In his latest article, Hubert Edwards argues that The Bahamas must build a 'rainy day war chest' by giving growth and debt management equal priority
Despite views to the contrary, more facilitative spending will be needed from the Government of The Bahamas is to find real alternative sources of export earnings. Fledgling industries will demand support for a period, either through direct grants, concessionary loans or concessions on taxes. New industries will only grow if protected. To enable this, the government will either have to provide tax incentives or increase its direct contribution. Regardless of the approach, more will be needed. The point here is that funding is required to secure the economic resilience that is needed. Debt financing has significant limitations, as ultimately it undermines the fiscal space and ability to do just that. The only remedy, therefore, is growing the economy. In a way, this is a circular argument but should be easily understood. Without growth, the desire for a more robust, resilient economy will not be achieved. Without growth, the ability to better absorb the effects of external shocks and the “once in a lifetime storms” that are occurring every couple of years will not be reached. Without growth the ability to consistently bounce back from a global financial crisis that seems to develop every decade or so becomes diminished.
In assessing the fiscal challenges of Caribbean countries with high debt burdens, the Caribbean Development and Cooperation Committee (CDCC) stated in its October to December 2013 newsletter: “Although the debt restructuring programmes have improved short to medium-term fiscal outcomes, they are inadequate for achieving long-term fiscal sustainability. This stems from the fact that the programmes are not well anchored in a growth and competitiveness strategy, which is essential to sound public finances in the region. Such a strategy should articulate how policymakers plan to re-engineer traditional sectors such as tourism and agriculture, and to develop new sectors, such as the creative industries, as drivers of growth.” The financial crisis of 2008 has many similarities to what is happening today in terms of the actions needed to stimulate recovery. The current crisis, though, is starkly different because it has eliminated earnings and shuttered economies. However, the argument I make here is the same one I have been making since 2012. The Bahamas and the wider region are burdened by a long-running debt crisis. Viewed from a survival perspective, things may appear to be fine. Looked at from the point of view of unexploited potential, the situation changes radically. Until and unless economies within the region seriously secure growth to match debt management efforts, there will be no significant improvements, generally, in the standard of living. This holds true for The Bahamas despite an inherent capacity to perform much better than other countries in the Caribbean.
The recent budget discussion around efforts to jump-start agriculture production is a positive. This has the potential to diversify foreign exchange earnings and reduce food imports. This sector has the ability to help retain more tourism dollars in the country by providing a greater local input. The possibilities are great. It must be viewed, though, within the context of re-engineering the economy. I am aware of the focus on the creative industries, “orange economy”, and discussions around “blue” and “green” economies. Every single element must be brought to bear on revving up the earning and productive capacity of The Bahamas. There has to be a real effort to explore how, through diversification within existing sectors or looking for vertical integration opportunities, the country either takes more out of what exists or creates new streams of earnings. All segments of public life must be geared towards this growth strategy. As an example, The Bahamas’ education apparatus should be primed strategically to facilitate and support future growth. Efforts in this area should be fully aligned with the objectives of a national vision. For example, is the education system fully prepared to facilitate the drive for greater digitisation? If not, what strategic shifts are being made? Matching growth to greater resilience is not simply a focus on the few traditional and well-known areas of income. Rethinking the entire national approach, setting expectations and demanding specific performance goals from all segments of the national machinery is critical to success.
Based on our analysis to this point, it is fair to conclude that The Bahamas suffers from low growth and a now-high debt burden. The debt-to-GDP ratio is projected at 82 percent, with the possibility it may rise even higher. This outcome rests on whether the modelling which flowed into the Budget accurately captures the loss in GDP. Will it be a ten percent, 20 percent or 30 percent loss? The time it takes for tourism to normalise will influence this significantly. On balance, it is fair to highlight that The Bahamas fares much better than most of the Caribbean. It has some important structural weaknesses, such as an over-reliance on tourism and financial services with limited space for counter-cyclical fiscal policy. The economy was not very resilient. Going back to normality will not make it resilient.
High debt and low growth translates into limited fiscal space and limited policy options. The Bahamas has done relatively well in its response to the COVID-19 crisis to-date, but its decisions all require important trade-offs. Consider again the views of the CDCC: “To tackle the debt problem, the most indebted countries will need to embark on a bold fiscal consolidation and growth programme.” It then goes on to effectively rationalise the reason for embarking on this dual approach, adding: “The aim of this programme is to bring down government debt to a sustainable level over the medium to longer-term. This should entail realistic targets for primary savings that do not choke off the weak recovery in these states.”
Debt management must therefore not impede opportunities for growth. The importance of fiscal consolidation is fundamental, and a reduction in debt burden is critical. However, if it hurts the potential for expanding industries, enhancing facilitative systems, or advancing infrastructure development, then it is not effective no matter the fall in debt. The CDCC wrapped its conclusion thus: “The programme should be built on targeted cuts in current spending, while preserving development-oriented capital expenditure and social protection for the poor... Also, governments should strive to reduce administrative and other hurdles to doing business. Governments should also seek to strengthen fiscal management that would encourage public savings when revenues are growing, and expand expenditure when growth is in decline”. This latter point is fundamental. This is a very practical way of enhancing resilience. The concept of saving for the proverbial “rainy day”. When the shocks emerge, as they will, The Bahamas will be in a better position to fund its response, having secured the ability to save during periods of growth and spend more when needed. Resilience is the ability to bounce back. Without a war chest, the ability to do so is always going to be limited. Ultimately, the government will either increase taxes or reduce the level of service it affords to its citzens. There is no easy initial path to achieving this desired goal. What, though, is clear is that failure to embark on this path will ultimately be more costly.
To be continued...