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Showing posts with label global financial crisis. Show all posts
Showing posts with label global financial crisis. Show all posts

Sunday, June 10, 2012

The Bahamian economy ...government debt, budgets and deficits: ...A look at how The Bahamas' economic circumstances have evolved over the past decade

A Perspective On The Bahamas Budget

The Bahamas

TOUGH CALL
By LARRY SMITH

Nassau, The Bahamas



AGAINST the backdrop of this year's post-election budget debate in Parliament, we thought it would be useful to look at how our economic circumstances have evolved over the past decade.

May 2001

When the first Ingraham administration tabled its final budget, Finance Minister Sir William Allen talked about containing the demands of inefficient, money-wasting state corporations like Bahamasair and ZNS.

He deplored the three-year delay in divesting BTC, which he attributed to the sorry state of the corporation's accounts - meaning it had been allowed to operate incompetently for decades.

But the future looked bright. The Bahamian economy had grown by 5 per cent in 2000, with more of the same projected for 2001. And the government debt-to-GDP ratio was about 30 per cent ($1.5 billion), considered sustainable by most economists.

"The declining debt and lower interest rates have reduced the cost of debt servicing," Sir William said. "Unemployment has been reduced to the lowest levels ever recorded (6.9 per cent), living standards are approaching those of the advanced OECD countries, and Bahamian society is prepared to meet the future with greater certainty and confidence than ever."

There were certainly achievements to brag about. An overall budget balance had been recorded for the first time since the early 1970s, and Allen was predicting that fiscal imbalances would become a thing of the past.

But that optimism was fleeting. Within months, the deadly terror attacks on New York and Washington produced panic in the US and sparked a worldwide recession that halved global economic growth. A sharp fall-off in travel forced The Bahamas to take emergency fiscal measures.

May 2002

So Perry Christie was able to say when he took office in 2002 that he had inherited a big deficit. His new government stressed the importance of containing public debt so that the country's limited resources could be applied more productively.

In the wake of the 9/11 attacks, State Finance Minister James Smith warned that revenue losses and emergency spending, combined with the demands of the loss-making public corporations, were straining the country's resources. And the government promised to complete the sale of BTC by 2003 at the latest.

May 2004

By the middle of his term in office, Christie was decidedly more upbeat. The impact of 9/11 on tourism had been short-lived, Sol Kerzner was investing a billion dollars to expand Atlantis, and the credit boom underway in the US was having a marked spillover effect on the Bahamas.

Although the administration promised to reduce government debt (which now topped $2 billion) to that 30-per-cent-of-GDP sweet spot, this time there was no talk about containing the demands of state corporations. And when Christie left office three years later, the BTC privatisation process was still in limbo - a full decade after it had been launched.

May 2006

As you might expect in what was to be his last year in office, Christie presented a grandiose budget in 2006-07. He talked about transforming the tourism and transportation sectors of New Providence, restoring Grand Bahama's prosperity, ending poverty, and getting crime and illegal immigration firmly under control.

"We have secured the future economic prospects of The Bahamas," he declared, "which are unrivalled in this region and without precedent in the economic history of our country...a scale of inward investment without parallel anywhere in the world..the economy has reached take-off point into what could be the longest, highest and most sustainable expansion of our history."

But ironically, and little noticed at the time, storm clouds were already gathering. Oil prices were about to spike, but energy was simply not on the government's radar. And the housing bubble in the US would soon burst, leading to an unprecedented global financial crisis with severe and long-lasting consequences for the Bahamas.

May 2007

When the FNM returned to office, they appeared to sniff the approaching storm. Hubert Ingraham tabled a balanced budget and promised to eliminate the deficit within five years, in the process bringing government debt down from over 37 per cent of GDP to around 30 per cent.

When Ingraham regained office, the total public debt (i.e borrowings by both the government and state corporations) was $2.9 billion, having grown by $656 million, or 29 per cent, during the Christie administration. At that time, the country was paying an overall interest rate of 7 per cent on borrowed funds, and servicing this debt was costing more than $141 million a year.

"It is crucial that we move quickly to reduce the ratio of debt to GDP and not allow it to drift upwards as it has in recent years," Ingraham said at the time. To do this, the government planned to rely on improved revenue collection and projected growth of more than 4 per cent.

