Imf Bahamas Chief Supports Fiscal Limits – Bahamas Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Funds (IMF) Bahamas mission chief has backed calls for a Fiscal Responsibility Act, describing it as a useful medium term component for reforming the Governments finances.

Jarkko Turunen also said the Bahamas vulnerability to major hurricanes was not necessarily an impediment to implementing stricter fiscal rules, explaining that there are ways to design them to allow the Government to respond properly to natural disasters.

Mr Turunen, in an exclusive interview with Tribune Business, described a Fiscal Responsibility Act and fiscal rules as important steps in the Bahamas effort to rein in its fiscal deficits and national debt.

The exact shape of that medium-term fiscal framework, theres many ways to do it, but in principle I would see it as a useful component of fiscal reform and fiscal planning in the Bahamas, he said of a Fiscal Responsibility Act.

Mr Turunens comments are likely to delight groups such as the Chamber of Commerces Coalition for Responsible Taxation, and the Organisation for Responsible Governance (ORG), who have long campaigned for the introduction of such legislation as a means to force the Government to be more transparent and accountable over how it spends taxpayer monies.

His remarks also contradict the position expressed recently by Michael Halkitis, minister of state for finance, who told The Revolution radio show that there were both merits and drawbacks to implementing such an Act.

The Minister said an IMF study had identified both the advantages and disadvantages associated with a Fiscal Responsibility Act, and expressed concerns it would prevent the Government from responding properly in the wake of events such as a Hurricane Matthew-type storm.

The IMF study referenced by Mr Halkitis had suggested that the Government enhance its economic data and statistics collection before implementing such legislation, hence Mr Turunens reference to the medium term.

However, the Bahamas IMF Mission chief suggested that this country could eventually even go beyond a Fiscal Responsibility Act through the implementation of so-called fiscal rules.

While the Act would force the Government to return to Parliament to explain, and gain approval for, exceeding previously set Budget limits with more spending, fiscal rules go even further. They set targets, or limits, such as debt and deficit caps, and accompanying ratios, which the Government cannot go beyond.

I would say there are ways to design fiscal rules that allow the Government to take into account natural disasters and events not anticipated, Mr Turunen told Tribune Business.

The Christie administration has failed to deliver on February 2015 promises to initiate consultation on a Fiscal Responsibility Act, and the 75 per cent year-over-year increase in the deficit for the four months to end-October 2016 has reignited domestic demands for such legislation.

The $67 million increase took the Governments $157.5 million deficit for the four months to end-October 2016, more than 50 per cent higher than its full-year projection.

Mr Turunen, meanwhile, also agreed with Simon Wilson, the Ministry of Finances financial secretary, that the Bahamas needed to reform its Business License regime and find more equitable ways to tax the private sector.

Mr Wilson told a Chamber of Commerce-organised seminar last week that Business License fee rates needed to be lowered, acknowledging that the turnover-based tax was inefficient and regressive because it did not take into account company profitability.

I think that in terms of the general principle, I would agree with what Simon said, Mr Turunen told Tribune Business.

There are better ways of taxing businesses and profits than the current Business License fee. We dont have a position out there in terms of an alternative, but its something we would look at.

Bahamian businesses have complained about the Business License fees structure for years, arguing that using turnover as the basis for its calculation disproportionately places the burden on high sales companies, such as food stores and gas stations, which have low profit margins.

Many companies complain of paying more in Business License fees than they earn in annual profits, with the turnover basis also exacerbating the effects of price controls for many firms.

Mr Turunen had earlier told the Chambers State of the Economy 2017 forum that the IMF had flagged declining foreign direct investment (FDI) inflows as a risk in relation to the Bahamas current account deficits.

Due to this nation importing most of what it consumes, the Bahamas traditionally runs current account deficits - the physical goods it exports minus those it consumes - worth several billion dollars annually.

These, though, are financed by billion dollar inflows on its capital account, which represent tourist spending in the Bahamas and, historically, FDI inflows.

Mr Turunen, though, said a reduction in FDI inflows meant the current account deficit was now being financed by alternative capital sources that were less reliable.

One trend weve seen is the decline in foreign direct investment inflows, he said. That used to be a big part of financing current account deficits, and now its much less so.

This source of financing has been replaced by government borrowing to some extent, and other capital flows.. Some of those flows are less reliable, and weve identified it as a risk, and identified it as a risk in our reports.

Mr Turunen added that the IMF had been a bit surprised by the extent of the Department of Statistics revisions to the 2014 and 2015 GDP numbers, which showed that the Bahamian economy contracted by 0.52 per cent and 1.66 per cent, respectively, for those two years.

We were a bit surprised. We had anticipated a downward revision, but not by such a margin, Mr Turunen said, adding that the IMF often wanted governments to move more quickly on reform.

We are often in agreement on the direction. Sometimes we are impatient. Wed like to see the authorities moving faster, including in areas of structural reform, but these things are difficult to achieve, he explained.

Mr Turunen told Tribune Business that it was possible for the Bahamas to achieve faster GDP growth rates at the same time as fiscal consolidation, again calling for the Government to re-purpose more of its spending to capital and infrastructure projects.

The Christie administration has done the opposite, reducing its capital spending in favour of mobilising private capital via public-private partnerships (PPPs), such as those for the Road Traffic Department and Post Office buildings.

Reiterating that it was time for the Government to rationalise spending to achieve further consolidation, Mr Turunen said reforms to the various components of the Bahamas ease of doing would take time to bear fruit in terms of better economic growth.

I would say that the Bahamas should have a bright future, he told Tribune Business. There are challenges; low growth, the need for fiscal consolidation, and the impact from the hurricane, but to some extent the country is managing with these challenges perhaps better than some of the neighbouring countries.

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Imf Bahamas Chief Supports Fiscal Limits - Bahamas Tribune