February 20, 2024

Bahamas Squandering ‘Caribbean’s Best Vat’

By NATARIO McKENZIE Tribune Business Reporter From Tribune 242

Royal Bank of Canada’s (RBC) chief regional economist yesterday accused the Bahamas of squandering the Caribbean’s “most successful Value-Added Tax” by failing to act in a fiscally prudent manner.

Marla Dukharan, in a harsh verdict on the Christie administration’s fiscal policies and achievements, said it had failed to slash the Bahamas’ annual fiscal deficits “in the way it had planned”.

Addressing Royal Fidelity’s Economic Business Outlook (EBO) conference, she called for the Bahamas to implement so-called ‘fiscal rules’ to cap government spending and establish a debt ceiling.

And she warned that the Government’s fiscal profligacy could ultimately impose pressure on the Bahamian dollar, and its one:one peg with its US counterpart.

Ms Dukharan, group economist for RBC’s Caribbean operations, said: “I am disappointed that despite having the most successful VAT in the whole region – despite getting more from this VAT than you expected to – the fiscal deficit was not reduced in the way it had planned to be reduced. Fiscal prudence had not been adhered to.

“This is going to put pressure on the currency. It has already put pressure on your ratings. I believe that if you continue on this path of persistent fiscal deficits, which drive debt up, you will end up in a situation where it’s unsustainable and you have to get help. That is where we consistently end up in the region.”

There have been repeated calls for a Fiscal Responsibility Act to force the Government to be more accountable and transparent in the management of the public finances.

This would require it to return to Parliament for approval to raise more money if it has to exceed the limits approved in the annual Budget.

However, ‘fiscal rules’ would impose even more stringent discipline on the Government, as they would set spending and debt-to-GDP ratio limits that it cannot breach.

While many believe that the Bahamas, and the Government, require just such a strong dose of fiscal medicine, some observers believe that ‘hard and fast’ rules could create difficulties in an emergency – such as the need for urgent response in the aftermath of storms such as Hurricane Matthew.

The Government is projecting that the GFS fiscal deficit will be eliminated by the 2018-2019 budget year, but in the meantime, notwithstanding VAT’s implementation, which has brought in almost $ 1 billion, the national debt has continued to grow – albeit at a slower pace in recent years.

At end-June 2016, Central Bank data pegged it at $6.695 billion or 74.9 per cent of GDP – a ratio in excess of the so-called 70 per cent debt-to-GDP ‘danger threshold’ established by the International Monetary Fund (IMF).

Ms Dukharan said: “I think on a fundamental level in the region we have a problem where we have politicians, not statesmen; people who think only about five-year electoral cycles. Each government tries to do what it can to stay in power and get re-elected, and not think about the greater good for the longer term.”

While there is growing public criticism over the Government’s accounting for the VAT revenue, and how it has used these monies, Ms Dukharan said governments are often tempted to spend such funds in a way they believe will appease the electorate.

“It’s easy to take the money and spend it on a mechanism that you think your electorate wants and will reward you for. We need to have ‘fiscal rules’ which limit how much you can spend, how big your deficit can be and how high your debt can go,” said Ms Dukharan.

She added that the Bahamian economy was too heavily dependent on foreign direct investment (FDI). “When are you going to get another Baha Mar here?” she asked.

“I don’t know that it is going to happen, so we have to figure out how to re-engineer the economy to not be so dependent on FDI to supplement our foreign exchange reserves, and to maintain a strong enough level of reserves to keep confidence in the currency.”

Ms Dukharan’s comments came after the Government’s fiscal deficit for the first four months of 2016-2017 increased by 75.3 per cent to $157.5 million, blowing past the full-year target of $100 million with two-thirds of the Budget period still to go.

The Central Bank of the Bahamas’ report on December’s monthly economic developments, released Monday night, disclosed that the fiscal deficit was up $67.7 million year-over-year due to a combination of reduced revenues and spending increases.

It added that Value-Added Tax (VAT) revenues for the four months to end-October 2016 were off 6.7 per cent, or $15.4 million, at $214.1 million due to tough prior year comparatives, which had been boosted by “ significant early payments”.

Part of the widened deficit will have resulted from Hurricane Matthew’s impact in early October. With the Bahamian economy ‘shut down’ for several days following the Category Four storm, and economic activity subdued (apart from rebuilding), the Government will have lost substantial revenues flows.

However, with the extra spending sparked by Matthew unlikely to be shown in the October figures, the concern is that the hurricane’s full impact on the Government’s finances – and the extent to which they have been blown off course – has yet to emerge.

And the $157.5 million worth of ‘red ink’ incurred during just one-third of the Government’s Budget year already exceeds the full-year forecast of $100 million by more than 50 per cent, a development that may catch the eye of international credit rating agencies.

The Central Bank acknowledged that the Bahamas’ sovereign credit rating had “fallen markedly” since the ‘A-’ and ‘A3’ ratings it enjoyed from Standard & Poor’s (S&P) and Moody’s prior to the 2008 financial crisis, the former having dropped this nation to so-called ‘junk’ investment status within the space of eight years.

However, the Central Bank consoled itself by saying the Bahamas’ sovereign creditworthiness remained “among the highest in the Caribbean region” when compared to the likes of Jamaica, Belize and Barbados.

For more on this story go to: http://www.tribune242.com/news/2017/feb/01/bahamas-squandering-caribbeans-best-vat/

IMAGE: http://www.newsday.co.tt/galeria/17-2a__marla_rbc.jpg

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