Govt expects debt to reach $10.4B in fiscal year 2021/2022

The government, in its Fiscal Strategy Report (FSR) released yesterday, expects debt to reach $10.4 billion by fiscal year 2021/2022, growing to $10.8 billion in fiscal year 2024/2025. Though the report also projects growth of more than $2 billion in gross domestic product (GDP) to more than $14 billion over that period, the government predicts it will not achieve its 50 percent debt target by the 2028/2029 fiscal year, as it projected in its 2019 Fiscal Adjustment Plan, which outlines reasons for a departure from fiscal targets.

The FSR was tabled in the House of Assembly by Prime Minister and Minister of Finance Dr. Hubert Minnis; the accompanying communication was read by Minister of State for Finance Kwasi Thompson.

Thompson explained that the government is once again invoking the Exceptional Circumstances Clause under the Fiscal Responsibility Act in order to deviate from the FAP, given the dire economic circumstances caused by the COVID-19 pandemic and Hurricane Dorian.

The FSR lays out the government’s medium-term fiscal strategy as modeled by the International Monetary Fund (IMF) and reveals that the government expects debt this fiscal year to reach 83 percent of GDP and grow to 85 percent by the 2021/2022 fiscal year.

“With the reduction in the overall deficit and the increasing primary surplus position in the outer years of the medium-term framework, it is envisaged that the debt would taper off to 73.7 percent of GDP by 2024/2025,” the FSR states.

“Given the already aggressive and policy weighted path to fiscal consolidation, it is unlikely that the government would achieve the 50 percent debt target by 2028/2029 as projected in the 2019 FAP.

“The government, therefore, envisages a more reasonable target date of 2030/2031 – a further extension of two years – for achieving the debt target. This is predicated on the assumption that the accumulation of primary surpluses in the intervening years would reduce the need for borrowing.”

The government’s outlook depends on its ability to curtail recurrent expenditure, avoid more external shocks like Hurricane Dorian and the COVID-19 pandemic, and the robust return of the tourism sector in the next two years coupled with foreign direct investment.

The FSR shows that recurrent expenditure also continues to climb over the next four fiscal years by $237 million, weighted by debt servicing and the public service. Public service expenditure increases by some $20 million by 2024/2025.

The government hopes it can balance the ratio of recurrent expenditures to GDP to a ceiling at 19 percent over the medium-term horizon.

“The assumed trajectory is for recurrent expenditure to GDP to gradually trend downwards from the COVID-19 and Hurricane Dorian peak of an estimated 22.4 percent of GDP in 2020/2021 to 21.9 percent of GDP in 2021/2022 and lowered progressively to 19 percent of GDP in 2024/2025 – which is not materially different from the pre-crisis 18.2 percent recorded in 2018/2019,” the FSR explains.

“The key elements of the medium-term forecasts are government’s commitment to reductions in subventions to SOEs, through a program of activities aimed at making these entities more self-sufficient and efficient. The forecasts also reflect the cost savings emanating from the cessation of the special expenditures associated with Hurricane Dorian by end-June, 2021 and COVID-19 by end-March, 2021.

“Areas such as education, health and the social program will continue to receive priority and in this COVID-19 environment, the government intends to ensure that additional resources are made available to meet expanding health requirements. The government also acknowledges that reducing and containing operational costs is critical for promoting operational efficiency and ensuring efficient utilization of future revenue gains.”

The government contended in the FSR that the medium-term fiscal strategy for increased internal revenue collection will focus on sustainable taxation policies and measures and closing the gaps in collection.

“The extreme uncertainty about the duration and intensity of this health and economic crisis and the second wave of outbreaks underway as this report is being prepared, represent significant downside risks to the forecasts, which the government view as medium to high,” the FSR states.

“The potential for an upside outcome would be predicated on the availability of more effective medical treatment and containment measures for COVID-19 and the fast-tracking of the rollout of promising vaccines. To illustrate a range of other plausible outcomes around the forecasts, two scenarios were considered: an extreme downside risk scenario and a moderate downside risk scenario.

“Under the extreme downside risk scenario, the assumptions considered are a widespread resurgence of COVID-19 infections across the world and in The Bahamas, which would lead to the imposition of containment measures, similar in stringency and duration to conditions imposed in the earlier months of the COVID-19 lockdown and in August and with low or no cross border activity until July 2021. Based on the revenue performance to date, these conditions could potentially lead to additional revenue losses in excess of 30 percent of budgeted levels over the remainder of 2020/2021.

“A more moderate downside scenario envisaged the continuation of the temporary, intermittent and less restrictive containment measures as resorted to over the month of October until April 2021. This scenario could produce potential revenue losses in excess of 22 percent of current projected levels.”

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source https://thenassauguardian.com/govt-expects-debt-to-reach-10-4b-in-fiscal-year-2021-2022/