In light of the challenges that our economy faces and the general consensus that we must revisit our economic model... it is disturbing to see that little is being said about the proposed fiscal policies of political parties as we enter the heart of the 2012 general election campaign

Confronting the debt crisis pt. 2

by Arinthia S. Komolafe

Last week we explored the effects that monetary policy at the turn of the millennium may have had upon the current mortgage and overall debt crisis.  As several individuals are calling for a further reduction of the discount and prime rates (DR and PR), it is important to note the impact such a move will have on individuals’ credit positions and financial wellbeing.

There is no doubt that the reduction of the DR and PR proved beneficial to the government in that it provided the government with an opportunity to service its debt at a lower interest rate, even though the overall benefits to consumers appears to be minimal.  On the other hand, the reduction of the DR and PR would have negatively impacted some organizations, Financial Institutions (FIs) and the National Insurance Board, as they would have lost millions of dollars in investment income.

In the final analysis, FIs usually win and are rarely dealt the bad hand of the stick in any situation within a credit-driven and consumer society like The Bahamas.  Financial Institutions in response to the aforementioned reduction imposed charges in other strategic areas, increased some of their fees and maintained their rates for consumer loans.  We have witnessed quiet increases in FIs’ fees for transactions such as ATM or passbook withdrawals – service charges on accounts and additional fees were applied to loans in the aftermath of the rate reductions.  A well-known fact is that the ultimate and main loser is usually the consumer who on the one hand receives a ‘supposed’ break on his debt servicing due to the DR and PR reduction, but pays hidden fees and charges on the other hand.

The net effect on the consumer is that he/she ends up paying the same amount and in some cases more to the FIs, which may result in non-performing loans or lost property to foreclosure.  This reinforces the point that an active Consumer Protection Commission ought to be in place to provide checks and balance on behalf of consumers relating to financial transactions among other things.

In addition to providing debt-servicing relief, it is expected that further reduction in the DR and PR should have also provided access to credit at a cheaper rate for individual and business consumers. The positive effect for business owners is that it creates the opportunity for expansion of the business and/or maintenance of inventory levels.  However, it is estimated that approximately one third of commercial banking loans extended to Bahamian companies are in arrears.  If businesses are faced with increased energy and gas costs combined with tax increases in National Insurance, business license fees and other diverse areas, it becomes less possible for businesses to be sustained during the current economic climate and more importantly create jobs that will help stem the growing unemployment rate.

The likelihood of FIs extending credit under already constrained circumstances is lower than normal and the underwriting of new loans is being done with extreme caution – a prudent course of action.  This further emphasizes and highlights the importance of and the urgent need for a functional and effective credit bureau.  It is noted that the Central Bank of The Bahamas had obtained assistance from the Caribbean Regional Technical Assistance Center (CARTAC) with the aim of establishing a credit bureau, albeit the process has been ongoing for a few years.  Considering the history of adjustments to the DR and PR, these rates are normally revised (downwards for the most part) not more frequently than in five-year intervals.  Whereas this does not suggest that monetary policy should be stalled or be predictable, the historical trends suggest that there is ample time to establish a credit bureau prior to any potential adjustments to the DR and PR.

What are the fiscal policies of the political parties?

In light of the challenges that our economy faces and the general consensus that we must revisit our economic model, it is disturbing to see that little is being said about the proposed fiscal policies of political parties as we enter the heart of the general election campaign.  It is a well-known fact that during the election campaign seasons in the past, we have heard politicians produce their grand ideas of what they intend to do for the Bahamian people.  The important part of the equation is, however, often omitted and very rarely if ever do we hear about how they propose to ‘foot the bill’ for their grand but necessary ideas.

It seems inevitable that the next government post the 2012 general election will have to continue this spate of borrowing at least during year one of governance to ensure the government is able to meet its obligations.  Fortunately, government debt servicing has been aided by one-off payments in 2011 from the sale of the Bahamas Telecommunications Company and capital inflows from Baha Mar. However, the likelihood of similar capital injections for 2012 is slim.  A part from a significant turnaround and increase in tourism numbers and the government’s ability to constrain its spending habits, it is difficult to see how we will get ourselves up out of this national disaster.

