Minister of State for Finance James Smith sought to put the government’s level of debt into perspective when he appeared as a guest on Love 97’s “Jones and Company which aired on Sunday.
The show’s host, Wendall Jones, asked the Minister whether the government was playing “too close to the edges” in terms of the level of debt projected in the 2005-2006 fiscal year.
The government expects that the level of debt to GDP will be just under 38 percent, which comes close to the 40 percent mark experts say would spell serious fiscal trouble.
Hitting 40 percent, they say, would severely constrain government borrowing and force the introduction of painful tax increases.
The government expects that the ratio of debt to GDP will be just under 38 percent for the next three fiscal years.
But Minister Smith indicated that with the economy growing and developing, the level of debt in the medium-term could turn out to be much lower that what was projected.
“We take the worst-case scenario,” Minister Smith explained. “We are feeling that over the next three or four years, the out turn is going to be even better than the projections, but we’d rather take the worst-possible scenario than the best and then find ourselves worst off.”
He explained that The Bahamas is better off than many other countries around the world when it comes to the level of debt.
“The worst case we have in the Caribbean, I think, is Jamaica,” he pointed out. “Their debt to GDP is 140 percent-In terms of direct debt we have $2.1 billion to $2.2 billion against our GDP of $6 billion. If we had what Jamaica has, our debt would have been more like $14 billion, seven times what it is now against a $6 billion economy.”
He indicated that in Jamaica, 82 cents of every dollar goes toward debt servicing, meaning that there is little money left for anything else and there is a high rate of borrowing.
“So we don’t want to be anywhere near that,” Minister Smith said. “Even Barbados that is presumably a well-managed economy, I think their debt to GDP is probably in the region of 70 percent.”
Minister Smith pointed out that The Bahamas is one of few small countries in the Western Hemisphere that has never sought bailout from the International Monetary Fund (IMF).
He noted that as it relates to the level of debt, The Bahamas is even in a better position than most of the European countries.
But Minister Smith pointed out, “We’re more vulnerable. They can turn around to any bank in the world or any other country in the world and get their money easily because they happen to be Italy, Greece, Poland or Spain. We can’t do that.”
He also revealed some of the results of the recent IMF team visit to The Bahamas, noting that it has continued to be generally positive.
“They said that we have continued to manage the fiscal affairs prudently and what they are saying to us is continue doing so,” the Minister said.
“When they were here the last time (last year), they were urging us to go beyond that 17.8, 18 percent revenue to GDP [ratio] and try to get it up to 21 percent. They suggested that we increase taxes in certain areas. We resisted that. We said ‘No. We really think that we can grow out of this.'”
In the budget communication in the House of Assembly last Wednesday, Acting Prime Minister Cynthia Pratt explained that the government is aiming to consistently bring the ratio of government revenue to GDP to 20 percent.
“At that level, we can also provide the level of resources that we need for ongoing public expenditure while containing the fiscal deficit,” she said.
As an example, she said if the ratio of revenue to GDP is 19 percent, the amount of revenue foregone by not realizing the 20 percent mark is $60 million.
“To put this $60 million in context,” Mrs. Pratt said, “it is two-thirds of the combined annual subsidies paid to Bahamasair, the Water and Sewerage Corporation and the Broadcasting Corporation of The Bahamas; it is about one-half of the combined amount spent on the Royal Bahamas Police Force; and it is about one-half of the amount which we spend on public hospitals. Therefore, 1 percent of GDP is not a trivial amount.”
While on the show, Minister Smith noted that the government was working to eventually bring the GFS deficit down. The 2005-2006 projects a deficit of $172 million. The projection for 2006-2007 is $135 million and the projection for 2007-2008 is $115 million.
The economy is expected to grow by 3.5 percent this year, according to the IMF.
Minister Smith said The Bahamas ought to use this period of prosperity to pay down its debt.
By: Candia Dames, The Bahama Journal
