...if the Bahamian economy were to grow at a level of six to eight percent ...we would not be talking about government debt... ...The reason why we should prioritize economic growth over debt reduction is because greater economic activity generates greater revenue for government... ...Greater revenue reduces reliance on borrowing and so, debt would fall over time... ...Further, higher levels of growth usually lead to lower levels of unemployment, more opportunities for individuals to make money in order to pay their mortgages, to pay for college, or to start new businesses... ...But, in order to achieve such levels of growth, we need a plan

A call for a national economic plan

By David Frazer

In the 1960s, Germany experienced one of the world’s most impressive examples of economic growth and development that raised the standard of living for the Germans exponentially.  Its success was due to a number of factors, not least of which was its ability to organize its industries, plan for the future and engage stakeholders at all levels in the work of economic growth.  If one posed the question today where is the economy of The Bahamas headed in the next five to 25 years, it would be difficult to provide a viable answer partly because of the lack of direction in state policy.

The recently published budget and budgets of past governments confirm this notion.  The 2012-2013 budget proposes short-term bandages on an economic wound that runs deep through society, addressing symptoms of a much larger structural problem.  It is now time to focus our energies and resources on a cure to our economic illness.  It is time for a national economic plan.

Highlights of the government’s 2012-2013 budget

• Expanding the role of the Bahamas Development Bank and the Bahamas Agricultural and Industrial Corporation to go beyond lending money to provide equity, credit guarantees and marketing/accounting support is a promising move to support small business and Bahamian entrepreneurship.

• Tax reform was four pronged.  The government will establish a central tax agency to improve its ability to collect taxes.  It will reform the property tax system including a cap on property taxes.  It will look to reducing leakages in the tax system and to charge international fees for aircraft passing through the country’s airspace.  This effort to raise government revenue is commendable but insufficient; the expected revenue which incorporates these ideas would still leave the country with a massive expenditure-revenue gap of nearly $300 million.

• A debt management committee will be developed to implement a debt management strategy.

• A plan to rescue Grand Bahama includes tax reduction and a Ministry of Grand Bahama.

• The jobs program of the previous government has not been continued.  Described by the current government as “lacking focus”, the jobs program attempted to alleviate the unemployment situation particularly for youth.  The problem is that the new government has not proposed an alternative to reducing youth unemployment.

• A mortgage relief effort aimed at reducing loan payments for distressed mortgage holders has received scathing international criticism.  Standard & Poor’s, a reputable rating agency, responded to the government’s promise to help mortgage holders by suggesting that the government may face lower credit ratings if it continues to spend more than it earns.

• Tax concessions laced the budget and there was an explicit promise not to raise taxes for Bahamians.  This combination of tax reduction and mortgage relief spending has cast doubt on the “government priority” to reduce national debt.

Let’s be smart about debt reduction: Focus on growth

Given the extent of the global economic recession, the government has been forced to play a greater role in economic activity.  As in the United States, government spending grew to supplant the lost economic activity after the recession.  While we must reduce the level of government debt, we must be careful not to damage the economy while doing so.  One can look to Europe for an example of how austerity soon after a recession can be detrimental to economic growth.

At the same time, government must not be frivolous in its spending.  Promises in the budget to help individuals make home repairs on top of aforementioned mortgage relief may be politically successful but do not spur further economic growth.

We hope that political leaders will go through the budget, line by line, and re-allocate/reduce unnecessary expenditure.  As much as is possible, government spending should be guided by the principle that every dollar spent directly increases the Bahamian GDP by more than a dollar and/or increases productivity.  Under this principle, unnecessary spending may be brought to light.

Hypothetically speaking, if the Bahamian economy were to grow at a level of six to eight percent, we would not be talking about government debt.  The reason why we should prioritize economic growth over debt reduction is because greater economic activity generates greater revenue for government.  Greater revenue reduces reliance on borrowing and so, debt would fall over time.  Further, higher levels of growth usually lead to lower levels of unemployment, more opportunities for individuals to make money in order to pay their mortgages, to pay for college, or to start new businesses.   But, in order to achieve such levels of growth, we need a plan.

The need for a national economic plan

Just over 26,000 Bahamians searching for work are unable to find it; thousands more have given up and left the labor force; unimpressive growth levels in the U.S. may dampen growth of tourist arrivals in the foreseeable future, and our own growth projection is stifled at less than three percent for the next few years.  These facts underscore a structural issue in the economy.  In essence, overreliance on tourism has limited the scope of economic growth.  We have failed to use the resources tourism has afforded us to develop other industries as a means to secure future growth.