Our politicians seem to have mastered the art of avoiding reality and failing to inform us that hard decisions will have to be made.  In essence, austerity measures are not unforeseeable and it could be argued that these measures are unavoidable.  Of course such declarations are unpopular (albeit they would be truthful) and politicians fear the potential backlash of such honesty.  The government has continued to borrow in the midst of declining revenues and increased taxes that placed a heavy burden on the Bahamian people.  It would not be surprising, therefore, if the current tax levels are maintained or increased to meet budget requirements.  Unfortunately, the persons most affected by these tax burdens form part of the working and shrinking middle classes.  In the absence of foreign direct investment or new sources of revenue, any reduction in taxes will most certainly require the government to carry out extreme measures to cut its spending, increase the efficiency of state-owned enterprises to stop wastage and implement efficient tax collection policies.

The national debt crisis constitutes an unwanted and unsolicited gift to future generations of Bahamians that threaten their opportunity for economic prosperity.  This crisis and prevailing macroeconomic indicators makes it difficult to see any significant economic growth in the near future.  Our leaders and all of us must rise above the partisan politics and make a concerted effort to place our economy back on track.

 

• Arinthia S. Komolafe is an attorney-at-law.  Comments can be directed at: arinthia.komolafe@komolafelaw.com

Confronting the Bahamian debt crisis pt. 1

Mar 15, 2012

thenassauguardian

Caribbean Blog International

The Bahamian government must be dedicated to ongoing funding of education at all levels... ...Further, a corresponding factor is the need for our leaders to actively pursue the diversification of our economy... ...The lack of diversity within our economic model and the depressed economic environment in The Bahamas does not favor young and up-and-coming professionals, entrepreneurs and investors...

Where do we go from here? Pt. 2

By Arinthia S. Komolafe:

A major obstacle that youth and our emerging leaders face is the lack of adequate education and/or opportunities to pursue higher education.  During 2009-2010, a major topic of discussion was subsidies provided to learning institutions.  The government announced that it was decreasing its subsidy to independent schools by 20 percent.  Many were outraged by this move; not least the parents themselves who were already faced with rising education costs and would consequently rethink their desire to privately educate their children.  In some cases many were forced to enroll their children in the public school system.

Proponents of the subsidy argue that parents who choose to send their children to private school are paying double, as their taxpaying dollars are already used to fund public schools.  At the same time, they take additional funds out of their pockets to educate their children privately.  It is worth noting, however, that those opposed to such subsidies believe this reduces the amount of funds available to public schools who ultimately suffer among other things the plight of underpaid educators, understaffed schools, inadequate infrastructure or reduced supplies.

The government’s reasoning for subsidy reduction was that certain independent schools received higher subsidies in comparison to public schools.  However, this argument was perceived by some as skewed, as the government itself operates approximately 160 institutions and is responsible for operating expenses, wages and other costs.

Nevertheless, the most alarming revelation was the statement that all but three of the independent schools were in contravention of the education (grants in aid) regulations by not submitting the requisite returns of income and expenditure.  It is necessary to ascertain upon which basis the government decides the level of subsidy it disburses – bearing in mind that independent schools also receive grants from private donors and/or the denominations that they are affiliated with.

Although there is a strong case for maintaining these subsidies, increased accountability should be demanded from recipients of tax-payers’ funds.  It was recently stated that many of the independent schools have become compliant.  However, the public has not been advised of how many of the independent schools remain non-compliant.  Ironically, it’s difficult to imagine that the government would aggressively ensure compliance with these regulations, when the government itself appears to be acting ultra vires of the same by exceeding the limits apportioned to various classes of schools. It is therefore incumbent upon the government to make the necessary amendments to adjust for the increases and/or new recipients of grants.

Nevertheless, subsidies provided to independent schools, (which generally produce better national results compared to the public system) can provide a good foundation in primary and secondary education to afford more Bahamians an opportunity to pursue tertiary level education.  Statistics reveal that only 20 percent of The Bahamian labor force attain a university degree.  It should also be noted that these statistics include expatriates, therefore decreasing the ultimate rate for Bahamians. The statistics are not unconnected to the lack of opportunities to obtain higher education in a broad range of fields locally.  The inability to receive diverse higher education outside of a few concentrated areas in The Bahamas has led several Bahamian students to pursue education abroad.  In 2010, the government questioned the wisdom of maintaining current subsidies of approximately $4 million for 197 Bahamian students attending University of the West Indies (UWI).  The real question should have been the potential downside of removing the aforesaid subsidies.  Removal of subsidies of this nature at this time will decrease the opportunities for Bahamians to become qualified in fields such as medicine at a reduced cost until such time as they can do so locally.  It is sad to say that in 21st century Bahamas, Bahamians are still not able to qualify as doctors and engineers locally. Until such time as The College of The Bahamas has been converted to a university and provides science and technological services, the discussion should remain a moot point.

