Prior to the 2005/2006 budget being brought to parliament, the International Monetary Fund warned that the government must move to get a tighter control on its deficit and overall debt, but the Christie Administration has been unable to meet key targets suggested by the global fiscal experts.
The IMF, in its concluding statement on its recent mission here, noted that the 2005/2006 budget provided an important opportunity for authorities to demonstrate their commitment to putting the debt ratio on a firmly declining trajectory through the target for the government deficit.
Researchers pointed out that the budget communication for 2003/2004 addressed the debt objective, explaining that the government’s aim was to eliminate the budget deficit as quickly as possible and return the ratio of government debt to GDP to well below 40 percent.
“However, since the debt has risen steadily over the last few years, the government needs to reaffirm its medium term objective and the mission recommends that the budget plans for the coming fiscal year be framed in that context,” the IMF document noted.
The government has projected that the level of debt to GDP in fiscal year 2005/2006 will be 37.8 percent.
Fiscal experts have warned repeatedly that hitting the 40 percent mark would be dangerous and would force the government to go into the kind of borrowing mode that could threaten its financial viability.
In its concluding statement, the IMF recommended that the government establish an objective for government debt that is sustainable, fosters confidence in the management of economic policy, and leaves room for policy responses to economic shocks.
“The mission recommends that the government aim at a reduction in the debt ratio to the level prevailing at the beginning of the decade (30 – 32 percent),” the concluding statement said.
“What would be key is the authorities’ decision to take ownership of a debt objective, and determine a deficit target for 2005/2006 that would represent a significant and credible step toward that objective.”
To achieve the deficit objective, the IMF said the government must closely monitor budgetary developments – particularly revenue, which has risen more slowly than anticipated in recent years.
It also advised that contingency plans should be developed to allow a timely response through revenue or expenditure measures in the course of the fiscal year, to the extent they may be needed to meet the budget deficit target.
“Setting the budget plans for 2005/2006 in a medium-term fiscal framework could help to underpin the strategy to maintain a prudent fiscal stance in the following budget year,” the IMF also said.
The evaluation by the international body is considered as a crucial assessment of recent economic developments and the challenges facing The Bahamas. It also includes the mission’s recommendations on how to address them.
Specifically, the mission recommended that the deficit be targeted to decline to around two and a half percent of GDP in 2005/2006, a reduction of 3/4 percentage points of GDP.
“Such a reduction in the deficit would represent a solid step toward reducing the debt ratio and thus would boost confidence in the government’s economic policy management and would support the exchange rate peg, which has served the country well,” the concluding statement said. “Moreover, it would reduce the economy’s vulnerability by restoring room for policy maneuver in case of future external shocks.”
The IMF also said, “The mission understands that a budget proposal is being developed with a deficit target of about 2 1/2 percent and it support these plans.”
But the government’s deficit target for 2005/2006 turned out to be 2.8 percent of GDP, or $172 million.
The IMF noted that the fiscal deficit has remained stable during the current fiscal year, but at a level that has resulted in sustained increases in the debt-to-GDP ratio.
“The government deficit in 2003/2004, at 3 1/4 percent of GDP ($178 million), was essentially unchanged from the year before, and the mission estimates that the deficit for 2004/2005 will remain unchanged in nominal terms,” the concluding statement said.
“Although this would put the deficit for the current fiscal year close the budgeted level, it will raise government debt to 37 percent of GDP, compared with 31 percent at the end of 2001.”
Minister of State in the Ministry of Finance James Smith pointed out in the Senate last week that there are portions of the IMF’s concluding statement, that have not been officially released that might be altered.
By: Tameka Lundy, The Bahama Journal
