Last Wednesday, I rose in this Honourable House in my capacity as the Minister of Finance, to table: The 2022 Fiscal Strategy Report, and the 2023/24-2025/26 Medium-Term Debt Management Strategy.
In approximately three weeks, the FY2022/23 Mid-Year review will also be tabled. This document will provide Members, the Bahamian public and the business community with an assessment of the Government’s performance in executing the plans outlined in its 2021 Fiscal Strategy Report, and the FY2022/23 Annual Budget.
These reports, along with the FY2022/23 Annual Budget document, and the FY2022/23 Mid-Year Review, provide the fiscal framework for the Government’s 2023/24 fiscal year.
During the most recent budget debate, the side opposite sowed the seeds of much confusion in respect of adjustments made to the medium-term forecasts presented in the 2021 Fiscal Strategy Report, as compared to those presented in the FY2022/23 Annual Budget.
Given that their term in office was characterized by confusion, incompetence and poor judgement, it is hard to determine whether their confusion was genuine, or simply posturing in order to cause political mischief.
To avoid further misunderstanding, let me first set out what the law requires.
In compliance with the FRA, Second Schedule 5, the annual Fiscal Strategy Report contains medium-term fiscal forecasts, outlining actual, estimated and projected fiscal values.
These estimates, however, are NOT binding and do NOT necessarily constitute the annual budget.
Section 10(6) of the FRA outlines and requires that the annual budget be prepared in accordance with the fiscal objectives of the Fiscal Strategy Report.
Let me be clear: the Fiscal Strategy Report is not the budget itself.
The budget is a document developed via a rigorous process, which includes engagement with myriad stakeholders across various Ministries, Departments and Agencies of Government as well as the private sector and the general public.
I recall the first Minister of Finance in the previous administration expressing a degree of surprise and wonder that such a comprehensive effort went into the creation of the Annual Budget.
I’m not sure if he passed on this bit of education to his successor.
But I digress.
The Fiscal Strategy Report and the Medium-Term Debt Management Strategy are products of the Ministry of Finance.
This distinction is important, as during last year’s budget debate, members opposite expressed surprise that the numbers in the budget, which undergo a much more vigorous process, were different from those expressed in the Fiscal Strategy Report.
This is despite their understanding that these documents go through two distinct processes at different times.
This misunderstanding, whether feigned or real is a major reason why this year’s debate will be the last debate of the Fiscal Strategy Report and the Medium-Term Debt Management Strategy as standalone documents, debated in isolation.
The political mischief-making that accompanies these debates does real reputational and economic harm to our country.
Madam Speaker, I am pleased to announce that in the soon-to-be-tabled revised Public Financial Management Act, the Fiscal Strategy Report and the Medium-Term Debt Management Strategy will be tabled at the same time as the annual budget.
This will ensure that all documents are based on the same economic assumptions, something which is not possible in the current framework, whereby one document is tabled in November and the other is tabled months later, in the last week of May.
Let me make this extremely clear: we are revising the compendium of fiscal legislation because we recognize that, the limitations in our information and reporting systems which were designed by the previous administration, are simply unworkable.
We believe in fiscal discipline, accountability and transparency.
The legislation is being revised to support that.
As things currently stand, in order to prepare for a November tabling, the documents have to be prepared at least two months earlier, in August or September.
To then use this data and projections as the primary influencer of your budget projections would mean that we would subsequently totally disregard 10 months of empirical evidence of the fiscal and economic performance of the country in preparation for your budget.
At best, this approach is unwise.
At worst, it is simply foolish.
Before, speaking specifically about the Fiscal Strategy Report and the Medium-Term Debt Management Strategy, it is important that I address some of the comments in the press about the Report itself, so that Honourable Members are not encumbered with misinformation.
Some of the commentary was made without a full study of the reports having been undertaken.
Hopefully, commentators will correct themselves after a proper read.
The first issue is the future estimate of real property tax revenue.
The basic fact is that we collect less than 40% of the real property tax that is billed annually.
Let me say that again.
The Government of The Bahamas collects less than 40% of the real property tax that is billed annually.
Honourable Members should appreciate that the Government’s revenue from real property taxes would be MORE THAN DOUBLED if all real property tax billed, was collected.