We should get the largest stakeholders and experts in one room – business leaders, academics, government officials and local/international investors – to search for and implement a national economic plan with an aim to secure high levels of growth into the future.  Such a plan should be medium to long-term in focus and grounded in rigorous research on the potential for local business expansion, export of Bahamian franchises, products and services, and diversification within and across industries.

A plan of such magnitude is important because it provides an industrial framework for growth and will provide a sense of security for local business owners who would be able to plan the development of their own enterprises as a result.  A plan could create a momentum for the growth of certain projects and industries.  Finally, it would enable government to plan other areas of society such as new education and training initiatives, infrastructural projects and immigration policies that correspond with the national plan.

Our current economic realities call on us to make big decisions to secure a prosperous future.  Let us plan our way to economic vitality and growth.

 

• David Geraldo Frazer is a master’s degree candidate at Johns Hopkins University studying international economics and international relations with a bachelor’s degree in economics and business.  He is also a free lance consultant and can be contacted at: dfrazer1@johnhopkins.edu

Jun 13, 2012

thenassauguardian

Caribbean Blog International

Bahamas Government Debt To Worsen

GOVT DEBT TO WORSEN
By CANDIA DAMES ~ Guardian News Editor ~ candia@nasguard.com:


A rising government deficit and persistent revenue vulnerability will continue to drive government debt up in the near future, according to international credit rating agency Standard & Poor's, which says in a report that government debt as a percentage of gross domestic product (GDP) will climb to more than 50 percent by next year.

The report fleshes out the details of the agency's initial assessment of the Bahamian economy and the fiscal and monetary conditions revealed late in 2009.

While the expanded report points to increasing debt levels — as did the initial assessment — all the news is not so gloomy.

As it regards unemployment, the agency projects that joblessness will drop from 14.5 percent this year to 12 percent next year. A further decline to 10 percent is projected in 2012.

But S&P said foreign direct investments will slow further this year, and it repeated previous projections that the economy will likely decline by 0.5 percent in 2010 and grow in 2011 for the first time in three years. The growth next year is expected to be 2 percent.

While debt levels are projected to remain pressured in the immediate future, the agency made the point that current government debt levels temporarily provide some space for fiscal weakening compared to similarly rated countries. Compared to many of its peers, The Bahamas' debt levels are in a favorable position, the report noted.

"We project debt levels to rise, but domestic markets will provide most of the financing," said S&P.

The agency projects that general government debt — which stood at 32.8 percent in 2006 — will climb to 49.5 percent this year, move up to 51.9 percent next year and increase further to 52.4 percent in 2012.

Minister of State for Finance Zhivargo Laing noted last night that the new report provides a more comprehensive story on what had been published by Standard & Poor's late last year.

Regarding the debt projections, Laing said the government will be able to comment more fully on what its views are on where the country will likely be when the budget communication is presented next month.

Asked whether there is cause for concern as it regards debt levels, he said, "Any sound fiscal management program rests on wanting to control debt to the extent possible. In fact, nobody would borrow if they didn't have to, but where it is necessary it has been a part of the government's fiscal program for some time.

"In an extraordinary economic climate there's some extraordinary borrowing. We now have weathered the worst of it so we're now seeking to return to levels of borrowing and deficit spending that are more in keeping with what has been our objective in times past. So to the extent that we have no difficulty servicing our debt there is no concern. To the extent that we want to ensure that we don't continue to grow the debt to a place where that could be a problem one is always concerned to do that."

According to the report, the general government deficit rose sharply and likely will average 4.7 percent of GDP in fiscal year 2009/2010 and 2010/2011. General government deficits averaged 1.4 percent of GDP from 2000 to 2007.

The report explained that increased spending against a narrow revenue base, which has declined amid the economic recession, led to larger deficits.

S&P said the higher deficits reflect government policy to alleviate the social impact of the economic recession and to support growth. The report points to the government's unemployment benefit program, the temporary jobs program and accelerated capital works projects.

The agency said, "Deficit financing comes predominantly from domestic sources, a credit strength for The Bahamas. The structure of the debt remains favorable, though it has recently relied more on foreign debt. Domestic debt accounted for 90 percent of total debt in 2007, which declined slightly to 88 percent in 2008 and further to 80 percent in 2009."

S&P pointed out that the government had hoped to receive between US$200 million and US$300 million in proceeds from the sale of a 51 percent stake in the Bahamas Telecommunications Company in the first half of 2010 to alleviate financing needs.

"However, the government has once again postponed the privatization following seemingly disappointment with the bids and prices offered at the end of 2009," the report said.

The ratings agency said it expects foreign direct investments (FDI) to remain low in 2010.