Debt and education

Flowing from this inability of Bahamians to be educated locally is the burden of debt acquired in pursuance of tertiary education abroad and hence the student debt loan crisis.  The government Guaranteed Loan Fund Program (GGLFP) was suspended by the current administration in 2009 at a time when many parents cannot afford tertiary education for their children in the absence of awarded scholarships.  As a result, persons unable to take advantage of the GGLFP are often left with no option but to obtain consumer loans from banks and other financial institutions where rates tend to be unfavorable.  Some aspiring students who cannot obtain loans are forced to depend on their parents who in turn resort to remortgaging their homes in order to give their offspring a chance to achieve the Bahamian Dream.

This week, Bloomberg reported a significant increase in student loan debts over the past three to four years.  The report was compiled from a survey of about 860 bankruptcy lawyers under the umbrella of the National Association of Consumer Bankruptcy Attorneys in the United States.  It was reported that student loan debt (both federal and private) in the United States is approaching $1 trillion and surpassed credit card debt for the first time in 2010.

In The Bahamas, it is estimated that some 5,000 applicants have benefited from the GGLFP since its inception in 2001.  At its debut, the program had nearly exhausted its $100 million statutory budget in less than two years, placing the sustainability of the fund at risk.  It is estimated that approximately $70 million of funds were in default before suspension of the program.  It was further stated at that time that the continuance of the program depended upon the defaulters repaying their outstanding debts.

The importance of planning for our children’s future via investments in educational funds and college funds cannot be overemphasized.  The program was plagued by multiple challenges that seemed to disadvantage the recipient of these loans.  The rate of interest, which had originally been subsidized at 50 percent by the government, was exorbitant and on the same level as that of mortgage loans.

It is worth noting that the subsidy has been reinstated in certain circumstances.  The payment terms were unfavorable and required recipients to pay large monthly payments in a short period of time, at times not taking into consideration other payment obligations of the recipient like additional student loans or car loans.  The lending institutions driven by profits, failed to take into consideration the proposed monthly payments in comparison to the earning capacity of the recipient.  As a result, the high monthly payments provided more of a burden for the recipient and/or guarantor who was accustomed to paying low interest payments that were presumably based upon their credit risk at the time the loan was approved.

The overall management of these student loans including the payment schedules, terms of payment, notification of past due payments and structuring of payments by financial institutions leaves much to be desired.  It could be argued that the poor management and minimal attention paid to this program by these institutions is because payment from the government is guaranteed in the event of defaults.  How much attention is given to the management of this program and other student loan programs to ensure that the interests of the students/borrowers are protected?

Huge monthly payments have in many cases exhausted a recipient’s debt-service ratio and have prevented many young professionals from qualifying for mortgage loans or funding for their entrepreneurial pursuits.  Consequently, many individuals are delayed from moving toward ownership in the Bahamian economy.  The extent of the challenges faced by young and up-and-coming professionals will more than likely be further exposed once the proposed credit bureau is fully implemented and operational.

Govt decision questionable

The Obama administration is proposing an overhaul of the student loan program in America by removing the current subsidies to private lending institutions.  The proposed term to forgive loans will be reduced from 25 to 20 years and the proposed monthly payments will be capped at 10 percent of the recipient’s discretionary income, representing a reduction from 15 percent.  Further, students with multiple loans will be given the option to consolidate and take advantage of lower interest rates.

A similar approach ought to be considered for existing defaulters and future reinstatement of the program in The Bahamas.  The government’s decision to suspend the program indefinitely and not address the student loan debt crisis is a flawed one.  This decision does not send a good message on government’s commitment to higher education of the youth in The Bahamas.  Further, the lending institutions must be engaged to re-evaluate their requirements and terms for student loans.  A universal amnesty period should be looked at for all outstanding recipients to pay a one-off minimal amount and restructure their loans, extend payment terms and effectively reduce monthly payments.