Although state corporations were not mentioned in that budget communication, for the first time energy was a talking point. The government announced a review of alternatives to fossil fuel imports for electricity generation - including solar, wind and wave energy technologies - and set about formulating a national energy policy.

May 2008

But the FNM's honeymoon was brief. By early 2008 the prospect of a deep global recession was looming, as financial markets came under increasing stress. In the second budget of his new term, Ingraham pointed to economic uncertainty and spiralling energy costs as major factors in the government's decision-making.

With the economy suffering "severe setbacks" from the credit crunch and from the surge in energy and food prices, the government sought to provide a targeted fiscal stimulus as unemployment began to rise. A $100 million loan from the Inter-American Development Bank was also secured to complete the much-delayed New Providence Road Project.

And all the loss-making state corporations were still receiving big subsidies - $28 million for Bahamasair, $22 million for Water & Sewerage, and almost $12 million for ZNS. As fuel prices reached record highs, BEC's financial position worsened, and it was exempted from paying import duty on fuel, further impacting the government's finances.

In September, the giant Lehman Brothers investment bank collapsed, sparking a panic in the financial world. It was a seminal event that dramatized the severity of the Great Recession, which had actually begun in late 2007. The fallout shrank the Bahamian economy by 1.5 per cent in 2008.

May 2009

The following year's budget acknowledged the "extraordinary" impact of the financial meltdown. Government debt was now over 38 per cent of GDP, while the deficit had grown to 5.7 per cent of GDP. But more borrowing was necessary, Ingraham said, if the country was to avoid painful adjustments.

Meanwhile, the seemingly never-ending privatisation of BTC was entering its final stages, and the government began to mull the sale of other public corporations. Plans were also drawn up to cut ZNS' bloated staff level by more than a third.

"The financial resources released from propping up these corporations, plus the proceeds of privatization, would provide welcome relief to the Bahamian taxpayer," Ingraham said.

As the vaunted Emerald Bay resort on Exuma closed and other major foreign developments were put on hold, the government sought to cushion the impact of "these deeply troubling times" with unemployment benefits and a national re-training initiative to help laid-off workers find new jobs.

May 2010

The 2010-11 budget prescribed the most stringent fiscal retrenching of recent times, against a backdrop of 15 per cent interest on the nation's $2.9 billion public debt. Unemployment rose to more than 14 per cent.

Ingraham acknowledged that the country could not sustain more deficit spending. This was in line with the IMF's view that emergency fiscal measures should now be withdrawn, to signal a credible commitment to contain debt.

Spending was essentially frozen at 2009 levels and the government said it would pursue tax reform to raise revenue collection to 20 per cent of GDP to slow the growth of debt. After contracting by about 7 per cent in 2008 and 2009, the Bahamian economy barely grew in 2010 - by less than half a per cent - while government debt soared to 48 per cent of GDP.

May 2011

By 2011, the debt had climbed to 53 per cent of GDP, as the government borrowed more to strengthen the social safety net and continue major infrastructure investments.

"Reforming and modernizing tax administration will be crucial to deal with future changes in the tax regime that may flow from a much-needed and overdue reassessment of the revenue structure of the government," Ingraham noted.

Meanwhile, revenue was bolstered by $210 million received from the sale of BTC in April, which reduced the deficit somewhat. Government debt was put at $3.8 billion, or 46 per cent of GDP, while revenue collection was 18.5 per cent of GDP. And the economy grew by a modest 1.6 per cent in 2011.

May 2012

In the first budget of his current term, Prime Minister Christie said the financial picture was worse than anticipated and promised to maintain fiscal prudence, while forecasting major new spending on mortgage relief, education, urban renewal and healthcare. He also undertook to explore ways of re-nationalizing BTC.

Christie said tax revenues would have to rise, suggesting they should be 25 to 30 per cent of GDP - a significant jump over previous revenue collection proposals. "Our tax base is much too narrow, focusing as it does on goods to the exclusion of services," he said. "This is simply unacceptable in a modern economy."

The government said it would appoint an economic advisory council and prepare a White Paper on tax reform, along with a centralized tax administration system. "The current structure is disjointed, inefficient and inequitable in many respects," Christie said.