That has to change.
And to do so, we are making some necessary investments in technology and people.
Within the next four years, our goal is to collect more than 75% of the property tax billed
Additionally, having completed the first mass re-assessment exercise in New Providence, over the next three years, we are embarking on a comprehensive real property tax reassessment exercise in the Family Islands.
This is a key component of our plan to triple revenue from the Family Islands over the next two years.
I would like to remind Honourable Members that this effort will be of substantial benefit to the Family Islands, as we have committed that 25% of the collected real property tax collected will go into the Family Island Development Fund.
We have also intensified our efforts in respect of the collection of property tax arrears.
The previous administration allowed contracts with private collectors to expire.
We have reinstated them.
And Madam Speaker: I am happy to report that these efforts have already produced a very favourable, early harvest.
Another issue which was has generated some erroneous commentary relates to the fuel arrears amassed by BPL.
The facts are simple: the spike in the global price of fuel, which was caused by the Russian invasion of Ukraine was the primary cause of the build-up of arrears by BPL.
There was no negligence by the Government, and the false reporting of this fact does not make it so.
The fuel hedges which were purchased, and which are still in place, are aligned to the fiscal year.
When this administration came into office, the window for extending those contracts had closed, because of the still unexplained indecision by the previous administration.
This is yet another example of the confusion, incompetence and poor judgement which I referred to earlier.
While overlapping arrangements were possible, given the liquidity challenges faced by the Government, to do so was not advisable.
And, Madam Speaker, even if an overlapping hedge had been purchased, the impact of the Ukrainian crisis would have had a great impact on BPL.
It is deeply regrettable that those who created so much of the problem, now seek to undermine progress being made by those of us who brought in a solution!
I would like to take a moment to commend the many hard-working professionals who have worked so diligently to generate the Fiscal Strategy Report and the Medium-Term Debt
They have certainly raised the bar in terms of the quality of analysis that is produced.
And this commendation not only comes from me.
I am pleased to report that it is the view of economists, regional development partners and other experts, that our administration has certainly raised the bar in the production of such key policy documents.
I thank everyone for their effort!
To properly understand the policies and strategies included in the 2022 Fiscal Strategy Report and 2023/24-2025/26 Medium-Term Debt Management Strategy, it is important to understand the economic context in which they were prepared.
Back in 2019, it was already clear that the Bahamian economy was in a weakened position, which back then I described in this House as being on a ‘fiscal cliff’.
The shock rise in VAT to 15% had put a severe brake on growth and consumer spending.
And the extraordinary rise in government borrowing, at very high levels of interest, had put a severe brake on public investment.
As there was not a single new school, road or hospital to show for it, we are still unclear as to the reasons behind such unprecedented borrowing.
On top of that, the range of tax cuts on private aircraft, commercial washing machines, and other luxury items which favoured a very narrow section of society, drove down the government’s tax revenue.
Then came two major shocks, which arguably pushed the economy over the cliff.
In September 2019, the landfall of category 5 Hurricane Dorian in the northern Bahamas brought with it historic levels of damage.
The subsequent emergence of the COVID-19 pandemic in The Bahamas in March 2020 led to decisions to suspend the constitution, close the borders, and impose curfews, lockdowns and restrictions on the movement of people, which presented economic and fiscal challenges never before experienced in modern times.
This was the situation when we were elected to office in September 2021.
Despite the wishful public assertions by some, The Bahamas had not as yet experienced a true economic or fiscal rebound.
Based on data provided by the Bahamas National Statistical Institute, in the months leading up to the General Election, the first quarter of 2021 continued to demonstrate an economic decline.
While the second quarter indicated a mild rebound in economic activity, compared to the previous year, this is largely explained by an increase in pre-election Government spending of $231.2 million.
This level of spending is certainly not sustainable and provided no real or long-term impact.
Madam Speaker: I simply cannot imagine why the government went on such a useless spending spree in the run-up to the Election!
But happily, the Bahamian people made their choice for a New Day.
After we eliminated the Emergency Orders in November 2021, many economic sectors re-opened, Government revenues rebounded, and quarterly output returned to levels of nearly 95 per cent of pre-pandemic and pre-Dorian levels.
