Published: Friday March 12th, 2010

Speaking Notes Hon. Senator Michael Halkitis Senator of the Bahamas Mid-Year Budget Review

March 10th 2010

Several of the previous speakers on the FNM side raked the Progressive Liberal Party over the coals alleging that in terms of the economy:

• The PLP did next to nothing in the five years spanning 2002-2007 • The PLP enjoyed good economic times from 2002-2007 • The PLP would do a far worse job in managing the economy if they were in power today, hence we are lucky and blessed to have the FNM in power

The leader of Government business in moving the bill took us on a long stroll down memory lane detailing what he felt were the failures of the PLP in general and during the years 2002-2007 in particular.

I want to offer bring some balance to what was presented earlier.

In 2001, the last full year that the FNM was in power, the Bahamian economy grew by negative 0.3%. In other words, it shrunk! Of course this was the result of the events of 9/11 and an emerging recession in the US that had begun in early 2001.

This is what the IMF said in 2003 about the Bahamian economy:

Background

“The Bahamas, a small open economy that is highly dependent on tourism, has a long track record of prudent macroeconomic management and financial stability. In the second half of the 1990s, large foreign investment flows raised growth to 4-5 percent. Policies focused on fiscal consolidation (the deficit was virtually eliminated) and the strengthening of financial regulation and supervision to address risks of money laundering and fraud in the offshore financial sector.

Growth turned negative in 2001 and remained subdued in 2002 and early 2003 under the impact of the global economic slowdown and lingering terrorism-related security concerns. With the downturn, the central government deficit widened markedly, to 3.4 percent of GDP in FY 2001/02. The new government (elected in May 2002) aimed at a gradual reduction of the deficit while supporting the recovery through selective tax exemptions. However, the deficit is estimated to have remained at 3.4 percent of GDP, with public debt rising to 36 percent of GDP at end 2002. “

When the PLP came to office in May 2002, the Bahamian economy faced enormous challenges. The effects of 9/11, the recession in the US that was setting in, the run up to the Iraq war and all the uncertainty and anxiety related thereto had a further, negative on the economy.

The first order of business for the new PLP administration when Parliament met on May 22nd 2002 was to borrow $125million to settle outstanding bills of the Government of the Bahamas.

The next order of business was, not to complain and blame the FNM, but to put in place policies to grow the economy. No endless blame game, no long, tortuous, seemingly endless strolls down memory lane.

We could have spent the whole time talking, and agreeing with former governor of the Central Bank of The Bahamas, Mr. Julian Francis, about how after the ten best years in the history of the economy of United States, we in the Bahamas had made no provisions for a rainy day; but we knew that the Bahamian people had little time for that. They wanted results from their government.

So we got down to work and the results at the end of the term in office are there for all to see:

Economic Growth 2001: -0.3% 2006: +4.30% Unemployment 2002: 9.10% 2007: 7.6% GDP 2001: $5.7bil 2006: $7.28bil

Imagine if we did not have to deal with the global uncertainty related to the buildup to the Iraq war and two hurricanes that affected every single island in the Bahamas! Imagine how much better things would have been! Yet the FNM says we did nothing. Growth up, unemployment down, the size of the economy increased by over a billion dollars in five years and yet they repeat this ridiculous claim that the PLP did nothing in five years.

In the 2007 IMF Article IV consultation which was completed November 2007 and released in January 2008 said the following:

“The economic expansion that started in 2004 continued in 2006, as strong tourism-related construction and domestic demand offset a lackluster tourism sector. In 2006, real GDP grew by 3.4 percent, as construction on new resort and second-home projects increased sharply. Domestic demand was fueled by expanding bank credit to the private sector, which grew by over 14 percent a year in 2005 and 2006 (mainly in consumer loans and mortgages). These activities offset a decline in tourism arrivals (following strong growth in 2004 and 2005), due mainly to the recovery of competitors from hurricane damage. The unemployment rate fell by one-fourth to 7.6 percent, and estimates of the output gap suggest that the economy is operating close to capacity. Nevertheless, inflation remains subdued at around 2 percent (Figure 1).”

From a very challenging situation in 2002, to full employment and robust economic growth in 2007; many people had two and three jobs! When the IMF says that the economy is operating close to capacity, that means close to full employment.

Interestingly the report goes on:

“Following steady improvements in recent years, the fiscal accounts deteriorated in FY 2006/07 mainly due to one-off factors. Preliminary results for FY 2006/07 (ending June 30) indicate an increase in the overall deficit of the central government to 2.6 percent of GDP—1 percent of GDP over the budget target and the FY 2005/06 outturn. The deterioration was associated with higher-than-budgeted transfers to two public enterprises and extraordinary expenditures for the renovation of schools. “

While no new schools were built, there was extensive renovation of existing schools, the construction of hundreds of new classrooms and the establishment of preschool units in New Providence and the Family Islands. The Anatol Rodgers School and Heritage School in Grand Bahama were started under the PLP.