Unemployment spiked at 16 per cent in late 2011 and economic growth this year is projected to be about 2.5 per cent, driven by tourism and foreign investment, especially the Baha Mar development on New Providence. Similar modest growth is expected next year.

Government debt was just over $4 billion in May, over 50 per cent of GDP, and the IMF has warned that delaying tax reform will raise financing costs and threaten the economic recovery. This year's budget includes spending of $1.82 billion against revenues of $1.55 billion, producing a deficit of $550 million - or 6.5 per cent of GDP. Debt servicing is now $328 million, or just over 18 per cent of total recurrent expenditure.

Conclusion

This potted history makes it clear that, from the beginning of the 21st century - when the US economy to which we are firmly attached had just experienced the longest economic expansion ever - successive governments have been ratcheting up the national debt, no matter what they said to the contrary.

There are valid reasons for this - the country needs better social and physical infrastructure to achieve orderly growth and improve the quality of life. This requires investment that has to be paid for. Simon Townend of KPMG (Bahamas) has said we need to spend more than $2 billion over the next few years in transport, health, education and other sectors to remain competitive.

The upshot is that the Bahamas has a serious infrastructure deficit - despite significant recent investments in roads, electricity and water supply, air and sea ports. There are still large backlogs of needed work on existing systems, together with new demands that go unmet. Meanwhile, scarce public funds are being poured into dysfunctional state corporations that provide very little public value.

Successive governments have also known for years that they have to tackle tax reform - changing revenue collection from an outdated system based on import duties to one based on consumption or income. But they have postponed all the hard decisions. Prime Minister Christie appears set to grasp this nettle, but it is critical that we achieve the right balance between revenue, spending and borrowing. And that requires the considered input of civil society, not just the pontifications of politicians.

One of the biggest contributors to deficit spending (and to the national debt) over the years has been the public sector. Despite the sale of 51 per cent of BTC last year (after 13 years of trying), inefficient state corporations continue to absorb hundreds of millions of tax dollars. Is it really necessary for the government to own and operate all these corporations?

And although energy is a critical problem for both the public and private sectors, it does not appear that urgent steps are being taken to (in the words of the National Energy Policy) "aggressively re-engineer our legislative, regulatory, and institutional frameworks and implement a diverse range of sustainable energy programmes."

Back in the good old days of 2001, Sir William Allen warned that unless fiscal deficits were curbed, "the resources required to service the increasing debt will eventually bankrupt national programmes." He added that "increasing the share of GDP taken in taxation above 20 per cent...would adversely impact the competitiveness of the economy and eventually...destroy jobs."

According to PLP Senator Jerome Gomez, the days of borrow, borrow, borrow and spend, spend, spend are over. Well, let's give him a raincheck on that.

In the meantime we should focus on this: many experts say that an economic shock from Europe, which is quite possible in the months ahead, could push the US and most of the rest of the world into another big recession. 


What do you think? Send comments to larry@tribunemedia.net or visit www.bahamapundit.com .

June 06, 2012

Saturday, December 5, 2009

Poor outlook for doing business across the Caribbean, says CDB president

GEORGETOWN, Guyana -- President of the Caribbean Development Bank (CDB) Compton Bourne believes the outlook for doing business in the Caribbean is a very poor one as it takes “forever” to get the paperwork and regulations to set up a business in the region.

Addressing the Georgetown Chamber of Commerce and Industry’s (GCCI) annual awards and dinner presentation on Wednesday, Bourne says another challenge is the slothfulness of the court system in resolving business disputes.

He has called for authorities across the Caribbean to address these shortcomings, so that the environment for doing business can be more conducive and attractive.

Turing his attention to the global financial crisis and its impact on the Caribbean, Bourne said several sectors in the Caribbean have been severely hit by the crisis, including tourism trade and bauxite.

He also cited the decrease in foreign investment in the Caribbean as another effect of the crisis.

However, Bourne said the CDB will not sit idly by and allow the crisis to shrivel the regional economies as already it is responding to the challenges facing the region.

“We at the CDB have been doing our best to modify policies and provide assistance... we have reduced the counterpart funding required for countries seeking to borrow money from the CDB, we are currently making fuller use of our policy based loans which provide strategy support to countries." Bourne explained.

