Economist: There might be a sovereign debt default next year

Respected Caribbean economist Marla Dukharan predicts The Bahamas will default on its sovereign debt next year, as the country attempts to pull itself out of a historic fiscal slump.

Dukharan, who made the remarks during Royal Fidelity’s Investor Forum 2020, also said this default could mean The Bahamas would enter an International Monetary Fund (IMF) program to assist in correcting the country’s fiscal course.

According to Dukharan, the historically high fiscal deficit could be more acute than was previously predicted.

“I personally believe there might be a sovereign debt default by next year, and that means that there will be difficulty to meet foreign currency obligations, including sovereign debt and perhaps there would then be a situation where the government of The Bahamas would have to go to the IMF to ask for support,” said Dukharan.

“The IMF is not the end of the world and the IMF is not the bogeyman, the IMF should not be demonized as it is by many politicians and policy makers in the region, because a lot of good comes out of an IMF program.”

While an IMF program has indeed been vilified by policymakers locally, even recently, Dukharan said given the extreme economic circumstances brought about by the global COVID-19 pandemic, the entry into an IMF program would not be a cause for “admission of failure or defeat” by the government.

“It is really circumstantial and unfortunate,” she said.

“Even in previous crises, previous pandemics, the global economy never came to a sudden stop the way it did.

“It is no real fault of the government of The Bahamas that this has happened, it just so happens that The Bahamas is the most dependent on the U.S. and most dependent on cruise tourism than other countries in the region and so they have been hit really hard in addition to coming on the heels of Hurricane Dorian, all in one year pretty much.”

Dukharan said Jamaica is successfully exiting an IMF program and Barbados is currently engaged in one.

She said for countries in the region, the COVID-19 pandemic has not been “the cause of our problems”, but she contended that it “amplifies our problems”. 

Central Bank Governor John Rolle said recently that The Bahamas has already imposed upon itself the harsh measures that may be required under an IMF program, adding that joining one of its programs is an option for this country.

But Rolle also contended that the government is not close to defaulting on its sovereign debt.

Illustrating the importance of the tourism sector and depth of foreign currency leakages, Dukharan explained that since 2014 the country has collected $15 billion in net travel receipts and only generated $1 billion in foreign exchange reserves.

She said while the country’s external reserves have strengthened, the numbers, as have been cited by The Central Bank of The Bahamas, are as robust as they are due to recent U.S. dollar borrowing by the government.

“If it weren’t for all of this borrowing, reserves would have actually declined and so we do have a serious problem here,” said Dukharan.

Dukharan said should The Bahamas be forced to turn to an IMF program, it could come with public sector layoffs, tax reform, ease of doing business reform and the relaxation of foreign exchange controls. 

“It could pay off for the people of The Bahamas,” she said.

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