Those are the facts; easily verifiable. That same PLP administration that the FNM likes to portray as all things negative was able to achieve these things through a combination of hard work in attracting investment, discipline and incentives for Bahamian homeowners and business people. So says the IMF!

Were mistakes made? Yes. Could some things have been done better? Of course! Could some things have been done faster? No doubt. But to characterize the last administration and the people in it as shiftless and wasteful of good fortune is not fair.

We lose sight of the mission of government when we spend most of our time looking backward trying to discredit instead of looking forward at the job at hand and keeping in the forefront of our minds, the people whose lives are impacted by the decisions we make and actions we take. Indeed we do the country a disservice. In this I am in agreement with the former Minister of State for Immigration.

In the short time remaining in this administration, I hope we can move forward Madame President and resist the temptation to abuse and to tamper with the memories of our people.

Madame President these are very serious times in our country. Times that require plain talk or as the young people say; real talk. Sugar coating the situation helps no one; it only prevents us from understanding the depths of our challenges and from taking the action that is necessary to rescue our economy. Sugarcoating, downplaying the seriousness of the issues facing us only results in even more pain, distress and hard choices down the road.

In 1993 a movie called Groundhog Day starring the American actor Bill Murray appeared in theatres. In the movie the main character, a crotchety weather man, found himself living the same day over and over again. Each morning when he woke up, it was February 2. Try as he might he could not escape the cycle. After a personal transformation, particularly in the way he treated people, he was finally able to escape what became the nightmare cycle of living the same day over and over again.

This budget exercise seems like ground hog day. The same thing over and over again; the same words over and over again; the same formulas over and over again only with worse results; once again no real plan that the Bahamian people can plainly see and buy into.

As in all previous budget exercises, the problem is described in excruciating detail; inevitably the figures reveal that as a country we are spending way more than we make; we run deficits; we borrow money and we keep our fingers crossed that somehow, some day, hopefully soon, things will get better.

No hint of a plan to get us out of this vicious cycle; Groundhog Day.

Instead of a plan laid out in plain terms that every Bahamian can understand, we have liberal use of big, fancy words and high sounding phrases; economic theory right out of the textbooks.

Words, phrases and theoretical concepts that mean very little to the chronically unemployed construction worker, the underemployed hotel worker, the croupier who is working two days per week or to the senior citizen who can no longer afford to pay her health insurance premium.

These people care very little about “counter cyclical fiscal policy” or “efficient function-based structures” They want solutions, they want a plan, the want hope.

In studying the estimates in the 2009/2010 Midyear Budget Review presented to Parliament by the Minister of Finance, I have observed some highlights or maybe lowlights may be a better term:

Recurrent Revenue $634 mil Recurrent Expenditure $942 mil

When we subtract the two we get a deficit of $307 million; in six months a $307 million deficit.

In the Mid-year budget statement itself, there is mention of “one off” receipts of $84million. The report does not spell out what makes up the $84 million. In another place it was reported that the funds are related to South Riding Point and the receipt by the Government of a dividend; presumably from BTC.

If we did not have these “one-off receipts”, and we subtract the $84 million from the $634million first half revenue, we get first half revenue of $550million. When we subtract from that first half expenditure of $942million, we would be looking at a six month deficit of at least $390million; in six months.

“Prudent management of the economy” and “steady hands” are very strange phrases to attach to these results.

In the estimates themselves, we see the government of the Bahamas intervening to pay $30million in outstanding fuels bills for BEC. This is a serious development given the fact that BEC recently raised $212milion in financing. Can we expect the government of the Bahamas to intervene further to pay the obligations of BEC and other public corporations arising out of their day to day operations? Can BEC pay its debts?

We note that the debt/GDP ratio as reported by the Minister of Finance is 46% at December 2009. When we add the debt guaranteed by the government on behalf of the public corporations, we get a debt/GDP of 54%. Obviously if today the government is paying for fuel for BEC, tomorrow, the government may be called upon to pay the debts of BEC and any other public entity. In fact part of the reason that lenders ask for the government to guarantee the debt of public entities is the understanding that the government is ultimately responsible, should these public entities default. So it is quite proper to look at these debts when calculating debt/GDP.

If we add the government overdraft of $150 million or thereabouts, we are looking at a total debt/GDP ratio of 56%.

We have borrowed plenty money!

There is also a $10 million provision to the first interest payment on the $300million raised on the international bond market. This is very interesting because one would have thought that when we passed the budget in July, the government would have known that they were going to raise these funds, albeit in November, and that interest would be required. The provisions should have been made then. This is a shocking omission and one is left to wonder question whether there was a deliberate attempt to exclude the provision for the interest low so as to keep expenditure low during the budget to disguise an even larger deficit.