He added that the bank has also reduced the interest rates continuously to the clients of the bank.

The CDB president added that two major initiatives are on stream to assist indigenous banks and hotels affected by low visitor arrivals.

The CDB will provide liquidity support to some banks, particularly indigenous banks that are in some difficulty, and liquidity support to some hotels in the region that would normally be viable but whose vulnerability is threatened by fall in visitor arrivals.

December 5, 2009

caribbeannetnews


Tuesday, November 17, 2009

Cuba condemns attitude of the rich countries at the Rome Summit

ROME, November 16. —

Cuba has condemned the attitude of the rich countries who were absent from the Heads of State or Government meeting at the FAO Food Security Summit taking place in this capital.



Cuba Food Security

In a statement to PL, Ulises Rosales del Toro, head of the Cuban delegation in Rome and vice president of the Council of Ministers, highlighted the fact that those present must accept that food should not be used as an instrument of political pressure.

This is a battle that our country has waged for many years and which, on this occasion, has reached the UN Food and Agricultural Organization (FAO) Summit, he commented.

The importance of cooperation and solidarity was also reconfirmed, as was the need to abstain from adopting unilateral measures that do not comply with international law and endanger food security, he added.

Likewise a member of the Political Bureau of the Communist Party of Cuba and minister of agriculture, Rosales del Toro criticized the absence of the world’s most powerful nations who do not appear to have the courage to face representatives of the developing countries.

Now they cannot justify themselves, he stated, referring to unfulfilled promises of aid in order to eradicate world hunger.

With respect to the validity of the FAO Summit, Cuban Deputy Foreign Minister Abelardo Moreno stated that the issue is not to cancel the meeting but to highlight the attitude of the rich countries, which are not only responsible for the current situation but also for the global financial crisis. (PL)

Translated by Granma International

granma.cu

Wednesday, October 21, 2009

Cuba's declining trade betrays depth of its crisis

By Marc Frank:

HAVANA, Cuba (Reuters) -- Business between Cuba and four of its top five trading partners has declined sharply this year in a reflection of the communist-led Caribbean island's deep economic crisis, trade reports from the countries said.

Reductions in exports to and imports from Cuba ranged from 20 percent to as high as 50 percent, according to the reports from China, Spain, Canada and the United States. In descending order, they are the top traders with Cuba after Venezuela.

Numbers were not available for Venezuela, which is the leading economic and political ally of Cuba's government and supplies the island with oil.

China, Cuba's second trading partner, reported that imports from the island fell 48.2percent to $368 million through August, while Chinese exports to Cuba dropped 12.7 percent to $641.9 million.

Spain, tied with Canada as the island's third biggest trading partner, said its exports to Cuba declined 43 percent to $394 million through July, while imports were down 24 percent to $91 million.

Canada, which did $1.4 billion in trade with Cuba last year, said exports plummeted 52.4 percent to $242 million through August and imports fell 55.7 percent to $283 million.

The United States, which is Cuba's fifth trading partner despite its 47-year-old trade embargo against the island, said sales to Cuba totaled $383.8 million through August, down 23 percent.

Most US exports to Cuba are agricultural products, which are permitted under an exemption to the embargo.

While no information was available from Venezuela, Cuba's close socialist ally, it is likely the value of its exports to the island -- mostly oil -- will fall dramatically from 2008's $5.3 billion due to lower oil prices.

Cuba's economy has been spiraling downward since last year when three damaging hurricanes raked the country, followed by the onset of the global financial crisis.

The combination of rising prices for its imports and declining value of its key exports also depleted cash reserves to the point that the government froze the local accounts of hundreds of foreign businesses and stopped or slowed payments to many foreign creditors.

Cuba's government has forecast a decline of $500 million in export revenues this year and slashed imports by 22.5 percent.

The island's trade deficit soared to $11.4 billion in 2008, up 65 percent, according to the National Statistics Office.

October 21, 2009

caribbeannetnews

Thursday, October 1, 2009

CARICOM seeks voice in G20

GEORGETOWN, Guyana -- The Caribbean Community (CARICOM) would like a voice in the Group of 20 (G20). This was one of the issues raised by the Community’s Foreign Ministers during a meeting with United States Secretary of State Hillary Clinton in New York, USA last Friday 25 September.

