James Smith - former minister of state for finance says Government's projections for budget year 2010-2011 'may be too optimistic'

Govt projections for budget year 'may be too optimistic'
By ALISON LOWE
Tribune Staff Reporter
alowe@tribunemedia.net:


THE GOVERNMENT'S debt-cutting and revenue-raising projections for the budget year may be too optimistic and do not take into account the possibility of a double-dip recession or an event like a major hurricane, said a former minister of state for finance.

James Smith, a senator during the former PLP administration, yesterday suggested an effective step to boost the economy which has not yet been proposed could be achieved by having the Central Bank of the Bahamas lower the prime interest rate - simultaneously lessening debt burdens for regular Bahamians and for the country's "biggest debtor", the Government.

"The prime rate in The Bahamas has not changed since February 2005 despite the fact the prime rate has been dropping across world. In the same way you go to a stimulus package to increase aggregate demand in a recession you also want to provide grease for the private sector by lowering interest rates," said Mr Smith, Chairman of CFAL.

"I think Ministry of Finance should speak to the Central Bank on monetary policy and ways it could assist us in this crisis. They tend to err on side of caution so unless you nudge them they'll not move," he added.

Speaking during the wrap-up of the Budget debate for 2010/2011, Prime Minister Hubert Ingraham said the measures it contains -- including an expenditure reduction of 2.6 per cent or four per cent in real terms, enhanced revenue collection measures and some increased taxes - are "designed and intended to correct an imbalance which left alone would create an enduring economic crisis of enormous proportions."

Having "borrowed to sustain living standards to the extent we could" the Bahamas has a "high level of debt" which is unsustainable, he has said. In his Budget presentation he said the government plans to reduce, through its budgetary measures, the country's GFS deficit from 5.7 to 3 per cent by July of 2011. Speaking on Thursday, he described the steps being taken to achieve this as "not a painless medicine" but said "the alternative is demonstrably worse", pointing to recent economic crises in Greece, Spain and other European countries.

For 2010-2011, the Government is projecting that it will cut its recurrent deficit (fixed revenues minus fixed costs) to just $62 million, compared to $259 million for 2010, a reduction of more than 76 per cent. With capital spending set to exceed capital revenues by $240 million, the Government is projecting a total deficit of $302 million in 2010-2011, compared to $514 million in 2009-2010.

Stripping out the cost of debt principal redemption for both years shows that the Government's targeted GFS fiscal deficit for 2010-2011 is $227 million, a 46.4 per cent reduction on this year's $425 million deficit. As a percentage of GDP, the target GFS deficit for 2010-2011 is 3 per cent.

Mr Smith said he believes the government is "sending the right message" to international credit rating agencies - who determine at what rate the Bahamas can borrow money on the international market - when it shows "recognition that debt and the deficit are rising too rapidly."

However, he said, he would have preferred to see "a more realistic timeline" for reduction in these figures than that proposed by the Prime Minister of "two to three years." He said that he feels it is unlikely the deficit can be reduced by $200 million in the next year unless "some external event" like the privatisation of BTC comes into play.

"By increasing a number of taxes you might really slow down the economic growth rate in the country which depends primarily on imports for its revenue base, having an unintended negative effect," he said.

Meanwhile, he said such optimistic revenue projections do not take into account the possibility that the Bahamas may see a ripple effect from the economic woes plaguing the Euro zone at present - exemplified by the Greek crisis - or the likelihood that a hurricane could hit, taking up precious resources.

June 12, 2010

tribune242

Bahamas Blog International

The Bahamas Government Warned Against Borrowing to Balance the Country's National Budget

The Bahamas government may face a fiscal crisis in the coming years if it continues to borrow at the rate the country has been borrowing at over the years

Governor And Minister At Odds

BY Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

09/06/2004

Some members of the Cabinet are reportedly peeved over recent remarks made by Central Bank Governor Julian Francis, who warned the government against borrowing to balance the budget.

When asked on Tuesday what he made of Mr. Francis’ warning, Minister of State for Finance James Smith said, “I think the governor should stick to monetary policy like all former governors did.  The comments on fiscal policy are not sometimes useful, but I’ll limit my comments to that for the time being.”

Mr. Francis also recently suggested that Bahamians should be made to pay higher taxes, although he stressed that it was not his intention to put himself at odds with the government. 

The governor said that it is the role of the Central Bank to be a policeman on these kinds of issues that also impact the development of the monetary sector.

He indicated that the government may face a fiscal crisis in the coming years if it continues to borrow at the rate the country has been borrowing at over the years.

According to the Estimates of Revenue and Expenditure, the government expects proceeds from borrowings to total $260,277,287 to fund the 2004/2005-budget shortfall.

This level of borrowing represents $60,921,40 more than what was borrowed this fiscal year.  This comes as the government continues to face warnings about the increasing national debt, which presently stands at around $2.4 billion.

The funds borrowed will be used to help cover the projected GFS deficit of $164 million, according to government officials.

In 2001/2002, the government borrowed $207,085,781; in 2002/2003, it borrowed $219,195,153; and in 2003/2004, the figure is estimated to be $199,355,879.

But Minister Smith said the government expects that it will actually have to do real borrowing of $176 million.

“I should point out that $90 million of [the $260 million figure] are loans that have already been committed for projects in the pipeline,” he told the Journal Tuesday.

 “For instance, the IDB road project, which is about $40 million, is included in that.  So the actual borrowing needs for 2004/2005 is really about $176 million.

“That’s the amount that we will probably have to go to market for, either locally or abroad, but that decision will be made later on in the year as we see how the revenue performs.  I should also point out that these are all projections or estimates.  If we perform much better on revenue or if we hold the line on expenditure, then surely we would have a reduced need for borrowing on the recurrent side.”

Prime Minister Perry Christie explained last Wednesday that there is no need for alarm regarding the size of the national debt, given that most of it is held domestically.

On Sunday, Governor Francis, who was a guest on the Love 97 programme “Jones and Company” said, “We can’t continue to add to the national debt indefinitely and that’s really the fundamental point that I’m trying to make.”

When asked whether this figure of over $260 million is significant, Parliamentary Secretary in the Ministry of Finance Michael Halkitis said that, “It is not insignificant.”

He added, “We have to keep things running.  There’s a lot to do, especially capital works in the Family Islands.  But we don’t believe there is any cause for alarm.”

Mr. Halkitis said the government is banking on an economic turnaround before the end of the upcoming fiscal year.

“We expect a lower shortfall the next year,” he said, indicating that borrowing should be substantially lower in 2005/2006.