taking action that might “shock” the market place, destructively disruptive to existing value propositions or harm long-term potentials.


THE CONCERNING


As policy makers work hard to reposition the country, they are caught in a web of tensions. The fight for progress is locked between what policy positions to pursue for increase in revenues and how to respond to the braking effect of the current debt burden, which is driving the need for increased revenue. It is not an argument many will have openly but the implications are many. The recent budget presentation give us glimpses of this. The projections to fiscal 2024/25 are clearly indicative of the administration’s desire to move the country along economically. The efficacy of the plans though are highly interlinked with the ability to finance current and expected deficits, manage the increasing level of interest payments and contend with the coming pressures as a resulting of maturities. According to the IMF “The pandemic has deepened the country’s medium-term growth challenges and public finances have deteriorated.” The main concern is the extent of the weakened state and therefore the significant narrowing of the margin of error for implementation of policy decisions and the execution of reforms.


When therefore the IMF declares, “The Bahamas would benefit from a more robust multi-year debt management strategy” one gets the clear impression that they may not deem the current strategy effective. Bearing in mind that the IMF is highly focused on influencing policy it is always likely to have an interest in what the current position is and what are the migrating factors going forward if the circumstances are not highly favourable. Therefore, the statement “Even with significant fiscal consolidation, financing needs will decline only gradually over the medium-term. This creates elevated risks of the country finding itself in debt distress. Mitigating these risks will require careful planning”, suggests the extent to which fiscal consolidation is central to existing strategies. The Moody’s report, which I will look at soon, should moderate expectation and underline the point above. The view from the perspective of normalizing performance and the reality from a debt or creditworthiness perspective are at odds and while there is room to be positive, maybe a more tempered approach should be taken.


Why would one conclude this? Consider you impressions when a policy centric institution outlines, “The new debt management committee should systematically track performance of the recently published multi-year government financing strategy and undertake contingency planning to ensure the strategy is robust in a less favorable market environment.” Then ask what could constitute less favourable market conditions. An inflationary environment? An environment where it might be difficult to secure debt or if so at increased cost? An environment where the effects of pandemic on educational, employment, displacement cause pressure on the social cohesion of the country and need for increase social support? On the other hand, imbalances in our tourist market from episodic impact of rising cases of Covid, or pressure on disposable income as a result if global inflationary pressures? Consider your impression when the IMF cautions, “The government should avoid undertaking strategies that may appear to reduce costs in the short-term but potentially exacerbate debt distress in certain circumstances.” What might the administration have done or is contemplating. Relating to debt, which would have prompt such a remark? As an observer, nothing readily comes to mind, but it is a rather intriguing statement.


There is no doubt that at this point debt represents the “Achilles heel” with respect to the country’s economic recovery. The actions taken by the government and conveyed by influential organizations such as the IMF will have serious implications. It is imperative that policymakers take the requite actions which will entertained the highest level of confidence that the most practical, strategic and complete steps are being taken. Statements such as “The Bahamas would benefit from a more robust multi-year debt management strategy” carries a potentially negative messaging to the financial market that is already showing an adverse outlook for the sovereign bonds, trading at relatively high yields. The realities are such that whatever mechanism is in place for debt management it must be clinical, effective and consistently sending the right message. Anything less carries potentially high costs of higher interest on potential new debt, increased roll ever risk, an inability to finance projected deficit spending over the next two years and increased likelihood of austere measures.


THE CONCLUSION


The following statements from the IMF readily contextualize the level of uncertainty the country faces. “Higher food and oil prices, including because of the effects of the war in Ukraine, could erode consumer demand and impose a particularly heavy burden on the vulnerable”. This is an apt reminder of the global influence with direct local adverse impact especially for those who are already challenged to cope with economic distress. It continues, “In addition, a sharp rise in global risk premia could limit the ability to place new debt and further strain public and private balance sheets”, pointing to the risk of fall out for both private and public sector. Fortunately, the Bahamas financial system has high liquidity and therefore private debt might not be at the same level of risk as public, already faced with significant yields in the international market. On one hand, there is the inescapable challenge of rising costs and the implication that hold while on the other there is the possibility for even greater pressures on national debt creating greater challenges for policy makers as they managing the finances of the country as they search for sustainable growth and greater resiliency.


Certain matters have become thematic in discussions surrounding the country’s economics and IMF raised a few as a specter of doubt on growth and targeted allocation of resources. “A reprioritization of public spending is also needed to promote better social and economic outcomes.” This effectively points to the fact that it believes that expenditure are not as productive as they could or ought to be. While tourism will remain systemically important, the authorities have long recognized the need to diversify toward a more knowledge-based economy. A greater emphasis on energy reforms and educational programs to improve the inclusion of young workers and the underemployed will raise growth potential.” The economy is in dire need of diversification and growth. Certain social underpinnings and broader reforms for national growth need urgent attention. No one should pretend that these are easy but we also cannot afford to continue to act as if they are impossible either. A way must be found to move the needle forward on growth. While it may be antithetical to other objectives, the best chance that happening is to embrace a long-term orientation. A rearrangement of the IMF’s statement above makes the point, the government should avoid undertaking strategies that may appear to be viable in the short-term but potentially exacerbate the economic distress of the country in the long-term.


Regardless of the nature or tone of the commentary, it is critical that where the suggestions makes sense that there should be wise movement in those directions. Given where the country is economically, it is important that we draw on all available sources, in a serious and practical manner. This must be done with a view of solving the problems which currently ails us and positions us for the a more vibrant and resilient future, a future where we are able to better cope with the shocks, internal and external, which will continue to assail us. The IMF report, despite its seemingly paradoxical state, is one such important source.


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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. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.

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