If corrective action is not taken, the fiscal deficit would widen to $180 million – or 3.4 percent of GDP – in fiscal year 2003-2004 and external reserves are expected to decline to $370 million at the end of this calendar year, according to a team of International Monetary Fund officials who recently visited The Bahamas to assess the country’s economic health.
The IMF applauded the government’s fiscal policies, welcoming the efforts of authorities to cut back on spending.
“Thanks to the modest recovery and the corrective steps taken by the authorities – including a 5 percent cut in current spending and measures to strengthen tax administration – the government deficit is projected to narrow in FY 02/03 to $140 million,” the IMF report said.
But it said that a combination of cyclical and structural effects including the tepid global recovery, the lull in foreign investment, and an upward drift in wages and transfer spending could lead to the further widening of the fiscal deficit.
The increase in the deficit would raise the stock of government debt to 40 percent of GDP by the end of 2004, the preliminary report said.
Pointing to recent developments, the IMF team said following solid growth in 1995 through 2000, the economy entered into recession, mostly reflecting the adverse impact on tourism and investment of the global economic slowdown and the terrorist attacks of September 2001.
With the downturn, the fiscal deficit widened to $170 million. As a result, government debt rose to the equivalent of 36 percent of GDP at the end of 2002, reflecting increases in central bank financing and in foreign currency borrowing.
The team also welcomed efforts by authorities to raise awareness among labour unions and the public at large of the need for wage restraint.
“In view of the large prevailing level of tax evasion, the first objective should be to raise the degree of compliance with existing taxes,” the team also concluded.
Government officials have long pointed to the need for tightening of tax collection measures to improve the country’s overall fiscal position. It also recommended that a combination of additional small-scale measures could be introduced to raise tax revenues.
The IMF said it would favour measures with the least distortionary effects, such as the strengthening of property taxation through the reassessment of property values, increases in specific excise taxes, including taxes on gasoline, and rises in certain licensing fees while also simplifying their overall structure.
It pointed out that the reliance on the present complex system of customs and tourism duties increases the vulnerability of tax revenue to cyclical fluctuations as well as the avenues for tax evasion. The team recommended shifting to a broad-based value-added tax or sales tax.
It recognized, however, that tax reform is a challenging objective that will require time, resources and political commitment.
The IMF said that the main priority of the government should be to consolidate the fiscal position to protect international reserves and avoid an excessive build up of debt. It also said that measures could be introduced to trim current spending and transfers to public corporations.
The government continues to be saddled with what Prime Minister Perry Christie on Sunday termed “cash hog” corporations that are too reliant on public revenue for survival.
To this end, privatisation has become the watchword with the Bahamas Telecommunications Company inching closer to 49 percent ownership by a strategic partner.
The government has also indicated that it intends to eventually privatise Bahamasair and the Bahamas Electricity Corporation.
The IMF also praised the authorities’ progress toward the privatisation of BTC and encouraged them to prepare for further sales of public-owned companies to the private sector.
There may also be scope for granting concessions to private operators in critical areas such as airports and ports, with a view of alleviating the demands on scarce public funds, the report said.
The team also encouraged authorities to continue with their process of integration to multilateral and regional trade arrangements.
By Candia Dames, The Bahama Journal