The government must be dedicated to ongoing funding of education at all levels.  Further, a corresponding factor is the need for our leaders to actively pursue the diversification of our economy.  The lack of diversity within our economic model and the depressed economic environment in The Bahamas does not favor young and up-and-coming professionals, entrepreneurs and investors.  These realities make the Bahamian Dream seem so unreachable, unattainable and at best a mirage.  A brain drain is certain to be a surety in our future, unless we place more emphasis upon education.  The question as to where we go from here is one that only the government and our leaders can answer through their policies, decisions and actions.

•Arinthia S. Komolafe is an attorney-at-law.  Comments can be directed at: arinthia.komolafe@Komolafelaw.com

Feb 09, 2012

thenassauguardian

Where do we go from here? pt. 1

Caribbean Blog International

Dr. Andre Rollins and double standards

Dr. Andre Rollins and compromise. Or are we witnessing double standards?

By Rick Lowe


I think I can refer to Dr. Rollins as an acquaintance. He used to visit Nassau Institute events where we would exchange thoughts/ideas.

But as we pointed out in this post... in politics, Mr. Obama included, appears to force a double standard or compromise when it comes to his deciding when to send troops off to "war" for example.

We also have reports of a recently elected Republican in the US receiving farm subsides and when pressed would not offer to give his subsidy up. Saying something like, farm subsidies need to be rationalised. Go figure.

Now let's look a little closer to home, where we have a political figure stating that foreign investment is both good and bad.

According to a story in The Nassau Guardian on April 1, 2011 by Chester Robards, recently nominated PLP candidate Dr. Andre Rollins chastised the current government for not attracting foreign investors to The Bahamas.

He was quoted as saying; "We need to cause businesses to come here that are outside of the scope of our current economic model."

While he is correct that The Bahamas needs foreign direct investment he does not appear to have indicated what those foreign businesses are that should be asked to come in and invest.

But what's the double standard or compromise then?

Well Dr. Rollins party just came off a heated campaign against allowing a foreign company into the country to buy BTC the government monopoly phone company and now he says we need foreign investment.

I sometimes wonder how we say these things with a straight face. And to our College of The Bahamas students no less.

I must paraphrase Mencken yet again for a little respite from this:

I dislike double standards and the compromise of politics forces on values, common sense, common honesty. It seems this makes me forever ineligible for public office.

Oh, you might find this article on Politics as the Art of Confined Comprises interesting.

Monday, April 04, 2011

weblogbahamas

Bahamas Blog International

Policy makers are urged to produce a coherent national development strategy with opportunities for public input and debate... Urgently

A Clash of Economic Models for the Bahamas
by Larry Smith
bahamapundit



"As I watch these students and their families, all so proud of their accomplishments, I cannot help but feel sorry for them...How will they feel about themselves in this tourist industry, playing the role of servant so clearly constructed as being part of the nature of Bahamian culture." -- Dellareese Higgs, 2008 doctoral dissertation

“It is clearly the case that, as a result of tourism, the Bahamas is chronically dependent.” -- Felix Bethel, College of the Bahamas lecturer

“Tourism is a form of ‘leisure imperialism’ and represents ‘the hedonistic’ face of neocolonialism." - Malcolm Crick, British anthropologist

"While direct travel services generated $1.8 billion in export earnings, the economy spent $1.9 billion on the purchase of merchandise imports. it could be suggested that in the (Stafford Sands) model, the state of foreign reserves is in fact the economy’s ultimate monetary target." -- Gabriella Fraser, researcher at the Central Bank of the Bahamas, 2001

"Because of our addictive reliance on foreign investment our appreciation for Bahamian genius is negligible and in so doing we are oppressing Bahamians....Our economic model perpetuates an economic apartheid." -- Olivia Saunders, College of the Bahamas lecturer

"One can argue that Bahamian national pride is to a degree a product of brochure discourse, of touristic marketing; that much of what Bahamians love about their country is what travellers and the tourist industry claim is worth loving." -- Ian Strachan, College of the Bahamas lecturer

"The world seems to be divided between people who predict rain and people who build arks. We know which one is easier. Let them continue to predict rain in the face of these opportunities. We will work with those who are in the business of building arks." -- Vincent Vanderpool-Wallace, Minister of Tourism

The preceding series of quotes (except for the last one) is fairly representative of the intellectual discourse over tourism, economics and identity that rages from time to time in the academic and cultural world, both here and abroad.

