THE TAXING PATH AHEAD

BACKGROUND – LANDSCAPE OF OPPORTUNITIES



BACKGROUND – LANDSCAPE OF OPPORTUNITIES


COVID-19 has radically changed the fortunes of countries around the world with major challenges expected for the near future. The Bahamas and the rest of the region have significant headwinds to confront; however, it is not all doom and gloom as there are also some tailwinds to be considered in any balanced assessment. Obviously, the level of resilience of countries vary significantly and consequently the rate of recovery will show notable differences. The Bahamas, like other countries, responded to the health crisis, which morphed into a global economic crisis, seeking to mitigate its impact. While there are various levels of criticism as to sufficiency of amount and effectiveness for the management of the processes, Government support for the business and social sectors was evident. Efforts to curtail community spread through lockdowns were prominent with the expected adverse impact on the economy. The national narrative focused on the health of the economy, it dominated national discourse with differing flavours of trepidation, negative outlook, optimism, over-optimism and prognostications of fundamental structural and fiscal shifts needed.


The focus now, with the curtailment of new cases, the emergence of a number of viable vaccines, is on post recovery. This position may be seen as premature by some, given the possibilities of a third wave and the impact of new variants. However, it is my view that The Bahamas should start directing all energies towards how the country will recover and sustain such recovery over the long term. If the country is to experience reasonable growth beyond the historical norms, it now needs a pragmatic, imaginative and highly transformational suite of treatments. These treatments must fully take into account the economic and global landscape, the observed vulnerability of the highly tourism dependent economy, with eyes firmly focused on the growth and development of the country, fostering economic equality, battling the menace of poverty and enhancing the future well-being of the citizenry.


It is just about one year now since the country started to feel the first real direct effects of COVID-19. All the urgent discussions conducted over the last year, the foreshadowed policies, and the explored strategies by various groupings and taskforces must now start seeing effect through execution. Time is at a premium. The approach going forward cannot be settled on business as usual. It is essential that a way be found to develop a broad based consensus around the issue, which must be addressed to move the country forward. The ideas of resilience must remain central to ongoing efforts; bringing clarity and certainty to the investment arena is an imperative. Creating a broad based understanding of the effects of the current economic structure, speaking and taking action to address the vulnerabilities, including the taxation regime, is fundamental. They must be honest and authentic evangelizing the need for the engagement of the national collective genius to solve the country’s problems. Where the country finds itself today provides an unfortunate but extremely valuable moment for finally locking in a national strategy to serve a true roadmap to the future, one accepted and committed to by all and sundry. The landscape, by all measures or assessment, is challenging and unsettling. However, it presents a glorious opportunity for moving speedily and pragmatically forward. Truly the options available pre-crisis are disappearing or at least their potency reducing. With our proverbial back against the wall and largely only one way to go, the decision-making should be more straightforward. They will not be necessarily less complex but with the options limited, the friction imposed by competing objectives, which up to now made that process more difficult and have arguably caused delays in many areas, universally agreed on, but remain languishing for decades. The reduction in options should make these tensions more easily managed.


In previous articles, I spoke to the possibility of economic recovery for the Bahamas stretching out to 2024. In fact, I never accepted the idea that there would have been a six-month recovery in 2020. My position was then, and remains, that this crisis for the Bahamas will be an 18-24 event, at best. It is not a comfortable proposition but one that must not be dismissed. The efforts to secure a more resilient economy must move ahead full speed. A part of the bold and generational shifting spoken of by the Prime Minister earlier in this crisis must be how the country solves its challenges on a bi-partisan basis and in ways that embrace all strata of the society. Policy makers must be ready to make the tough decisions and push the envelope to uncomfortable levels without harming the economy further. To solve the problems faced by The Bahamas, sound treatments have to be brought to bear on the growing debt, low GDP growth, the concentration of export earnings and addition of new revenue sources, low productivity, and public sector reforms. The country needs a more resilient economy, a broader fiscal space and a deeper economic breadth. Debt management and fiscal consolidation is a critical part of the process, however, without growth the desire for a more robust, resilient economy with the ability to better absorb the effects of external shocks will remain difficult to achieve.


THE SIX-MONTHS REALITY


The difficulty indicated above is underlined by the current fiscal state of the country as borne out by the recent half-year budget presentation. With an expected 16.2% decline in GDP in 2020 to be followed by a 2% and 8.5% growth in 2021 and 2022 respectively, the country's finances will be under pressure. The growth over the next few years is clearly insufficient to reverse the 2020 loss and it is expected therefore that government revenue, left unchanged, will be curtailed. This holds important implications for the way forward. Based on the six-month outturn it is likely that the projected deficit of $1.3B will be surpassed. At the half-year mark tax revenue stood at only 38% on the annual budget. While there is seasonality to government revenue and a linear extrapolation is ill advised, a subjective conclusion that we will get nowhere near the 100% mark in twelve months should enjoy little or no controversy.

Tax revenue contracted by over $400M to settle at $673M, with the significant contributor, VAT seeing near 50% decline. While the banking system shows no sign yet of any stress with significant levels of liquidity, external reserves up by over $600M to $2.4B, it is sobering that up to November 2020 tourist arrival recorded a 78% decline. That latter measure provides important context of the uphill battle faced by the country if a significant near term recovery is not experienced in the touristic sector.


At the current trends, taking into account the above caveat, the deficit is trending toward $2B. This would be a significant shift in an environment where the global demand for debt is high and the country’s capacity to borrow, without increases in tax revenue, weakened because of a consistent buildup of debt. With debt to GDP, and contingent liabilities and guarantees standing at 79%, the country saw net borrowing of 1.2B in the face of pressures on expenditure for continued social and private sector support. The trends are unsustainable and this is why there is often the articulation of us being okay when tourism returns. Unfortunately, such discussions are not neither sufficient nor strategic enough in response to the deep economic malaise the country faces. Without a doubt, it needs some good fortune. Now more than ever the country needs the USA to be good and healthy. Now more than ever we need massive amounts of tourists to head to our shores. Now more than ever the country understands the need for more diversified streams of foreign exchange revenues. A deficit of $736M or 55% of budget unambiguously underlines this. The country is at a place where the only great near term news will be a return of visitors. The fiscal fundamentals deliver a clear indication of the work ahead and if nothing else, it should facilitate understanding of the urgency needed in dealing with the challenges and appreciating the perilousness of what may lie ahead.


Often we hear commentators or officials talk about the “come back” of tourism as a means of alleviating The Bahamas’ challenges. Here is why that trending response is an inadequate one. The demand side shocks we are experiencing are abnormal and driven by the need of countries to protect their citizens, the source of our tourism. While there is nothing policy makers can do about that, there is the need to recognize the gravity and start talking alternatives. As it relates to revenue, the conversation is in many ways an apple and orange conversation. We will not be able to replace like with like. The quality of revenues at risk during this crisis is much broader than tourism revenue. The thinking therefore must be done in the context of the widest sources of vulnerabilities, a practical search for new possibilities, and potent strategic responses. The fact is COVID-19 is presenting a real life scenario analysis of what happens when a major aspect of the economy becomes significantly disrupted. In my view, there are some important considerations. What if the tourism sector never returns to pre-crisis levels? What other source of national income will we exploit to make up the diff