NASSAU, BAHAMAS — While the Fiscal Responsibility Act (FRA) represents a “major step” towards strengthening this nation’s fiscal framework, it could benefit from some improvements, an Inter-American Development Bank (IDB) study has found.
Commenting on the country’s FRA in a book entitled “Economic Institutions for a Resilient Caribbean”, Teresa Ter-Minassian, a senior IDB consultant, noted: “The FRA undoubtedly represents a major step in strengthening the fiscal framework in The Bahamas.
“It has many features that accord with the lessons from theory and international experience.”
It was noted that the FRA sets a long-term ceiling of 50 percent of GDP for the debt but leaves it to the government to specify the year when it would be achieved.
In its 2018 Fiscal Strategy Report (FSR), the government indicated that fiscal year 2024/2025 is the target year stabilizing debt at around 50 percent of GDP.
Ter-Minassian noted: “As regards the 50 percent of GDP debt ceiling, it must be recognized that the adverse impact of COVID-19 on the public finances makes its attainment in the next few years very difficult.”
She added: “Several reasons argue for not changing the debt target, in particular The Bahamas ’ exposure to significant risks, including weather-related natural disasters, which have occurred with relatively high and increasing frequency in recent years; increases in international prices of key commodity imports; needs to support SOEs in financial difficulties; and the longer-term costs associated with a fairly rapid aging of the population.
“There is, however, a clear case for significantly lengthening the period of convergence to the ceiling.
“Decisions about the specific timing and path of convergence should probably be postponed to later in 2021, when hopefully the course of the pandemic will become clearer not only in The Bahamas but also in the countries from which most of its tourism originates.”
It was further noted that there appears to be a clear need to strengthen the analysis of fiscal risks.
“The FRA provides substantial flexibility to the government in its fiscal conduct, in addition to the 0.5 percent of GDP annual compliance margin,” noted Ter-Minassian.
“The escape clause does not include quantitative thresholds (in terms of the severity of economic downturns or natural disasters) for its activation by the government.
“Moreover, the FRA does not set any specific guidelines on the time profile of the correction program to be presented by the government to Parliament following the use of the escape clause or other deviations from the numerical rules.
“This latitude is not in line with best international practices. While it may be justified in the current initial phase of adoption of the rules, it would be desirable to set more specific requirements for the activation of the escape clause and for the correction of deviations from the rules, at the latest during the first review of the FRA.”