Because of specific and targeted policy initiatives, the pace of the rebound of the Bahamian economy continued to accelerate into 2022.
As a result of the rebound in economic conditions in our tourism source markets, in the nine months to September 2022, tourist arrivals totalled 4.8 million and were forecast to return to near pre-COVID-19 levels.
As a result of the global economic rebound, and the impact of the war in Ukraine, inflationary pressures experienced in 2021 continued, as the pass-through impact of higher global oil prices began to impact products in the Bahamian marketplace.
2022 Fiscal Strategy Report
The 2022 Fiscal Strategy Report is grounded in six priorities:
Firstly, the restoration of the fiscal health of The Bahamas. This is heavily based on pursuing aggressive revenue enhancement targets, designed to ensure greater fairness in the existing tax framework. Those who are able to contribute more should contribute more.
Secondly: broadening and strengthening the health infrastructure of the country, making it more resilient and ensuring greater access for all Bahamians.
Thirdly: the development of community-centred, bottom-up development strategies for each island and community, empowering them with greater financial resources to achieve these objectives.
The Fourth Priority is the maximization of investment in the Bahamian Blue Economy, to provide greater levels of economic diversification and financing opportunities.
The Fifth Priority is to increase the use of non-traditional financing mechanisms, such as Repurchase Agreements (Repos), Public-Private Partnerships, blue carbon financing, etc. to finance critical infrastructure and budgetary needs.
And finally, to pursue fiscal sustainability while maintaining high levels of fiscal transparency and accountability to investors, stakeholders, and the Bahamian people.
These priorities shape the fiscal outlook and are at the heart of the development of the Government’s Fiscal Strategy.
The plan and outlook for the Government’s revenue remain positive.
I will now set out a number of initiatives which The Government is implementing, to ensure that those who owe taxes should pay them.
This includes the reversal of several policies implemented by the previous administration, which favoured a number of special interests.
As previously announced, we have reconstituted and strengthened the Revenue Enhancement Unit, which had been disbanded.
They are already increasing the number of VAT audits undertaken, to ensure proper compliance with the law.
We are also re-launching the Revenue Policy Committee to eliminate leakage and identify areas for enhanced collections
We will continue to expand the ‘Customs Electronic Single Window’, also known as ‘Click2Clear’.
In the second half of this fiscal year, VAT will begin to be collected on domestic vacation rental properties.
A targeted programme will also be launched to collect tax arrears owing on VAT, Real Property Tax, and Business License fees.
Additionally, we are phasing in VAT e-invoicing, to simplify and reduce errors in the VAT billing and remittance process.
The number of post-clearance audits by the Customs Department will also be increased.
We anticipate improved revenue from Real Property Tax as a result of the recently-completed re-assessment of property values in New Providence, and expansion of the Real Property Tax roll to include unidentified properties.
We also anticipate further improvement in the collection of Real Property Tax on mortgaged properties by requiring domestic commercial banks to include those fees within mortgage payments and then remitting them to the Government.
Finally, we are reinstating the business license fee for all banks operating in The Bahamas.
As a result of our revenue-enhancing programmes, revenue for FY2022/23 is estimated at $2.8 billion, which represents 21.2 per cent of GDP.
I will now set out a number of plans and policies articulated in the Government’s Fiscal Strategy document, which go even further in introducing measures to provide broad-based stimulation to the economy.
My Government recognizes the contribution of Micro, Small and Medium Sized Businesses to sustainable and more inclusive national development.
These enterprises contribute significantly to economic growth, the creation of jobs, and the provision of products and services for the public good.
They also play a significant role in alleviating poverty and reducing inequality.
My Government, therefore, intends to continue to provide funding of $50 million per year. to further support the growth of Micro, Small and Medium Sized Businesses.
At the other end of the scale, The Government recognizes the need for greater efficiency in promoting the development of larger-scale investments, which contribute significantly to new jobs and spending in the economy.
Work has already begun on the transformational effort to expand the Bahamas Investment Authority by creating BahamasInvest, which will ensure the alignment of major investments with the long-term development goals of the country.
Our plans include a number of measures to encourage economic diversification by expanding opportunities in trade.
The Bahamas’ Permanent Mission in Geneva is already pursuing opportunities to expand trade.