We see a $3.4million provision to ensure solvency of the Bahamas Development Bank. We hope this institution can weather the economic crisis. We note that since 2007, the managing director and most of the management has been fired. We wonder whether these people were made the scapegoats for a very difficult position.

In the midyear budget statement we are told that the worst is over and that skies are turning blue. We are told that revenue is stabilizing. Where is the evidence? Surely not in the figures presented here. Revenue for each year is lower than the year before.

Issues Important to Bahamians.

Bahamians are less concerned about verbal skirmishes and more concerned about:

Unemployment

The last statistics showed unemployment at 14.2% which we know and the minister of state for finance has acknowledged publicly on many occasions, is grossly understated, as it does not account for those many thousands of Bahamians who have become discouraged, lost hope and have given up looking for work. Among the young people the unemployment rate is over 25%.

Hotel workers are on reduced shift. Women are particularly hard hit. Hotel workers I have spoken to believe that some in management are taking advantage of the economic climate and turmoil in the union, where there is a union, to reduce the work week and terminate workers. We need strategies to create good, permanent jobs for Bahamians and I see none in this midyear budget review.

Crime

The fear of crime continues to cripple our nation. People are not safe in their homes. The minister of national security was recently boasting about the increases in this budget of approximately $6million for the police. Of that $6million, $2.8million was for the purchase of equipment and $3.2million was for recurring expenses.

I took a look at the amounts allocated to the RBPF for capital expenditure, the account used to purchase equipment; I found the following:

2007/2008 $11.2million 2008/2009 $4.96million -$6.5mil reduction 2009/2010 $1.06million -$3.9mil reduction

The total amounts allocated to the police over the last three years are as follows:

2007/2008 $128.692million 2008/2009 $126.893million 2009/2010 $119.9876million

Steady cuts every year, yet the minister is bragging on an increase now of $6million! Bahamians have a right to wonder how these cuts in the allocation to the police have affected their ability to fight crime over the past two years. Have the police been hamstrung in their fight against crime by the government withholding the funds necessary for them to properly do their jobs?

This is scandalous! How is it that in the middle of a crime wave when murder, rape, robbery and home invasions are on the increase, the FNM is cutting the funds allocated to the police?

The Bahamian people deserve an explanation.

Health Insurance Premiums

Many Bahamians are facing tremendous hardship as a result of high health insurance premiums. I recently spoke to a lady whose premium rose from $137 to $468 per month. Just like that. She got a notice in the mail and that was that. Meanwhile members of Parliament and Senators get free medical coverage, paid for by these very same people, the tax payers, who now have to make the decision whether they should let their own health coverage lapse.

People have to decide whether to maintain their coverage, yet through their taxes, they pay for the coverage of members of Parliament and Senators. We can save some money by making members pay for their own coverage until such time as national health insurance is available for all Bahamians!

Clico

It has been over a year since Clico went into liquidation. When will the policy holders be given answers? People remain without health coverage today and they do not know what to do. The people deserve better than they are getting in this matter.

These are matters that require urgent attention from the government, not repeated attempts at revising history or election gimmicks.

On the topic of action the government intends to take to improve the economy; reading the Statement I found something interesting. We know that to the extent businesses can thrive, the economy benefits particularly in the area of job creation. Under the heading:

IMPROVING THE BUSINESS ENVIRONMENT

Streamlining the Business License Act

We find the following statement:

“We are taking a number of steps to strengthen the Bahamian business environment. Specifically, proposed amendments to the Business Licence Act will soon be introduced to simplify the legal and regulatory requirements to operate a business. The amendments will eliminate the need for separate applications for shop, liquor, music and dancing and other occasional licenses. We also propose to simplify the fee structure for Business Licence.”

More bars!! They will make it easier to open even more bars! That is the extent of the plan to improve the business environment! More bars!

Madame President I have consistently called for concrete evidence of the creation of permanent jobs for Bahamians as a result of the “stimulus package”. We have had a lot of figures thrown out. I was very pleased to see a reference made in the midyear statement committing the government to quantify the effects of its stimulus efforts in the future. Specifically it speaks about a commitment to:

“Modernizing the institutional framework for monitoring and evaluating performance of public investment projects;”

I hope that we can see this come to fruition so that we can make the decisions to spend public funds having the advantage of an economic (and social) impact study. This I believe would be a step forward.

Business people are complaining about the lack of return on the investment in the harbour dredging project. The government says things are going great! Who is right? An economic impact assessment done before funds are spent; and a follow up study after the projects are completed would be very beneficial, in my opinion.

Furthermore, how is the economy stimulated when the hundreds of millions of dollars borrowed have gone to foreign contractors; as has been done with the NRIP? Where is the knowledge transfer? Where is the empowerment of Bahamians?

