THE International Monetary Fund (IMF) is pressing authorities in The Bahamas to raise taxes, cut unnecessary spending and target more growth-inducing expenditure while putting its debt, which climbed above 100 per cent at the end of 2021, on a sustainable path.
The recommendations came in the fund’s Article IV consultation that was released earlier this week.
The Bahamas’ financies were in a precarious position made worse by pandemic spending adding to expenditures to fund the recovery and reconstruction from Hurricane Dorian.
“The pandemic has deepened medium-term growth challenges and public finances have deteriorated,” the IMF wrote in its assessment of The Bahamas.
The collapse in revenues that followed the pandemic, combined with the Government’s swift response measures — food assistance, extension of unemployment benefits duration, tax deferrals and business loans — pushed the fiscal deficit up to 13.7 per cent of gross domestic product (GDP) in fiscal year 2020/21, the IMF noted. The Bahamas’ fiscal year runs from July 1 to June 30.
The impact was a steep increase in The Bahamas’ public debt which rose from 75 per cent of GDP in 2020 to 103 per cent of GDP by end-2021.
So far, the fund contends that turning around the situation could require “an increase in the revenue-GDP ratio by five per cent through a credible tax reform, permanent cuts to unproductive spending of 1.5 per cent of GDP, and higher spending on capital investment, education and health of 2.5 per cent of GDP.”
The IMF added that the proposed path would reduce cumulative gross financing requirements by about 10 per cent of GDP between fiscal year 2022/23 and fiscal year 2026/27.
The IMF pointed to The Bahamas’ gross financing needs, estimated around 16 per cent of GDP in the current fiscal year which ended on June 30, citing if it is to be achieved, the country will have to raise various taxes among other things. (The Bahamas’ 16 per cent financing need does not include short-term Treasury bills, notes, and central bank advances of about 10 per cent of GDP).
A gradual increase of the value-added tax (VAT) rate to 15 per cent was cited as one way to raise around 2.7 per cent of GDP in extra revenues. “Further eliminating various indirect tax expenditures (zero-rated or exempted items, including for insurance, gambling and building supplies) could raise an additional 0.8 per cent of GDP,” the IMF stated. Increases in the excise tax, personal and corporate income taxes and property taxes were pinpointed by the IMF as areas which the Government could raise additional funds to finance it’s debt and spending obligations.
However, increasing fuel taxes was the most controversial taxation measure suggested by the IMF.
“A phased increase in taxation of fuels, accompanied by compensation for vulnerable households, would raise revenues and more appropriately price the social costs,” the IMF outlined. The fund said its calculations show the social costs amount to about B$1.70 per gallon for gasoline and diesel used for transportation and B$1.10 for diesel used for power generation. “Current tax rates of B$1.15 for road use and no taxation for diesel used for power generation are too low,” it continued. (B$1 = US$1)
The IMF added in the assessment of The Bahamas that if its Government increased and then indexed taxation of road fuels, it would raise revenue of an additional 1.5 and 0.2 per cent of GDP by 2025, respectively. It also recommended removing the tax exemption on the Bahamas Electricity Corporation (BEC) which it estimates would raise revenues of about 1.4 per cent of GDP and could improve incentives for shifting to renewable electricity.
“However, the elimination of the BEC exemption could lead to an increase of up to 60 per cent of residential electricity prices and a sizable portion of the increase in road fuels taxes would be passed on to consumers,” it acknowledged. Given that scenario, the IMF said financial support would be needed to compensate poorer households and potentially some smaller firms if the recommendations were to be carried out.
Despite the recommendations, Bahamian authorities are not keen on raising taxes at the moment. The IMF says while the authorities broadly concurred with the fiscal challenges ahead, they are confident that they can raise the needed financing for this fiscal year and beyond using both domestic and external sources. They emphasised that nearly five per cent of GDP of additional revenues have been identified by the Revenue Enhancement unit, of which three per cent of GDP would be recurrent revenues. Raising tax rates or introducing new taxes is thus seen as a last resort.
The Bahamas is experiencing a tourism-led rebound that has seen its economy expanding by almost 14 per cent in 2021 with 2022 growth forecast at eigth per cent, cautions that downside risks to growth persist. The war in Ukraine which is expected to impact The Bahamas through higher commodity prices, could drive inflation to 6.75 per cent in the island chain in 2022 was cited among the risks.