In the first of a new three-part series, Hubert Edwards looks at the scale of the recovery task confronting The Bahamas in the immediate term and further out.
The Bahamian economy must be rebuilt following this global crisis. We deliberately avoid using the word “recovery” because of its potential to convey the idea of going back to what was. The reality is, regardless of how the global economy ultimately matches what existed previously in terms of numbers, we will never return to that normal. There will be significant shifts around regulation, supply chains, national security, sustained attacks on financial services and loss of employment capacity. With the anticipated fall-out expected to significantly affect persons in the lower levels of society, there must be sharp focus on economic inclusion, equity and greater equality. A rebuild designed to go back to achieving prior performance levels, but without real underlying strategic reforms, adjustments and innovations, will fall short of responding to the call for a new “new normal”.
“We face two crises. One is the COVID-19 pandemic that has claimed tens of thousands of lives around the world, and which will claim many more. The other is the economic crisis that will persist after the virus is beaten back. Joblessness is on the rise across the globe and here at home. The economic crisis is severe for The Bahamas”. These were the words of the Prime Minister, Dr Hubert Minis, in a speech delivered on April 1, 2020. It underlined the gravity of the situation and signals, in our opinion, the first clear indication by the government that it was truly concerned about a long-lasting event. For context, based on our observations, it was around this time that the narrative of a June opening started its “stage left” exit. The message from the prime minister was loud and clear, and rang consistently with our own analyses, as presented in three previous articles. There are indications that the economy will be opening soon, albeit in limited ways, and the economic impact is already hardening.
With The Bahamas reportedly faced with a fiscal deficit of close to $1bn, and current revenues down by 50 percent year-over-year, the government’s already narrow fiscal space is contracting faster than the demand for spending on social safety nets and efforts to save businesses. The affordability of social and economic programmes is greatly limited. The possibility of a 30 percent national unemployment rate has significant social implications and, as accurately foreshadowed by the prime minister, must take on a high level of priority. Continuing on this trajectory, government decisions will eventually be reduced to determining how we help to ensure persons have sufficient social support versus paying certain obligations. This, of course, will not be unlike decisions being made at the household and corporate levels. With a relatively weak healthcare system, which imposes major limitations on how quickly the economy can be re-opened, and overwhelming reliance on a single and highly-concentrated tourism sector, The Bahamas’ options are limited. Decisions must necessarily be balanced and bold, and measured risks will have to be taken.
Let us jump forward to May 10, 2020, and the Prime Minister’s narrative of concern deepens even further. “We are in a time of heartbreak and hardship. Not since the outbreak of World War II over 70 years ago have we lived through such a devastating impact on our economy and the livelihoods of so many Bahamians,” he said. This historical context is important, given that the Bahamian economy as we know it was largely engineered post-World War II. Built fundamentally in response to the demands of the time, it has largely remained the same - a two-pronged mechanism resting unequally on tourism and financial services.
This crisis has shown how highly vulnerable The Bahamas is, and this is not limited to economics. With an economy, not unlike many in the Caribbean, that is dependent on travel and leisure, it must now wait for the return of tourists before it will realise any significant level of economic normalcy. With a virus as the backdrop to this reality, the country has significant problems. Should it fail to find viable solutions, the suffering will be long and hard, and the economic and social fall-out will be deep - much deeper than what is apparent at this time. The challenges faced in finding solutions should be viewed against the background of some existing factors that will naturally impose limitations on the flexibility policy makers will have. In no order of importance, there is first the pegged exchange rate that must be actively defended. This creates the need for a pool of foreign exchange reserves that must be actively maintained at a certain minimum level to give efficacy to the peg. To maintain this efficacy, there are policy restrictions that exert limitations on economic activities. Currently, the reserves are expected to reduce significantly without inflows that come mostly from tourism. With closed borders, the natural shift would be to domestic markets. However, with extremely small internal markets the options are limited. Much of what is sold locally is imported without any real capacity for import substitution in the short-term. There are well-known existing structural weaknesses, together with policy deficiencies, that have remained unresolved for a long time. All these issues will have to be addressed as we build the path for the way forward.
The fact is The Bahamas has been vulnerable for a very long time. Without making light of our current circumstances, consider this. Is tourism the only thing that is currently missing from the country today? What if, by some magical process, COVID-19 disappears and the tourists return with the attendant opening of the rest of the country? Will we be OK? Will there be broad-based economic inclusion? Will there be greater economic and social equity? Will the cost of living and the cost of doing business improve? Will the tax base for the government expand? Will there be robust economic growth? As you read this article, let these and other questions occupy your mind. Let them linger for a moment. Only when the answers to those are explored, and the issues driving them are confronted, will the statements made by the prime minister take on the seriousness we think they were intended to convey. In an April speech, Dr Minnis said: “As a people we have to be ready to shift how we operate. We have to be ready for generational changes to the economic structure of our Commonwealth.” And, one month later, he added: “For too long we have embraced a status quo model that is not suited for the times...we must also change the way we approach how our economy functions.”
