As published on tribune242.com, Wednesday 6 May, 2020.
The Bahamas will be in an International Monetary Fund (IMF) adjustment programme by 2021 due to a "balance of payments crisis", a noted Caribbean economist predicted yesterday.
Marla Dukharan, formerly Royal Bank of Canada's (RBC) top regional economics expert, told a webinar with Cayman Islands financial analysts that "the collapse of foreign exchange inflows" due to the tourism shutdown will leave The Bahamas with no choice but to seek the IMF's financial aid.
Now running her own economics consultancy, Ms Dukharan said the COVID-19 pandemic will set The Bahamas' back seven years - returning it to 2013 economic output (gross domestic product or GDP) levels if the fund's projection of an 8.3 percent contraction in 2020 comes true.
Warning that the true outcome this year will likely be worse than the IMF's forecast, given that assessments of COVID-19's impact are changing on an almost daily basis, she branded The Bahamas as "one of the most vulnerable countries" due to its overwhelming dependence on tourism.
"The Inter-American Development Bank estimated that The Bahamas could lose $900m in foreign reserves this year," Ms Dukharan said. "As a result, even though they have seven months' of import cover, based on what we saw earlier in terms of the relative dependence of The Bahamas on tourism, and particularly cruise tourism - about 75 percent of their tourism is based on cruises - I would imagine that their foreign exchange inflows are going to collapse or have collapsed already.
"This is why the government is implementing tougher restrictions on foreign currency outflows. I believe there's going to be a balance of payments crisis from what it looks like right now in The Bahamas by next year, and therefore an IMF programme."
The words "IMF programme" will likely fill many Bahamians with dread, as will Ms Dukharan's 2021 prediction. In return for receiving any financial bail-out, The Bahamas would likely have to accept strict austerity measures and a restructuring of its economy that could result in the downsizing of the public service and other conditions that could negatively affect employment, incomes and businesses.
An IMF "programme" would effectively result in The Bahamas' losing control over how its own economy is governed. However, Ms Dukharan yesterday argued that IMF "structural adjustment" initiatives have often been "demonised" by Caribbean countries, and are not the "hell" they are sometimes made out to be.
She pointed to Jamaica's recent exit from a seven-year IMF initiative, spanning three different administrations, which is viewed as having reduced a debt burden greater than that country's GDP and positioned it for greater economic growth moving forward. The former RBC regional economist also said Barbados's programme with the IMF was showing promising signs.
While The Bahamas may not be there yet in terms of Ms Dukharan's 2021 forecast, her projections underscore the threat to the foreign exchange reserves that support this nation's ability to feed itself and procure other essential imports as well as undergird the one:one fixed exchange rate peg with the US dollar.
Devaluation is the great unspoken fear of many Bahamians and residents especially given that the tourism industry shutdown has deprived the country of its normal foreign currency inflows. Much depends on how quickly tourism resumes, and the extent of visitor volumes and inflows, with many predicting the sector will not fully rebound until the Thanksgiving/Christmas period at earliest.
Many believe that is an optimistic timeline, and The Bahamas' vulnerability was further highlighted yesterday when Norwegian Cruise Line (NCL) - one of the major companies bringing passengers to this nation - warned in regulatory filings that there is "substantial doubt" about its ability to continue as a "going concern" because it does not yet have sufficient liquidity to meet its obligations for the next year.
John Rolle, the Central Bank's governor, on Monday indicated that maintaining the foreign currency reserves at adequate levels to support The Bahamas' balance of payment needs and the fixed exchange rate regime is among his top priorities.
Underscoring how real the threat is, he unveiled a four-strong package of measures designed to create a $300m "buffer" for the external reserves by restricting foreign currency outflows as well as seeking to generate badly-needed inflows.
The Central Bank has suspended all approvals for Bahamians seeking to invest in foreign securities and real estate, and requested that the National Insurance Board (NIB) liquidate "some" of its overseas investments and return the proceeds back home, as part of a package intended to protect the country's monetary foundation from the COVID-19 fall-out.
These two initiatives join the bar on Canadian-owned bank dividend remittances. While the suspension of economic activity for the past six weeks due to the national lockdown has kept the country's foreign reserves at near-$2bn for the moment, Mr Rolle said the Central Bank is projecting a reduction "potentially exceeding $1bn" to leave them somewhere between $800m and $1bn at year-end.
Although this level will still offer "adequate support in place to uphold the value of the Bahamian dollar fixed exchange rate", Mr Rolle said he was prepared to act swiftly in imposing even harsher restrictions if the need arises by targeting "domestic import capacity".
Ms Dukharan, meanwhile, yesterday argued that The Bahamas' failure to address "structural weaknesses" in its economic make-up had resulted in an unemployment rate higher than 10 percent for the past decade while leaving it more exposed to COVID-19's ravages.
"Even before [Hurricane] Dorian, I don't think that The Bahamas had ever really gotten to the point where I would say its economy was really recovered and roaring after the global financial crisis," she said.
"The unemployment rate has been 10 percent since 2008. I feel there were structural weaknesses in the economy that, coming out of the global financial crisis, were not really dealt with. Dorian added to that and compounded these weaknesses, and now we have COVID-19.
Backing the Central Bank's decision to restrict foreign currency outflows as "a wise move", Ms Dukharan added: "I feel that they're [The Bahamas] one of the more vulnerable countries facing this crisis right now."
She noted that The Bahamas' credit had declined from 'A-' with a 'stable' outlook in December 2003 to 'BB' with a negative outlook currently, the latter of which she described as "non-investment grade". And The Bahamas' current debt-to-GDP ratio was higher than the 55 percent 'sweet spot' below which extra borrowing could boost economic growth.
Still, Ms Dukharan advised the likes of The Bahamas: "Now is the time for governments without fiscal space to borrow big, borrow hard, putting some of it aside if you have to. Focus on keeping people fed and maintaining the level of social stability. That is really the most critical because that kind of outweighs everything else you can do."
She also suggested the Minnis administration was on the right lines with its $120m "stimulus" package targeted at supporting small businesses, company payroll, and those who are unemployed or have lost significant income.
Calling on Caribbean governments to be more assertive in dealing with the cruise industry, Ms Dukharan added that the region also needed to tackle growing inequality - set to increase further with COVID-19 - by developing "progressive tax policies" based on a person's ability to pay and shifting away from regressive forms such as VAT.
Noting that hotels may be left with bad debt due to the inability of tour operators to pay 30-90 day receivables, she said the US dollar's strengthening against other global currencies is also undermining The Bahamas' competitiveness outside its main tourism source market.
And Ms Dukharan said the "most shocking part" of research relied upon by Moody's, which suggested that 67 percent of The Bahamas' population will be submerged if global temperatures rise by three degrees centigrade, is that this is "baked in".
She explained that regardless of whether the world cuts carbon emissions and other behaviours, this temperature rise is set to occur anyway, posing a significant threat to this country having a sustainable future.