By Alison Lowe
Nassau Guardian Business Editor
NASSAU, Bahamas -- The Inter-American Development Bank (IDB) says that The Bahamas has “further worsened its potential” to be subject to a downgrade of its credit rating by international agencies as a result of pushing back the implementation date for value-added tax (VAT).
In its Caribbean Region Quarterly Bulletin, the IDB noted that there has been concern expressed by international agencies about a “lack of substantial implementation” of fiscal consolidation strategies to reduce the government deficit and slow the accumulation of debt in The Bahamas.
“Slippages in the implementation (delays in implementation, confirmation of the VAT rate, finalization of the tariff rates, etc.) have resulted in warnings of likely downgrades by one to two notches in 2014, thereby leading to a loss of the country’s investment-grade rating.
“Recent push-backs in the implementation date from July 1, 2014 to later in 2014 or 2015 further worsen the potential for downgrades. At this point, the outlook given by rating agencies remains negative, reflecting ‘their expectation that the government will find it difficult to achieve... a sustainable trajectory in the near term’ (Moody’s, 2014).”
Currently, the country’s rating by Standard and Poor’s (S&P) is BBB/A2, while its Moody’s rating is Baa1. These ratings impact the cost of borrowing for the government, with a lower rating likely to lead to higher interest payments on debt for the government, thereby potentially exacerbating the current debt crisis which the implementation of tax reform is intended to assuage.
In the bulletin, the IDB – like the International Monetary Fund did last year – voiced its support for a “fiscal rule” governing government spending.
The IDB said such a rule would bring greater “credibility” to the budgeting process and promote growth by encouraging more investor confidence.
It added: “The concept of fiscal rules has been discussed by the authorities. A recent public debate on the pros and cons of implementing a fiscal rules framework has been escalated. This step, if implemented by the government, could be considered the first toward creating a public debt management legal framework that would rationalize and provide greater structure and transparency to debt management in The Bahamas.
“Not only would this proposed framework provide greater credibility to the budget process, but it would also improve investor confidence related to future foreign direct investment flows, thereby promoting growth. If this effort gained momentum, future budget processes and policymaking would be backed by a legislative framework and greater accountability. However, authorities have not yet moved towards actual implementation.”
The comments come as the bank observed that economic activity in the country remained “sluggish” through the beginning of 2014.
“Tourism grew by 3.5 percent, with sea arrivals increasing and air arrivals declining, despite closure of a mid-sized hotel. Private sector credit growth moderated signaling a persistent weakness in the domestic market. The percentage of unemployed individuals remains in the double-digits, while inflation abated. Fiscal performance improved with the deficit contracting for the first 6 months.”
Noting the continued expansion of the current account deficit in 2013, following ongoing growth over the past ten years, the IDB said that the persistent current account deficit poses a “risk to long-term stability”.
“Key to diminishing the risk factors include the reduction of the oil import bill, a more diversified economy that is less reliant on one sector (tourism), reduction of the dependency on imported goods and higher reserve levels; this could be achieved through a reduction of structural impediments to growth,” said the bank.
Republished with permission of the Nassau Guardian