AMID all the headline-catching stories that hammer us every day – never-ending power outages, BAMSI, mis-statements,Rubis contamination, Minister Gray in court proceedings, Carnival profitability(?), intra-party wrangling – we overlook long-term trends that may quietly nibble away at our economy and the welfare of our citizens, particularly the less affluent ones.
Monetary policy – control of money supply and interest rates – and fiscal policy, decisions about taxation and government budgets, are tedious, abstract subjects that rarely command our attention. But they have real-world consequences.
Consider a typical Bahamian employee dependent on a salary or hourly wage. If there’s any extra cash at month’s end, it goes straight into the bank. Until four or five years ago, that paid interest up to 5 per cent, enough to beat inflation, buy a few extras, give to the church and build up a little nest-egg. Not today. According to the Central Bank’s annual report, in 2014 the average yield on all types of deposits was 1.46 per cent, with demand deposits as low as 0.29 per cent and savings deposits at 0.89 per cent. Truly, it is insanity to keep more than a month’s cash needs in a bank.
Meanwhile, bank lending rates for loans have barely dropped. The same employee looking for a mortgage loan will have to pay interest at 7.5 to 8.0 per cent, an the average consumer loan rate was 13.9 per cent in late 2014. In other words, Bahamian monetary policy has squeezed to rock-bottom the amount banks pay their depositors, while hardly reducing the amount they collect from their borrowers. The natural result is a nice interest rate ‘spread’ for banks, which they claim is needed to compensate for defaulted loans.
Very likely, but those were loans that banks made – with open eyes – and often pressed the debtor to accept.
Bahamian banks hold about $6 billion in deposits. At the average rate of 1.46 per cent, they yield about $90 million to depositors. In normal times, the rate would be about 5 per cent, yielding $300 million. In other words, there’s a reduction of over $200 million in ready cash, much of which would have been spent for goods and services and add to growth.
At this very point of historically low yields, government steps in with a fiscal policy to impose Value Added Tax (VAT) taking a probable $300 million annually, plus maybe $50 million in new Business License Fees. Adding the reduced interest to the new taxes, we see over $500 million being sucked out of the private sector economy. Is it any surprise that we are still suffering a recession?
In any country, the best index for judging a recession is the unemployment rate. In the Bahamas, the Central Bank reports that in late 2014 the rate reached a high of 15.7 per cent, which even Progressive Liberal Party (PLP) politicians find unacceptable. Given the unreliability of workforce statistics, the true rate is doubtless higher, particularly for young job-seekers. By contrast , in the US, the Federal Reserve loose-money policy has gradually reduced unemployment to 5.5 per cent today, about the lowest sustainable in a healthy economy.
Why the difference? US deposit rates are event lower than here, but the Fed has built into its charter the objective to maintain ‘full employment’, while our Central Bank has no such directive. The Fed has stimulated the economy by buying billions of dollars of government bonds and driving lending rates down.
This policy is vigorously disputed by ‘hard-money’ economists and financial pundits as leading to eventual collapse of investment values and runaway inflation. Maybe so, but to date the Fed Chairs Ben Bernanke and Janet Yellen can take credit for higher employment and minimal inflation, now near zero.
Of course they were helped by the Treasury’s taxation policy: For over 10 years there have been no major increases in US taxation levels, while here, 7.5 per cent VAT and a near-tripled Business License Fee were abruptly imposed just as deposit interest rates fell to near zero – a double whammy for Bahamians.
Government will always argue that tax receipts are not removed from the economy but just transferred from the private sector to the public sector, where presumably they will be wisely spent. Bahamians are rightly suspicious of that argument. They see no evidence that VAT funds are being used for the original stated purpose of reducing public debt, which at the end of 2014 reached the all time high of 73 per cent of Gross Domestic Product (GDP).(NB: The recent Budget message suggests a welcome Government decision to apply tax receipts to paying down debt.) Since government never reduces public employment they fear a continuing regime of bloated payrolls and make-work jobs for loyal voters.
Accepting that VAT is here to stay (and maybe increased), and that deposit rates will remain low, all is not lost. There are still many steps available to government to reduce unemployment and increase the GDP growth rate above the anemic 1 per cent recorded in 2014.
First, state ownership of losing ventures like Bahamasair and the Broadcasting Corporation Corporation should be dropped. We have plenty of well-trained Bahamian executives, engineers, pilots, broadcasters and technicians, capable and eager to replace these public companies. The elimination of the perennial subsidies would free up funds for education investment in our most valuable asset – our youth.
Second, government could strengthen our capital markets. The Bahamas International Securities Exchange (BISX) is a key mechanism for wealth creation that seems virtually ignored by our politicians. The more local companies that are listed on BISX, the more choices investors will have, and share ownership among the public would soon rise. There is no better way for the country to approach a higher level of corporate democracy and shared wealth.
Government could encourage our many strong private, family-owned companies to ‘go public’ by giving them a tax break: Exemption from Business License fees for several years. Any loss of licence receipts would be compensated by higher listing and trading fees earned by BISX, in which government holds a significant stake. Wider ownership of tradable securities provides the best escape from the near-zero return on bank deposits.
Third, it is time for government to end its years-long procrastination about eastern Bay Street, which was (rightly) abandoned by commercial shipping but has become a commercial dead zone, shunned by tourists and locals alike. The Prime Minister has emoted frequently on this subject, followed by zero action. He should announce clearly the plans for the oft-promised harbour-front boardwalk, which allegedly the Chinese are willing to build, and he should approve or give clear guidelines to the plans of private owners for self-financed projects, plans that appear to be cemented firmly into bureaucrats’ desks.
Economic growth cannot take off without a buoyant capital city.
Finally, Government should abandon the network of consumer price controls that restrict open-market prices. We are the only Caribbean country that puts a limit on dealers’ prices for automobiles, big-ticket items with wide choices that create no need for consumer protection. Prices for basic food items are limited on the theory that the ‘little man’ buyer could be gouged by huge supermarkets, whereas many studies have shown that price controls reduce the very competition that is the prime weapon enforcing fair prices.
Food price controls make it impossible for our supermarkets to take advantage of brief bargain deals offered by their foreign suppliers. The only ‘addition’ to our economy is the wages of a flock of inspectors who could be better employed in the private sector.
The doubtful near-term future of Baha Mar and its contribution to GDP makes it imperative that government fully opens the gates to local private enterprise, the only sure generator of economic recovery. But the omens are not encouraging.
National Health Insurance is being handled strictly as a government initiative – the Bahamas Insurance Association has stated its concern "that the currently proposed NHI plans leave no room for private health insurers". What happened to Mr. Christie’s vaunted ‘public-private partnership’?
Only if that principle is firmly grasped, by both parties, can we have grounds to be optimistic about finding a way out of our present difficulties.
Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant. He has recently released his autobiography, A Corkscrew Life: Adventures of a Travelling Financier.
First published in The Tribune Business, and posted here with the kind permission of the author.
The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.