By NEIL HARTNELL
Tribune Business Editor
The Bahamas’ economic growth potential has “dropped quite sharply” since this century began, an International Monetary Fund (IMF) executive said yesterday, urging the Government to curb spending “to ensure fiscal sustainability”.
Jarkko Turunen, the Fund’s ‘mission chief’ to the Bahamas, said Value-Added Tax (VAT) and other revenue reforms had failed to eliminate the fiscal deficit, as promised, because the Christie administration had increased spending at the same time.
He told the Chamber of Commerce’s State of the Economy 2017 forum that the Government’s spending had risen across “all main components”, with the biggest jump in subsidies and transfers to the public corporations.
On the positive side, Mr Turunen said the IMF expected the Bahamas’ $6.7 billion national debt, and accompanying ratio to GDP, to “stabilise”, although this was likely to be above the so-called 70 per cent ‘danger threshold’ due to Hurricane Matthew.
However, he added that “the roots” of the problems bedevilling the Bahamian economy and its financial sector lay in this nation’s persistently low GDP growth rates, which factored into high levels of unemployment and violent crime.
Mr Turunen said the Bahamas needed to now simultaneously achieve faster economic growth and push forward with fiscal consolidation via reduced spending, so that VAT’s revenue gains were not squandered.
“Many of the issues we see in the Bahamian economy and financial sector (non-performing loans) have their roots in the fact growth has been so low,” the IMF’s mission chief to the Bahamas said.
“Real GDP growth has been weak, negative for the past two years. Take out 2010 and 2012, and growth has been negative or zero since the global crisis” of 2008-2009.
The Bahamian economy’s anemic growth had fed into high double-digit unemployment rates, especially among young persons aged 15-24 years-old, where it is around 30 per cent.
“Reading the news about crime, I’m reminded about high youth unemployment,” Mr Turunen said. “At the same time, potential growth has declined.”
He said the Bahamas’ economic growth potential had dropped from between 2.5-4 per cent at the start of the 21st century to around 1-1.5 per cent now - a decline that, at its maximum, is equivalent to 3 GDP percentage points.
“Potential growth was actually high in the 2000s in comparison to the Caribbean, but has declined quite sharply,” Mr Turunen said. “Our estimate is the potential growth is between 1-1.5 per cent in the medium term.
“There has been a decline in the major factors, labour and capital, but the decline has been driven by negative productivity growth, which has persisted for quite a while.
“Fundamentally, low productivity growth shows there’s some structural constraints.” Mr Turunen pointed to the Bahamas’ high cost environment, particularly on labour and energy, and sliding ‘ease of doing business’ as the culprits.
Adding that the Bahamas needed to better prepare its high school graduates for the workplace, Mr Turunen backed the concept of a National Development Plan (NDP), but said the “stark negative” growth position meant the IMF would “recommend a shift to implementation” as opposed to the ongoing planning.
To combine faster economic growth with fiscal consolidation (austerity), the IMF executive called on the Government to re-purpose its spending, switching monies from its recurrent (fixed cost) account to invest in infrastructure projects that would enhance medium and long-term GDP expansion.
Mr Turunen reiterated that the IMF was projecting a 3.5 per cent fiscal deficit for the 2015-2016 Budget period, placing the total amount of ‘red ink’ at between $280-$300 million, well in excess of the Government’s $150 million forecast.
“The deficit has not been eliminated because government spending increased at the same time,” Mr Turunen said.
Referring to the previous speaker, Simon Wilson, the Ministry of Finance’s financial secretary, Mr Turunen added: “I’m sure Simon has a much more interesting story to tell. There has been an increase in spending on all the main components. The biggest increase is in subsidies and transfers.”
When adjusted for inflation, Mr Turunen said the Government’s spending had been flat in some years, but it had increased in real terms for the past two fiscal years.
“There has been quite a bit of progress on the revenue side. Now is the time to focus efforts on rationalising spending to ensure fiscal sustainability,” he added.
“The debt is expected to stabilise over the medium term. You don’t want a situation where the debt continues increasing, and that’s not a situation where we see the Bahamas going.”
Mr Turunen said the IMF had projected that the Bahamas’ central government debt would stabilise at 68 per cent of GDP pre-Matthew, but it was now expected to “increase significantly and exceed” 70 per cent.
He called on the Bahamas to Budget and set fiscal targets according to its position in “the hurricane zone”, and to also focus on its total public sector debt and unfunded pension liabilities.