"FDI totaled US$600 million during the first nine months of 2009, compared with US$1 billion in full-year 2008," S&P said. "We expect FDI to slow further in 2010 as tourism projects progress slowly."

The report said FDI projects that appear to have staying power are those that eventually will serve high-end customers or a niche group of tourists, as well as those that will provide residential tourism products.

The agency said, "Once buoyant prospects for a major expansion of tourism projects, totaling more than US$10 billion over the next five to 10 years, are more subdued."

In the report S&P repeats a controversial statement it made in a previous report.

It said, "After posting real GDP growth of 5.7 percent in 2005, momentum slowed sharply and then the economy contracted. In 2007, the increase in real GDP was a mere 0.7 percent as growth was interrupted, first by the elections and then by the new administration's protracted period of reviewing contracts after it came into office in May 2007.

"The review of $80 million worth of contracts and the eventual cancellation of a $23 million public contract for the straw market negatively affected investor sentiment and brought substantial disruption to the contracts' activity."

It noted that the straw market project did not move back on track until December 2009, when the government signed a construction contract.

As noted in its summary release at the end of 2009, the agency placed The Bahamas' sovereign credit rating at BBB+/Stable/A-2. This compares to the A-/Negative/A-2 rating it gave in November 2008.

Regarding the December 2009 rating, S&P said, "The stable outlook reflects Standard & Poor's expectation that the government will gradually reduce its fiscal deficit and will maintain a generally stable external financing profile. We do not expect The Bahamas' tourism product to improve sharply until the U.S. economic (and U.S. consumer) recovery has consolidated."

April 30, 2010

thenassauguardian

Bahamas Blog International

The Bahamas Government’s Commitment to Fiscal Prudence Questioned

Hubert Ingraham on Fiscal Prudence

Ingraham Slams Budget

By Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

17th June 2005

There appears to be a disconnect between an expanding economy and the growth in government revenue, former prime minister, Hubert Ingraham, declared in the House of Assembly on Thursday as he questioned the government’s commitment to fiscal prudence.

During the budget communication on May 25, Acting Prime Minister Cynthia Pratt noted that the government is aiming to contain the ratio of government debt to GDP to under 38 percent in fiscal year 2005/2006.

Expert advice is that the government should limit the ratio of government debt to GDP to as near as possible to 30 percent "so as to avoid the problems which would arise from a ratio significantly in excess of that level."

The government also projects that in the two fiscal years that will follow 2005/2006; the ratio of government debt to GDP will still remain around the 37 percent level.

At the time, the Acting Prime Minister also noted that the ideal government revenue to GDP is about 20 percent, but she admitted that this is becoming increasingly hard to achieve because of the narrowness of the country’s revenue system, which is heavily dependent on customs duties.

The government also projects a GFS deficit of $172 million, which would be $30 million more than what was projected for 2004/2005.

However, Mrs. Pratt stressed that the economy is on the upswing with growth of 3.5 percent expected in 2005.

The projections were the basis for Mr. Ingraham’s declaration of an apparent disconnect.

In the five years immediately prior to September 2001, government revenue averaged roughly 19 percent of GDP, he said, adding that the actual results of the following three years show government revenue falling by more than 2 percentage points to under 17 percent of GDP.

"It is therefore not a sufficient economic policy to focus exclusively on foreign investment and its impact on economic growth when that economic growth is not simultaneously translating into increased government revenue," Mr. Ingraham reasoned.

"Nothing can more quickly and more effectively arrest that flow of inward investment than a fiscal situation which is not sustainable, where the level of debt continues to rise by an ever increasing proportion of GDP, and where doubts about the commitment of fiscal management may legitimately arise."

He also indicated that after falling continuously since fiscal year 1996/1997, government debt as a percentage of national income has been increasing steadily each year since fiscal year 2001/2002.

"It would have been desirable for this budget to give a signal of a commitment to change in this pattern," Mr. Ingraham said.  "It did not."

He also pointed to the projected outcome of a GFS deficit of 2.8 percent for 2005/2006, the same outcome projected for 2004/2005.

"As a result, government debt as a per centum of GDP is projected to grow by 1/2 of 1 percent in fiscal year 2005/2006, rising from 37 percent to 37 1/2 percent and projected to rise further in 2006/2007," Mr. Ingraham said.

"This [is going to happen] at a time when the economy is projected to grow by a nominal rate of more than 5 percent.  There is no better time to send the signal of fiscal prudence than now.  If it cannot be done now, when can it be done?  Next year with election in the air?"

