IDB: Govt debt strategy calls for reduced lending

Mon, Nov 25th 2013, 11:25 AM

The Inter-American Development Bank (IDB) is pointing to the government's debt management strategy as the reason for a significant planned fall in the volume of financing the Washington, D.C.-based institution will make to The Bahamas over the next four years.
Meanwhile, the IDB has revealed that The Bahamas is estimated to need $1.2 billion in debt financing between 2013 and 2017, with around 50 percent of this set to come from domestic sources.
In its as-yet-unreleased Country Strategy for The Bahamas for the period 2013 to 2017, obtained by Guardian Business, the IDB lays out its plans to assist The Bahamas with challenges including decreasing labor productivity, high unemployment, increasing poverty and escalating crime and violence.
However, it notes that the government's debt management strategy "limits the size of the bank's financial support during the strategy period", indicating that the government is seeking to cut back on the volume of loan support it seeks from the IDB over the next four years as it chips away at its debt levels.
With this in mind, the bank anticipates providing an average of US$34 million a year in financing to The Bahamas between 2013 and 2017, as compared to an average of US$53 million annually under the current IDB country strategy, which was designed to run from 2010 to 2014.
While loans made under the upcoming strategy are projected to see The Bahamas' overall debt stock with the IDB increase from the 2012 level of $229 million to $284 million in 2017, it will fall as a percentage of overall external debt held by The Bahamas from 23.5 per cent to 20.7 percent over the same period.
Most of The Bahamas' borrowings from the IDB under the most recent country strategy, since 2010, have been for projects in the area of infrastructure (89 per cent). Trade-related project disbursements account for five percent of the portfolio, while education and social protection amount to four percent and two percent respectively.
While the previous Ingraham administration sought IDB assistance primarily with infrastructural projects, including energy, water and sanitation, transport and SME (small and medium-sized enterprises) development, the new strategy will see the bank issue loans and provide technical assistance designed to delve into potentially more vexing and complex challenges such as crime and violence, energy reform and climate change mitigation.
The bank will also focus on assisting the government with improving policy and planning processes to ensure more effective implementation of programs entered into.
Growth faltered
Laying out the context for its interventions, the IDB notes macroeconomic challenges faced by The Bahamas after economic growth "faltered" in 2008.
"The exogenous shock of sudden and prolonged economic downturn in its main trading partner, the United States, exposed structural weaknesses that inhibit the country's economic growth and compromise its resilience to such shocks.
"The country faces several macroeconomic risks in the medium term and the timely implementation of the policy reforms is key to maintain macroeconomic stability. The debt stock might reach unsustainable levels if the medium term fiscal consolidation plan is not implemented in a timely fashion. The bank is working closely with the government of the Bahamas and the IMF in supporting the implementation of the required reforms," states the IDB.
Per capita incomes in The Bahamas remain 8.2 per cent below 2007 levels, the IDB has noted, adding that reversing many of the challenges faced has been difficult given some of the "inherent characteristics of this archipelagic nation".
Outlining its plans to support the Bahamian government during the 2013 to 2017 period, the bank said it sees "structural obstacles to growth" which need to be addressed.
These include a tax system which is "opaque and introduces several distortions to economic activity", an "unreliable and expensive" energy supply, a skills mismatch in the labor market, crime's compromising of economic activity, the deficiency of certain public infrastructure and the fact that bureaucratic inefficiencies hinder economic diversification.
Strategic support
"The strategic intent of this country strategy is to support the government of The Bahamas' efforts to ensure macroeconomic sustainability, social stability and employment; and to increase resilience to the negative impacts of natural disasters and climate change. The bank intends to (i) support the implementation of fiscal and debt sustainability reforms in public sector finances and management; (ii) foster social cohesion, with an emphasis on preventing crime and violence and strengthening the criminal justice system; (iii) modernize the electricity subsector and diversify the energy matrix; (iv) facilitate diversification of both the economy and its trading partners by enhancing areas of comparative advantage and removing constraints to private sector activity; and (v) build resilience to natural disasters through improved coastal zone management, incorporating disaster risk reduction and climate change adaptation measures in development planning, control and monitoring."

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