The threat of excessive public sector debt in The Bahamas...

The national debt

thenassauguardian editorial



Governments, international agencies, rating agencies and most businessmen regard the level of national debt to the size of the economy (GDP) as one of the most important economic indicators in assessing the current and future health of the economy.

The national debt consists of funds borrowed directly by the government plus any debt of the government corporations which have been guaranteed by the government.

Governments usually borrow funds when there is a need to undertake capital projects (office buildings, schools, roads, docks etc.) and the revenue from taxes is insufficient to cover the capital works.

The size of any economy determines the level of potential taxes that could be collected to meet government expenditure needs for, among other things, education, health, law enforcement, social welfare and of course, debt servicing of any loans taken out by the government.

Current and future living standards in any country are influenced by the amount of resources applied by governments, on a yearly basis, to education, health, national security, social welfare and other public sector areas.

In order to ensure that sufficient resources are available on a sustainable basis for those fundamental public sector functions, good fiscal management compels governments to restrain the growth in debt servicing to a level where it does not threaten to crowd-out and push aside the needs of the other important sectors of society.

In many third-world countries in Africa, Asia, Latin America and the Caribbean, the public resources from tax revenues to finance public debt have exceeded the public resources allocations for education and health; a position considered by many as an undesirable path towards the lowering of living standards.

In an attempt to address poor policy choices by governments, international agencies such as the IMF (International Monetary Fund), World Bank and the IDB (Inter-American Development Bank) which provide economic advice on a global basis, urge governments to try and keep debt ratios (total national debt as a percentage of total national output or GDP) to a reasonable level.

In the case of developing countries such as The Bahamas, the level suggested is somewhere in the region of 40 percent.

Most countries, particularly those in the developing world, have fallen short of that objective.

Indeed, with the exception of Trinidad and Tobago at 26 percent, many developing countries are in the high 80s (Barbados) or, in some cases the ratio exceeded 100 percent, (Jamaica at 123 percent for example), while the European countries have set the debt to GDP ratio at 60 percent as the desired level for their community. Our nearest neighbor and largest trading partner, the United States, has a debt to GDP ratio that stands at an unusually high level of 97 percent.

When a country’s debt to GDP is high, it implies that the country is struggling and could have difficulty servicing its debt.

Currently The Bahamas’ ratio is in the high 50s and growing.

It is not yet in troublesome territory but given the trend over the past few years and the growing commitments to further borrowing, including the Chinese loans and the associated capital needs of the utility companies, there is surely some cause for some concern.

The policy makers and other interested parties would need to closely monitor the debt situation to ensure that the nation’s economy remains healthy and that our living standards are not threatened by excessive public sector debt.

3/18/2011

thenassauguardian editorial

Bahamas Blog International

The Bahamas National Debt Increases

Fiscal experts have warned repeatedly that government debt exceeding 40 percent would signal danger as The Bahamas government may be forced into a mode of borrowing that could be fiscally unhealthy 

Bahamas: $2.54 Billion In National Debt

By Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

24 August 2005

The National Debt rose from $2.54 billion to $2.63 billion in the second quarter of 2005, the Central Bank of The Bahamas says in its newly released statistical digest.

In the second quarter of 2004, the National Debt stood at $2.39 billion, but has continued to see a steady rise, according to the figures.

The report reveals that the government’s contingent liabilities continued to grow, jumping from $438.4 million in the first quarter of 2005 to $454.13 million in the second quarter of the year.

The National Debt takes into consideration the government guaranteed borrowings of public corporations and other public entities.

These contingent liabilities include the $24 million in bonds issued by the Clifton Heritage Authority; $40.7 million in loans taken up by the Education Loan Authority; and $111.7 million in Bahamas Mortgage Corporation loans.

At the end of this fiscal year, government debt as a percentage of GDP is projected to be 37.5 or $2.330 billion.

Fiscal experts have warned repeatedly that government debt exceeding 40 percent would signal danger as the government may be forced into a mode of borrowing that could be fiscally unhealthy.

In the notes attached to the 2004/2005-budget communication, the government explains that growth in the debt is justified if it supports increases in the productive capacity within the economy, and if the servicing burden from principal repayment and interest costs does not unduly constrain the economy’s access to foreign exchange for other beneficial purposes.

It’s a point Minister of State for Finance James Smith – who is presently in the U.S. convalescing after what was termed a successful surgery – has made repeatedly.

He has also noted that the economy is projected to grow by 3.5 percent this year and the foreign component of the National Debt is "extremely low."

In an earlier interview, Minister Smith explained that, "If the $2 billion were held by a foreign bank, at anytime [that bank] could demand payment and you’re virtually bankrupt.  You can’t even go and negotiate with them for whatever reason.  So that means your risk is much higher."

The government has also noted that international observers closely monitor the total foreign currency debt of the government and public corporations, as on the repayment side it represents a required use of foreign exchange earnings.

The International Monetary Fund recommended in its June 2005 report on The Bahamas "a further strengthening of the 2005/2006 fiscal stance relative to the budget proposal and closer monitoring of budgetary developments to help ensure that the more stringent objective [of government debt-to-GDP ratio of 30 percent] is achieved."

In the upcoming fiscal year, the government intends to spend $1.214 billion, an increase of $39 million, or three percent over the 2004/2005 budget.

The government projects it will collect $1.145 billion, an increase of $93 million, or nine percent in revenues.