This is a defining moment where we must resist - with every bit of our collective will - any temptation to gloss over the issues and to reach for sub-optimal goals. This is a defining moment when the only thing which matters is where we end up as a country. The global financial/health crisis presents the Bahamas with a rare opportunity to reimagine the country, and its economic and social arrangements. This moment cannot be squandered. Generations as yet unborn are depending on us to get it right. Not necessarily complete, but to start charting a bold “new” path. As the prime minister most appropriately puts it: “We will not [cannot] sugarcoat the severity of the circumstances in which we find ourselves...Some of the decisions that we shall have to take will no doubt be uncomfortable, and indeed painful. But we cannot shirk away from making the hard decisions”.
A Devastated Economy?
The economy has been devastated, but there are issues we must confront which existed prior to this. To achieve this there must be a willingness to shift the way we have been operating up to now. There is no possibility of understatement in saying that the status quo has remained for too long. Unfortunately, in the national discussion, this tends to focus on personalities rather than on the institutionalised processes that engender inefficiency and ineffectiveness, and therefore limit the country’s ability to grow. While COVID-19 has caused a dramatic halt to commerce, as we move to rebuild, the entrenched issues that existed before cannot be ignored. The overarching point here is simply this: A “recovered” economy will not have optimal impact. Based on where we are today, getting back to pre-COVID-19 levels will definitely be a positive. While that must be a part of the thought process and an imperative, it is not sufficient for the long-term. The structural matters, which have been perennially lamented by commentators, consecutive administrations and pressure groups, and documented by multiple national planning initiatives, have to form a part of any sustainable rebuild. Let us therefore undertake a brief analysis of some of these factors, namely growth, structural weaknesses, diversification and macro and microeconomic competitiveness.
The economy needs growth. Historically, it has been growing too slowly. This is the case for many Caribbean countries. Jamaica, for example, prior to this economic crisis highlighted its 20 consecutive quarters of growth but, on a closer look, had a low annual outturn of 1.9 percent. Barbados, on the other hand, showed growth of negative 0.5 percent. For the Bahamas, our analysis shows that prior to the last two years, GDP was growing on average at less than 1 percent. In 2018, the economy grew below the projected 2 percent to settle at 1.6 percent. Following the implementation of VAT, we saw reported GDP expanding to $12bn. Prior to that, it fluctuated within a narrow range of just below $11bn. While this represents a shift of around $1bn, when looked at in real growth terms the change is not very significant. Why is this important? GDP is popularly reported in nominal or prevailing price terms, which simply means there is no adjustment for inflation and taxes. Real GDP, on the other hand, reflects this adjustment and represents the actual production of goods and services in the economy. Real GDP for 2018 stood at $10.76bn. This same measure was $10.41bn in 2014, just before the implementation of VAT, for a change of $350m over the three-year period. This level of growth is not robust enough to help build buffers and resilience in the economy. We need significant development to address the vulnerabilities we face. Some will challenge this thinking. How can we grow now may be the instinctive refrain. The answer to this is to keep an eye on the future and build for growth. The stance must be to maximise all opportunities for GDP expansion. A general policy shift to more aggressive GDP growth is required. It is difficult to achieve resilience in a chronically low growth environment
As we seek to remediate the current state of affairs, there are some important structural issues with the Bahamian economy that must be addressed. Let us be clear. The Government does not have the capacity to borrow enough to solve the current issues without further hurting the economy. As we argued in a previous piece, the recent downgrade and general global crisis will result in increased borrowing costs. The recent statements by Michael Maura, the Nassau Cruise Port’s chief executive, in relation to the cost of raising funds for the new port is indicative of how serious this is. The 8 percent interest rate attached to the cruise port’s bonds demonstrates the level of risk the market has priced into Bahamian-connected debt. Interestingly, prior to the recent Standard & Poor’s downgrade, existing Bahamian government bonds were showing indicative pricing in this same ramge. At the date of writing, we are reliably informed that the number is much higher than this. Borrowing will not be a comfortable undertaking for The Bahamas. This was why we proposed in our earlier writings that the government should get out of the gate quickly to secure as much borrowing as analysis showed was needed, and the country could afford. We do acknowledge that the speed at which this could happen comes into question, given the current environment globally.
Given limited public resources, a major underlying principle of the remediation effort must be to create the environment that allows the private sector (local and international players) to drive economic growth. One of the greatest advantage policymakers have is their ability to be facilitative. Flattening approval levels, and streamlining the processes, will position the country to benefit from deeper private sector investment, especially in areas that are traditionally the focus of government. Public-private partnerships (PPPs) are therefore likely to loom large as a policy position emanating from the budget, and as part of the work of the Economic Recovery Committee appointed by the Prime Minister.