Assistant Secretary-General at the CARICOM Secretariat for Foreign and Community Relations Ambassador Colin Granderson said that Secretary Clinton was informed of the concern by CARICOM countries of not having a presence in the Group of 20 (G20) global policy arena where many of the issues on the global economy are discussed and decided. He added that the concern of the Region was ‘taken on board”.

“It is believed that the views of vulnerable states with peculiarities such as ours need to be heard,” Granderson emphasised.

The latest meeting provided yet another opportunity for follow-up discussions arising from the meeting between CARICOM Heads of Government and United States President Barack Obama at the 5th Summit of the Americas in Port of Spain, Trinidad and Tobago in April 2009 and a previous meeting between the Ministers and Secretary Clinton in Honduras in June during the Organisation of American States General Assembly.

Granderson revealed that discussions were dominated by the continuing global financial crisis and trade. With regards to the global financial crisis, the Region expressed continued concerns about accessing funds that developed countries had made available for developing countries to assist in offsetting some of the fall out from the financial crisis.

The Assistant Secretary-General said that it was stressed that the graduation of some CARICOM Member States to the level of middle income countries had made it quite challenging for them to access these much needed funds.

On the trade front, Granderson said the Region pressed home the point that it is anxious to meet with the US Trade Representative as there are several issues in this arena to be ironed out and on which the Region needed clarity.

The CARICOM Assistant Secretary-General also informed that developments on a planned Caribbean-US Regional Security Framework was also discussed. He informed that a Joint Working Group which was established earlier this year had already met and planned a second meeting in the coming weeks.

The Dominican Republic also participated in last week’s discussions.

October 1, 2009

caribbeannetnews

Tuesday, September 29, 2009

Saint Vincent speaks out at UN debate on efforts to clamp down on tax havens

Amb. Camillo Gonsalves, Chairman of the Delegation of Saint Vincent and the Grenadines29 September 2009 – The efforts of major and industrialized economies to crack down on so-called tax havens are just an excuse to spread the blame for the global financial crisis on small nations’ legitimate attempts at development, Saint Vincent and the Grenadines told the General Assembly today.

Camillo M. Gonsalves, the Caribbean archipelago’s Permanent Representative to the United Nations, told the sixth day of the Assembly’s high-level segment that is country faces “being stigmatized out of our transition into financial services” by the Group of Twenty (G20) major economies, the Organization for Economic Cooperation and Development (OECD) and what he called “other non-inclusive bodies.”

Speaking at UN Headquarters in New York, Mr. Gonsalves said the crackdown on tax havens were actually “a pathetic effort to cast a wide and indiscriminate net of blame across a swath of legitimate and well-regulated countries’ development efforts.

“We note the irony of these paternalistic prescriptions from the same countries that are unable to stem corruption and mismanagement within their own borders, where corporations recklessly squander trillions of dollars and a single buccaneer investor can make $50 billion disappear into thin air – an amount greater than the combined annual budget expenditures of the entire CARICOM [Caribbean Community] sub-region,” he said.

Mr. Gonsalves took aim at the G20 for describing itself last week, at a summit in the United States city of Pittsburgh, as the premier forum for international economic cooperation.

“Saint Vincent and the Grenadines is not a member of the G20, nor were we consulted on its ascension to the ranks of arbiters of our economic fate… The G20 faces a serious legitimacy problem: aside from being non-inclusive and unofficial, many of the countries at that table represent the champions of the financial and economic orthodoxies that led the world down the rabbit-hole to its current economic malaise.”

The Permanent Representative also cast doubt on recent reports from some observers that the economy is returning to normal.

“The invisible hand of the market is still clasped firmly around the throats of poor people and the developing countries of the world. We see none of the so-called ‘green shoots’ that populate the fantasies of discredited economic cheerleaders.

“Indeed, the seeds sown by this crisis may produce the strange and bitter fruit of increased poverty, suffering and social and political upheaval. The crisis itself, with its disproportionate impact on the poor, will only widen and deepen the yawning gap between developed and developing countries.”

UN News




News Tracker: past stories on this issue:

Dominican Republic calls for tax on tax havens to fund UN humanitarian goals