In addition to that initiative, reform is also underway to support trade in the Orange Economy. Legislation is being prepared and updated to strengthen intellectual property rights, through which artists and creative entrepreneurs may be able to protect, commercialise and monetise their creations.
A key priority of the Government’s economic resilience plan is to stimulate growth through specialized tourism.
The Government has therefore committed to relaunching the ‘Sports in Paradise’ programme, as a means of encouraging major international sports federations and leagues to use The Bahamas as a base, so that we are the number one hub for athletics in The Caribbean.
The many sporting events which have been planned or completed include:
2022 Babe Ruth Caribbean Championships;
2024 IAAF World Relays;
2023 CARIFTA Track and Field; and the 2023 CARIFTA Swimming Championships.
In line with our policies which we have committed to both home and abroad, the Government is committed to the use of more efficient and environmentally-friendly energy sources, as a means of improving energy security and cost.
We are already introducing renewable resources throughout the Family Islands, a project which will not only result in cost savings for Bahamian families but also provide much-needed jobs.
As The Bahamas is a Small Island Developing State which is highly susceptible to the impacts of global climate change, my administration has taken a leading role globally, in advocating for the adoption of innovative climate financing solutions.
We have therefore embarked on an innovative strategy to commercialize the blue carbon credits generated from marine preservation. This capitalizes on previous investments to protect the marine environment, as well as provide new sources of revenue.
We have procured expert scientific support to help us assess the quantum and value of domestic seagrass meadow carbon sequestration.
To date, expert scientific assistance has been procured to aid in assessing the quantum and value of domestic seagrass meadow carbon sequestration.
In the land-based Green Economy, which is closely tied to our marine-based Blue Economy, we are continuing to increase Government support to farmers and fishermen. The various grants and concessions granted will all combine to promote greater food security in our country.
We look to the continuing proliferation of innovative ventures, such as Eden Farms, which is focused on hydroponic food production and its planned $60.0 million expansion by year end-2023.
Revenue is forecast at 22.9 percent of GDP in FY2023/24, and 24.4 percent in FY2024/25.
Thereafter we expect to achieve revenue targets of at least 25.0 per cent.
With respect to public expenditure, Government fiscal projections support the prudent management of expenditure, while at the same time utilizing alternative financing methods to continue and improve service delivery.
This approach means that we are on course to achieve our fiscal target to reduce recurrent expenditure to 20 per cent of GDP by FY2025/26, down from an estimated 22.6 per cent of GDP in FY2022/23.
In order to achieve this reduction in expenditure, we will implement a number of measures.
We will implement targeted public expenditure reforms, relying on the most recent IDB-supported public expenditure review.
We will resume reforms of the State Owned Enterprise Reform and Rationalization programme.
We will contain costs and drive innovation in the public sector by continuing to digitize government services.
In line with the recommendations made by the accounting firm, KPMG, we will reform and modernize the Government pension scheme.
In the Fiscal Year 2020/2021, capital expenditure outlay peaked at 3.8 per cent of GDP.
This was because of transfers to support small and medium-sized businesses during the COVID-19 economic downturn.
Capital expenditure is now forecast to contract to 2.3 per cent of GDP by FY2024/2025.
To support long-term economic growth, expenditure on capital projects is forecast to remain at 3.5 per cent of GDP over the medium term.
The preparation of the Fiscal Strategy Report and Fiscal Forecasts naturally contains risks.
Where possible we have sought to mitigate these risks and included fiscal buffers in our framework.
In respect of Natural Disasters, we will maintain our CCRIF insurance policy, continue to build a disaster relief fund, renew the IDB $100m contingent credit line, continue to implement improvements in building standards, introduce more comprehensive planning, and implement coastal improvement measures.
Another key risk is in respect of our debt management, and so the Government will continue to maintain The Sinking Fund, in order to mitigate the risk of default of future debt repayment.
The Dormant Account Fund provides another source of mitigation. The legislation that governs dormant accounts allows for accounts to be transferred to the treasury when dormant for a period of seven years or more.
The balance on country’s dormant account fund currently stands at $88.0 million.
