It will require ‘pain’ and ‘collaboration’ to fix economy, says economic expert

Fixing The Bahamas’ economy in the wake of two of the worst economic shocks on record will require “pain”, “collaborative actions”, and will mean accepting difficult truths about the current structure of the country’s economy, Managing Consultant of Next Level Solutions Hubert Edwards said yesterday, adding that a balanced budget is not in the cards for the Bahamian economy in the short term.

Edwards, who shared this analysis with a local think tank group, called for clear policy discourse on the way forward for the country’s economy.

According to Edwards, there “are some significant tensions at play” on the country’s economy, and he insisted that they must be assessed by looking at how the economic structure designed for The Bahamas is supposed to work. 

He trained on the elephant in the room, explaining that the country’s debt to gross domestic product (GDP) levels have grown to unsustainable levels, as the COVID-19 pandemic continues to rob the country of the foreign currency inflows needed to feed the country’s growing foreign currency debt.

“The Bahamas is currently either in or flirting with a vicious cycle of debt and borrowing,” Edwards said.

“Some aggressive estimates, taking into account contingencies, would put debt to GDP (on the basis of $11.5B economy) at near 100 percent.

“The economy is built and driven/controlled by a pegged exchange rate, which demands a level of reserves. Without robust flows of (foreign exchange), this is going to be under pressure, as evidenced currently. One may disagree with such a statement, however, in my opinion where debt is needed to sure up a position, that is pressure.

“That said, it’s logical, given the current state of commerce and trade, or rather the lack thereof, that this pressure exists. Without a robust tourism sector, this will always be challenging.

“The debt levels, therefore, with any longer term depression of that sector, could spiral into areas seen in some of the southern countries of the region.”

The country’s deficit level has rocketed up to almost $900 million, and there is expected to be more large foreign currency borrowing in the 2021/2022 budget cycle given that the tourism industry is expected to rebound slower than was hoped.

“Historically, B$ borrowings outstrip USD,” said Edwards.

“This remains the case currently but the space has narrowed and will continue to narrow until the economy starts to produce sufficient inflows.

“This introduces a very delicate reality. The proportion of income that will now go into debt servicing, over the next few years, at least, shifts the productive capacity of the country. This, though, is not fatal as debt management/restructure can/could, with improved economic activity, create a better reality.” 

Edwards said that borrowing is “firmly on the cards” for the country, and suggested any investments made through borrowing be strategic, so as to facilitate future growth and greater productive capacity. 

Edwards contended that shooting for a balanced budget is a bad strategy, given the current state of fiscal affairs, and he foresees an eventual rise in taxes in the near term.

He said in his analysis of the country’s economic course that austerity will not work for The Bahamas, given its dedication to the US dollar peg.

“Simple austerity won’t work as in other economies where the exchange rate is allowed to find its own level in response to new taxes, reduced spending, curtailed production, etc.,” he said.

“There is absolutely no value in The Bahamas experiencing a devaluation or at least no very good reason. Even if The Bahamas employed austerity measures, and arguably there is currently some measure of austere strategies being employed, there is always a need for forex inflows. That portion of the equation will keep sending us back to the credit markets.”

He argued that some of the measures put in place by government already, such as revamping the investment approval apparatus, greater transparency around public finances through legislation, gradual movement to accrual accounting, and the step toward freedom of information, could have positive outcomes for the economy.

However, Edwards insists the conversations surrounding these problems need urgent, nonpartisan discussions, and an honest take on where the country’s economy stands.

“What, though, is true is that as a country, we are confronted today with a set of circumstances, which tears at the root of our economic arrangements, exacerbated by many, many years of neglect in addressing the things which helps the economy run more efficiently and effectively,” he said.

“A significant part of the capacity to fix therefore lies in the commitment to acknowledge that and make the requisite fundamental changes.

“The way forward is neither easy nor clear. We must accept that and state it as such. If we do otherwise, we may unwittingly understate or underestimate the efforts required.”

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