Heavy equipment owned by Bahamians is parked up and rottening down while they watch others come in here and take advantage of opportunities in the Bahamas. Opportunities that should go to Bahamians! Eighteen road corridors in the NPRIP and not one given to a Bahamian contractor! Not one! Bahamians can build the Milo Butler extension, they can build Baillou Hill Road from the round-a-bout at AF Adderley School to Robinson Road, but they cannot build from Robinson Road north?

While the foreign contractors get the big, big jobs; the big, big jobs that give them the opportunity to grow their businesses and generate even more wealth; Bahamians have to be satisfied with a temporary job, a little contract here and there to push up a couple lots or the clean the side of the road. But, we are told the Bahamians should be glad they get even that!

A billion borrowed and Bahamians should be satisfied with the crumbs.

What we need to do in order to emerge from this crisis in a better position:

• Better expenditure management, value for money spent, strict accountability I note in the mid year statement a commitment to:

“Upgrading the legal framework for government procurement, with transparent guidelines for the procurement and contracting process”

I hope this means that we will enact legislation for a Contractor General. An independent officer who will be responsible for overseeing contracts entered into by the Government and ensuring that contracts are awarded based on merit, the highest standards are observed and that the Bahamian people receive value for money. It is high time that we come into the twentieth century. The contractor general should be appointed by and report to Parliament. Maybe then we can truly have transparency in the contract award process.

The scandals at the DEHS and the Mortgage Corp. are ample evidence that we need an independent body to review the issuance and fulfillment of government contracts.

• Strict accountability for government revenue, all must pay their share.

• Relaxing of credit to businesses and individuals to spur economic growth

The midyear report went into great detail about the contraction of credit and the banks tightening up their lending policies. This is not good for the economy. I call on the government to sit down with the financial institutions to figure out a way to get money flowing in this economy.

• Ensure that the stimulus funds go toward creating jobs and empowerment opportunities for Bahamians.-this is fundamental!

We must invest in our people. The view of the government is that in light of the crisis we invest millions in roads but we cancel, the student loan programme; with just days notice to the hundreds of young people who had pinned their hopes of higher education on that loan programme!

There is a danger to oversimplifying our economic condition and painting an overly rosy picture. We saw this in the very first Midyear budget review when, responding to concerns expressed by the PLP and Standard & Poor’s that the economy was in danger of slowing and that the government should take note, this is what the Prime Minister said:

Domestic Economic Developments “I should also mention in this context the Standard & Poor’s report on the Bahamian economy. That report noted the downturn in tourism arrivals in the first 9months of 2007, bearing in mind that tourism contributes 60% of GDP, suggested a shrinking in the construction sector which accounts for 10% of GDP, and also suggested that the financial services sector, which accounts for 20% of GDP, could be adversely affected by the global crisis in the financial markets.

While, we note with concern the views of Standard &Poor’s, framed as they are in the general context of a US and global downturn which is not yet certain, we are not yet persuaded to downgrade the growth rate, in view of the fact that it was not a particularly dynamic rate in the first instance. As regards the individual sectors, we believe that tourism performance is below expectation, and we are going to address this issue decisively by allocating additional funds for tourism promotion. However, we also believe that the construction sector will perform more strongly than the report suggests.

My Government has chosen to take a balanced view of the likely growth prospects of the Bahamian economy in 2008. The current outlook for strong capital inflows into productive projects already underway may not be seriously affected by global or U.S. developments in 2008 and 2009.

This could give rise to what we consider would be a certain element of ‘decoupling’ between the performance of the US and Bahamian economies in 2008. By this I mean that while normally the health of our tourism sector, and therefore our economy, is heavily connected to prevailing conditions in North America, in 2008 matters might be a little different. This is because even if there is a more severe recession in the US in 2008, the capital inflows and the momentum of some of the major investment projects in The Bahamas will partially compensate.”

Hubert Ingraham – Midterm budget review 2007/2008

We know how that “decoupling” turned out. We have heard the overly optimistic forecasts before. So this talk of blue skies really means little in the absence of solid evidence. I urge the government to be realistic and not try to sell Bahamians a bill of goods.

Now we hear this phrase creeping into the local discussion: The New Normal. I spoke about this in here before. It speaks to spending patterns, the robustness of future economic expansions and people’s attitudes toward money after the crisis. Generally it is believed that we will experience slower growth, lower levels of employment and lower levels of employment than those that existed before the crisis. What are the implications for our tourism economy? How will we adapt? How do we equip ourselves for the future?

This is no time to be politically correct, to try and sell a bill of goods, to paint a rosy picture that is not supported by evidence.

This is time for real talk about where we are and where we need to be. Followed closely by decisive action to ensure that we in the Bahamas are equipped to survive and thrive in the twenty first century and that we emerge form this economic crisis better equipped to face the challenges of the twenty first century.