Interestingly, this normally esoteric debate was thrown into sharp relief last week when Tourism Minister Vincent Vanderpool-Wallace and College of the Bahamas lecturer Olivia Saunders delivered diametrically opposing views at the Bahamas Business Outlook conference on Cable Beach. The theme of the conference was economic diversification.

This discussion began with a description of our current economic model. What is often described as the "Stafford Sands model" for ease of reference, is really just an updated version of the oppressive 19th century colonial system, critics say. It is a typical dependency model, which was fashioned long before Sands was born. And it needs to be overthrown.

Olivia Saunders said the creation of the Development Board in 1914 formalised earlier promotional efforts by paying foreigners to bring tourists into the colony and to develop hotels. In the 1930s, promoters like Harold Christie started selling Bahamian land to wealthy foreigners for second homes and other investments. The influx of foreign capital was driven by the absence of taxes on earnings. And all this set the country largely on the course it travels today.

Although Sands was not the originator of this model, he did take advantage of the global economic recovery after the Second World War to dramatically expand tourism and financial services. Rapid economic growth in the 1950s and 60s was partly due to unprecedented promotional spending to position The Bahamas as a year-round tourist destination.

Saunders summed it up like this: "The Bahamian economic model is designed for the country to relinquish responsibility for its resources and the commanding heights of its economy. It is one where the role of the residents is to provide labour and to be consumers while the owners of the economy, foreign nationals and a small minority of locals, amass great wealth.

This was a model that ensured underdevelopment of our human resources, she said. "We maintain a tax and incentive regime that not only favours the foreign investor but oppresses Bahamians...An economy so designed does not have much need for a local intelligentsia...It is disastrous for us to continue using the present economic model of dependence and economic apartheid."

Saunders offered a vague three-point plan to address these issues. First, leverage the abilities of Bahamians who have the aptitude and expertise to own and operate anything that is vital to nation-building. Second, ensure that Bahamian capital and resources benefit Bahamians rather than foreigners. And third, accept that our current economic model is dysfunctional and incapable of producing the results we need.

"Human beings are more than workers and consumers, and policy makers should not measure how well the nation is doing by how many jobs arise from this or that project or how many cars are purchased," she said to standing ovations from some in the audience. "My advocacy is for a new economy so fashioned that it portrays and liberates Bahamian brilliance; an economy that is congruent with healthy and sustainable communities, and an economy that extends wealth to Bahamian citizens."

Vincent Vanderpool-Wallace offered a different approach. While acknowledging that tourism was facing "stiff headwinds" due to a longer than expected recession, "what is often forgotten is that the most diversified economies on earth are not only going through the same troubles we are, these highly diversified economies are in fact the source of our troubles. And several American states and European countries are now in deeper trouble than The Bahamas has ever seen in recent times."

According to the minister, "any initiatives to grow our economy in the short and long term must be grounded in activities that arise from making existing and accepted strengths stronger, because we know that any effort that requires massive training and retraining of our population, while noble, is for the medium and longer term and is less certain. So yes, I believe in diversification, but not necessarily diversification in the way that consumes so much debate."

He went on to cite statistics that may surprise some readers. For example, if Nassau and Paradise Island were a separate country, it would rank fifth in the number of stopover visitors, second in the number of total visitors and first in the number of cruise passengers in the entire Caribbean. Yet these two connected islands are less than 2 per cent of the total Bahamian land mass.

"Today, this 2 per cent 'country' would be the third wealthiest independent nation in the hemisphere," he said. "If fully developing only 2 per cent of our islands yields these results, imagine what could happen if we began to utilize more of our natural assets. If we want to diversify, why not diversify like Toyota did in extending their brands of cars? Why not diversify within one’s areas of strength and comparative advantage?"

As we all know, the Bahamas is right next door to the United States, which constitutes 25 per cent of the global economy - a proportion that is likely to remain relatively stable for the foreseeable future despite the growth of emerging economies like Brazil, Russia, India and China. Collectively, these nations account for less than 12 per cent of global GDP today.