He said the widening of the recurrent deficit over the last several years has to be a major concern for those who value prudent fiscal management.

"The recurrent balance is a critical element in fiscal management," he reminded.  "For governments, it reflects the long-term sustainability of its fiscal situation.  It is for this reason that my government’s fiscal policy focused so heavily on the recurrent account which led to a substantial lowering of the level of recurrent imbalances and eventually resulted in a surplus on the recurrent account for two fiscal periods running – 1999/2000 and 2000/2001, for the first time in 23 years."

The Bahamas 2005-2006 Fiscal Deficit is Projected to Increase Over the Previous Period

The Bahamas 2005-2006 National Budget Projects The Government Finance Statistic (GFS) Deficit of $172 million

Budget Deficit Soars

By Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

26th May 2005

The 2005-2006 budget projects a GFS deficit of $172 million, which would be $30 million more than the deficit expected when this fiscal year draws to a close on June 30.

The $172 million deficit would be 2.8 percent of GDP and would be the highest deficit since fiscal year 2002-2003 when the spending shortfall came in at $184 million.

There are several factors that are expected to contribute to increased spending in the 2005-2006 fiscal year, Acting Prime Minister Cynthia Pratt announced in the House of Assembly yesterday.

The recurrent expenditure is pegged at $1.214 billion, which is an increase of $39 million or 3 percent over the 2004/2005 budget.

"The single major component of the increase is the provision in the Ministry of Finance Estimates to pay increases for public servants and related groups, arising from the present negotiations, as well as some increase in benefits for retired public servants," Mrs. Pratt announced.

"Another important increase is for the improvement in insurance arrangements for the Royal Bahamas Police Force, the Royal Bahamas Defence Force and the other law enforcement officers."

This comes to a total of $8 million, the Acting Prime Minister announced.

In addition to the GFS deficit, one of the traditional highlights in the annual budget communication is the ratio of government debt to GDP given that financial experts continue to advise that this ratio should be kept as near as possible to 30 percent of GDP to avoid the problems which would arise from a ratio significantly in excess of that level.

Exceeding the 40 percent mark could mean that the government’s ability to borrow money would be severely constrained and it would be forced to sharply increase taxes, Mrs. Pratt reiterated during her communication, which she delivered on behalf of Prime Minister and Minister of Finance Perry Christie, who is still convalescing at home three weeks after suffering a slight stroke.

"Fiscal deficits arise if we spend more than we earn in revenues and if this situation continues for long enough we build up massive borrowing problems," Mrs. Pratt pointed out.

She added that circumstances are quite different if the ratio of government debt to GDP is closer to 30 percent.

"There would be much greater scope to avoid these drastic remedies because there would be the capacity to borrow until the economic situation improves and until revenues recover so as to again close the gap between revenue and expenditure.  This is what transpired in 2001 and 2002," the Acting Prime Minister said.

She said in order to bring the ratio of government debt to GDP as close as possible to 30 percent revenues must consistently attain the level of 20 percent of GDP.

"At that level, we can also provide the level of revenue resources which we need for ongoing public expenditure while containing the fiscal deficit," Mrs. Pratt said.

She also noted that successive governments have tried to attain the ratio of government revenue to GDP of about 20 percent.

At that level, Mrs. Pratt said, Bahamians could enjoy a reasonable level of public services without the introduction of taxation to pay for them.

"However, the ratio of revenue to GDP of 20 percent is becoming increasingly hard to achieve because of the narrowness of our revenue system, heavily dependent as it is on customs revenues and the non-taxation of services.  Thus, the expansion of essential public services has resulted in fiscal deficits emerging, which have been met by borrowing.

"As a result, the level of government debt to GDP has risen inexorably since the year 2000.  In recognition of this issue, in the 2005/2006 budget- the government is aiming to contain the ratio of government debt to GDP to under 38 percent."

The Acting Prime Minister also said that the government is continuing an aggressive process of addressing tax reform to improve its revenue situation.

The 2005-2006 budget projects recurrent revenue of $1.145 billion, an increase of $93 million or 9 percent over the 2004/2005 budget.

"The reason for projecting an increase of 9 percent over 2004/2005 is because of the strengthening of the economy, with growth in current terms of over five percent and the heightened emphasis being given to concrete and specific improvement in revenue administration," Mrs. Pratt said.

The Acting Prime Minister also announced that the government plans to improve all of the country’s national airports to raise them to the highest standards required.

"Accordingly, a variety of air navigational fees and related charges in the Family Islands are being increased to more realistic levels to meet part of the cost," she announced.  "In addition, it is intended to implement passenger facility fees at major airports as part of the cost recovery exercise."