The Dormant Accounts Fund was a pivotal source of support in the government’s aid to Grand Bahama and Abaco after Hurricane Dorian.
In 2019, the government allocated $10 million from the dormant accounts fund to help restart businesses on Grand Bahama and Abaco.
Further risk mitigation comes via a targeted strategy to collect more than $1.0 billion in revenue tax arrears via the Revenue Enhancement Unit.
And our administration has made a commitment to allocate any collected arrears, to the reduction of our outstanding debt.
Finally Madam Speaker:
We continue to make progress on the design of a Blue Carbon facility for The Bahamas.
Under the current framework, commercial assets produced by this arrangement will be transferred to a domestic facility and used to fund Government capital projects.
Taken together, these efforts provide a strong package of measures to mitigate the risks identified in the Fiscal Strategy Report and Forecasts.
2023/24-2025/26 Medium-Term Debt Management Strategy
The FY2023/24 – FY2025/26 Medium-Term Debt Management Strategy guides the Government’s borrowing decisions to fund any deficits identified in the Fiscal Strategy.
It also addresses any considerations for any refinancing and debt repayments which may emerge.
As with the Government’s Fiscal Strategy, the Debt Strategy is prepared after having given consideration to prevailing macroeconomic and financial market conditions, and the implications which then arise on borrowing requirements and debt service costs.
The Debt Strategy has therefore been devised on the assumption that there will continue to be a robust recovery in The Bahamas, following on from the combined shocks of Hurricane Dorian and the COVID-19 pandemic, and the questionable borrowing practices of the previous administration.
At the end of June 2021, Government debt peaked at an astonishing 100.9 per cent of GDP. By the end of September 2022, the debt had been reduced to 81.1 per cent of GDP, in the amount of $10.775 million.
In preparing the Government’s debt strategy, an evaluation was undertaken of the cost and risks of four (4) alternative debt strategies, which were deemed feasible under the prevailing domestic and international financial market conditions.
These included: increasing or reducing the proportion of foreign currency debt, increasing or reducing the tenor of the debt portfolio, and the use of liability-management operations.
The debt strategy includes benchmarks for the cost and market risk indicators for:-
- foreign currency (FX) risk;
- interest rate risk; and
- refinancing risk.
The optimum debt strategy selected maximizes the use of domestic sources of financing to address refinancing risk.
It also extends the average time to the maturity of the portfolio, meaning that repayments are spread over a longer period.
It develops the domestic capital market, manages interest rate risk by utilizing more fixed interest rate instruments, and incorporates liability management operations, while also balancing the cost.
Under this preferred approach, the financing mix suggests gross external and domestic borrowings of 11 per cent and 89 per cent, respectively.
Members should recall that in October 2022, Moody’s Investor Services downgraded The Bahamas from Ba3 to B1, but revised the outlook upwards to ‘stable’, reflecting the strength of the tourism-driven economic recovery which was underway, along with a narrowing of the fiscal deficit.
In November 2022, S&P Global Ratings affirmed The Bahamas’ credit rating at B+ and the outlook at stable, based on the positive economic fundamentals which support a lowering of the fiscal deficit, and a slowing in the growth of Government debt.
I am proud to report to the House, that as a result of the advice and efforts of our Financial Advisor, over the past year, Government has made a significant effort in managing our investor relations.
In keeping with Government’s commitment to maintain the highest level of debt transparency, and to support continued market confidence in both the domestic and foreign currency debt, a campaign was launched which included ongoing publication of public debt data on the Government’s website.
More direct investor outreaches were also included in the strategy and took the form of ‘deal’ and ‘non-deal’ roadshows and targeted meetings.
I am happy to report that the strategy has already begun to yield significant results! As a result of our efforts, Bahamian foreign currency bonds, which were previously trading at yields far below our peers, have demonstrated a strong rebound.
Given current global credit conditions, market insiders have noted that, due to the prudent policy management of our administration, The Bahamas had the second-best market performance in the region for 2022.
Our strategies are working!
The economy is on the right track.
This is what competent governance looks like.
This is what competent fiscal management produces.
This is what competent economic policy yields when it is conducted in the best interests of ALL Bahamian people.
Tough times are being experienced the world over.
But by the Grace of God, we will continue to work towards building a better Bahamas.