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Laying Out The Road Map For Economic Resilience

In the latest of his series, Hubert Edwards says growth must be The Bahamas' focus amid the COVID-19 quagmire

If the problems faced by The Bahamas are to be solved in a sustainable way, it is critical there should be a proper problem definition. What exactly is it that ails the economy? The answers need to be on multiple levels for solid solutions to be realised. First, COVID-19 has spawned a financial and economic crisis of significant proportions that has effectively taken away much of the country’s foreign exchange earnings. This is a reality beyond the control of anyone. But is there anything that existed prior to COVID-19 that either made the impact worse or increased The Bahamas’ vulnerability? There are a few: Debt, low growth, concentration of earnings, low productivity, high cost of energy, challenges with the ease of doing business, and the need for public sector reforms. If the issues caused by COVID-19, which is beyond our control, were fixed, would there still be fundamental problems to grapple with? Yes. Can we fix the COVID-related issues? No, we can only mitigate their impact. How can we better afford to finance the mitigating treatments? We need a more resilient economy, a broader fiscal space and deeper economic breadth. If this rudimentary reasoning holds true in any regard then our “true north” starts to emerge with great clarity. The foundation of the economy must be given attention, and traditional practices questioned and overhauled to maximise output.

The Bahamas, like many small island states, struggles with two important challenges: Low growth and high debt. I am aware that before the COVID crisis, the latter, in the case of The Bahamas, is arguable. However, when $400m of a $3bn budget goes to pay interest on that debt, it is time to start taking close notice. There is no question that a way must be found to remove (or reduce) this burden from our economic neck. I am, however, not a proponent of simply seeking to pay down debt. From a credit granting perspective, once one has the capacity to generate revenue, and demonstrate the quality of future revenue is good, the capacity to borrow comfortably exists. Assessments using the standard measure of debt-to-GDP tend to focus too much on the debt side of the equation, and too little on the GDP itself. While I do not argue that it is easy to secure growth, I make the point that trying to secure growth consistently using the same historical arrangement is rather difficult. In the remedial actions to come, the task, though complex, can be oversimplified by calling for greater focus on the denominator. Grow GDP and the ratio falls. Grow GDP, and the fiscal space is likely to expand accordingly. Grow GDP and the capacity for counter-cyclical spending expands. Grow GDP and create greater space for a more resilient economy. If you accept most or all of those statements then you would agree that growth must be the focus.

There is a famous quote which states: “The obstacle is the path”. One of the biggest obstacles faced by The Bahamas is its reliance on concentrated sources of export earnings, namely tourism and financial services. The concentration for tourism gets more acute when you consider that 80 percent of the market is the US, and further so given that most of that market is on the eastern coast, primarily Florida and the New York area. This has come to life in real terms with COVID-19. All projections called for a June end to the crisis, and that the economy must open by then. Yet all local businesses are still feeling the effects, unemployment is rocketing sky high, and spending on social support is astronomical. New York, the initial US epicentre of COVID-19, seems to be doing a fantastic job of bending the curve. But other US states are rejecting the idea of social distancing. We were ready to go on July 1, and our biggest market within the 80 percent (Florida) is seeing record infesctions. Still, we must open the economy or face the real possibility of permanently hurting it. What if we had a mature digital centre of excellence in Grand Bahama? What if The Bahamas was a recognised centre of excellence for financial services training. What if we could cut significantly into our potential food bill by producing locally. What if there were larger internal markets to support commerce. What if we had multiple exportable goods and services? The answer would undoubtedly be that there is a greater ability to bounce back. The answer would point to a more robust economy. The answer is likely to demonstrate wider economic participation and dispersion of commerce. So, what if we took a different look at how we approach the recovery?

Currently, The Bahamas has a projected national debt of $10.5bn with contingencies at just over $700m. Based on the recent budget presentation, we all understand that debt-to-GDP will rise to around 82 percent. One important aspect of debt that we do not often consider is the impact of government’s domestic borrowings on the productive economy. Ignore, for the moment, what government uses the money it borrows to do. More than half the national debt is domestic. This is funding which in some ways crowds out the private sector. Institutions are very willing to lend heavily to the less risky sovereign and, with this high demand, have no problem ignoring opportunities in the commercial sector. The net effect is that entrepreneurial efforts are starved of funding, which in turn has a negative impact on the economy. Domestic investment becomes an inadvertent victim of domestic government borrowing. The Bahamas also has an additional wrinkle to its debt reality. A number of local institutions manage long-term liability obligations with significant government stock holdings. These are primarily the National Insurance Board (NIB), insurance companies and commercial banks. This fact places adverse pressure on the country’s monetary policy space. There is a clear recognition that a reduction in interest rates during a crisis could be a valuable stimulus. The net impact on the economy, though, could be disastrous. Such a move would result in significant asset value reduction for NIB, which would demand an increase in employer and employee contributions (effectively a payroll tax increase).

According to the Inter-American Development Bank (IDB), there is a funding gap for small and medium-sized enterprises (SMEs) in The Bahamas of approximately $180m. The nimblest segment of any economy, especially during a crisis, is the SME, and it lacks significant funding. The government must now bridge that gap with funds from its already-narrow fiscal space given its importance. Note how K Peter Turnquest, the deputy prime minister, underlines this: “We anticipate that 500 entities, new business persons and entities which have been successfully in funding; we anticipate they will carry some of the load through this interim to stimulate economic activity while waiting on tourism”. Consider the potency of the government being able to direct an additional quarter of its projected interest payment towards this sector. Therefore, the efforts currently underway by the government in the area of fiscal reform - promoting greater transparency and accountability - should continue. Efforts at debt management and all attendant reforms should continue robustly and, where necessary, accelerate. Nevertheless, as previously stated, and a recurring theme throughout, all attention to debt must be undergirded with clearly outlined growth strategies and initiatives. SMEs provide a very viable option in this regard, as not only does it generate economic activity but also increased employment.

The build-up of debt in The Bahamas is because of consistent fiscal deficits. On average, over recent years, government spending is more than $2.5bn. On average, there is a deficit in the hundreds of millions of dollars. Some years this is less, and others more. The current state of affairs, as a result of COVID-19, is a deficit of $1.3bn and a projected $800m in 2021-2022, both of which could be larger having regard to the way the crisis continues to unfold. Perpetual fiscal spending is only sustainable if there is reasonable real GDP growth. As stated before, this should be at least two percent annually. The reality is that when looked at objectively, it is clear that even a budgeted expenditure of $3bn is not sufficient to bring the country’s infrastructure to the level it needs to be. Greater injection is needed in important areas of the economy. The ability to invest more from “savings” realised from debt management will help to spark greater growth. In this regard, Jamaica, before the crisis, stood as an example. Having successfully emerged from debt management programmes there was clear evidence of greater infrastructure investments and allocation to the social sector of the economy. These activities were fueling growth, realised over 20 consecutive quarters. A positive development but, unfortunately, not sufficiently robust. However, the point is made. There is significance in proper debt management treatment, and it can co-exist with a growth strategies programme.

To be continued....

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