Vanderpool-Wallace pointed out that despite our proximity to the world's largest economy, "it is much less expensive and takes less time to travel from most places in the US to most competing destinations in the Caribbean than it does to travel to any of our Family Islands. Reducing the cost and time for travel to our islands will most assuredly lead to explosive growth and can turn our economy from the wind in our face to the wind at our backs."

This will also make domestic travel for Bahamians much more appealing compared to the current cost advantages of a trip to south Florida, he said. "The power of low-cost, high-quality air and sea transportation is no longer a debate in our industry. Our Companion Fly Free programme has been the most successful promotion in history, selling nearly 300,000 room nights, and the growth of our cruise business by more than 18 per cent last year is adequate testimony to the value of low-cost access to a Bahamas vacation."

While Nassau and Paradise Island teeter on overdevelopment, Vanderpool-Wallace noted that we have failed to provide adequate inter-island transportation, and argued that "Infrastructure development in an archipelago depends as much on connections between islands as it does on infrastructure on islands."

He advanced a "mission to the moon" vision in which Bahamians living on nearby islands like Eleuthera or Andros would commute to work in Nassau as we begin to develop the other 98 per cent of the Bahamas more completely. "Such commutes are done every day around the world. Why not The Bahamas? Our overall mission must be to go back to the islands through the expansion of inter-island transportation and communications services."

He envisioned a future where containers arriving at the new port on Arawak Cay can roll off vessels and roll onto trucks for transportation to other islands to deliver goods to the resident population, returning to Nassau with farm produce. And passengers would be able to take their personal vehicles with them to travel through the archipelago. This will accelerate the use of first and second homes in the islands and "make that globally desired idea of living and loving the island life immensely more accessible and attractive."

Efforts are already underway, he said, to establish an electronic booking system for all of the air and sea transportation within The Bahamas so that residents and visitors can book and pay for their transportation from anywhere on the planet to anywhere in The Bahamas. Currently, visitors have to go to airports and seaports to make those arrangements in most cases.

"Imagine all of the land, sea and air transportation throughout The Bahamas owned and operated by Bahamians. Imagine the size of aircraft and volume of seats coming into Lynden Pindling International Airport if substantial numbers of those passengers are also connecting to other islands of The Bahamas."

He said the government's online initiatives and a robust telecommunications sector were essential ingredients of this “Back to the Islands” vision. And all that is required for Bahamians to be successful in tourism are “bed & breakfast” facilities that can be viewed and booked online from anywhere in the world along with the necessary air and sea transportation.

"When those difficulties are overcome, we can enable hundreds to enter the tourism business immediately all over the country. And incentives could be offered to Bahamians now living overseas or on New Providence to move to the Family Islands. The largest incentive thus far is the government’s declaration that it will tackle the problem of generation and commonage land," he said. "That will be the greatest distribution of wealth in our history."

While broader diversification of the economy is a wonderful mantra, Vanderpool-Wallace said the exploitation of our existing tourism assets will be more beneficial over the short term. "Tourism cannot grow without other sectors contributing to that growth and growing themselves. It needs agricultural, legal, accounting, medical, engineering and software services. The more useful mantra is that one must compete in one's area of comparative and competitive advantage. We have not come close to making maximum use of tourism."

Quoting motivational trainer Steven Covey's comment that “the main thing is to keep the main thing the main thing", Vanderpool-Wallace said our main thing was "100,000 square miles of the most salubrious waters in the world. If we continue to guard and protect that resource, it does not diminish in size or value over the course of time, unlike the natural resources of many other nations. We have more islands and more beaches than the rest of the Caribbean combined.

"We are now at the beginning of the biggest educational, transportation and electronic infrastructure development in our history," he said. "This is the beginning of the wave to move us all forward, upward and onward together. For the sake of our children and grandchildren, now is the time to give focused attention to the development of our islands."

The contrast between Vanderpool-Wallace's common sense vision of empowerment and the bitter, near Marxist, approach of academics like Saunders could not be more marked. We would urge policy makers to extrapolate this vision, and incorporate other sectors, to urgently produce a coherent national development strategy with opportunities for public input and debate.

bahamapundit

Bahamas Blog International