Fiscal Performance in the First Half of 2016/2017

Mr. Speaker,

Fiscal performance during the first half 2016/2017 was adversely influenced by Hurricane Matthew which impacted the Northern Bahamas. The shock was felt equally on the revenue and expenditure sides of the Budget, through marked reductions in revenue, due to the disruption of normal business
activity and increases in expenditure as the Government accelerated its spending to assist with the recovery efforts.

The net direct impact to the Government would be over $300 million or roughly 50% of the estimated cost of Hurricane Matthew. The post Matthew hurricane related financing provided only partial funding for the relief and recovery efforts of the Government.

As at January 31st, the Government has spent $35 million on direct hurricane related expenses. Of that amount, $21 million was disbursed for recovery expenses, which included clean-up and relief costs. Another $9.67 million has been spent on reconstruction efforts with respect to schools and other
public buildings, and $4 million has been outlaid for the home reconstruction programme.

At the same date, 5,083 loans, totalling $31 million, would have been disbursed to employees in the public and quasi-public sector. These loans have lessened the burden on the state with respect to the recovery effort.

Mr. Speaker,

The Government also made some large financial investments in the 1st half of the fiscal year, including the capitalization of Holdco, the entity which has the majority share in Newco, the 2nd cellular operator in The Bahamas, as well as the capitalization of the Bank of The Bahamas, through participation in a rights offering. In the presentation of the fiscal accounts for international financial
reporting purposes, these transactions appear below the line and are not considered recurrent or capital expenditure. That is because such investments also represent an increase in the Government’s assets and, therefore, do not lead to higher Government Debt levels. However, because of the significant amounts involved, we have put them in footnotes to our fiscal summary.

Revenue performance in the period July to December 2016 suffered because of the negative impact of Hurricane Matthew on economic activity. After three strong months of revenue performance over the July to September period, recurrent receipts fell precipitously in the months of October and November. Although the recovery in revenue evident for the month of December strengthened, with receipts for January and February running broadly in line with projection, we are still unlikely to achieve our recurrent revenue target for the 2016/2017 fiscal year. However, we believe that the gap between actual and projected revenues will be considerably narrowed by the end of the fiscal year.

My optimism is based on the initial outcome of a strategic revenue enhancement project undertaken by the Ministry of Finance, with the ultimate objective of reducing revenue leakage and underpinning our fiscal sustainability objective.

These strengthened tax compliance initiatives have included targeted container inspections, an enhanced programme of VAT and business licence audits and persistent follow-though on real property tax invoices. The initial results of the project have been very promising, since its launch in November of last year. So far, the project has yielded $31 million directly and $62 million in
total revenue impact, with the largest intake coming from the deterrent effect on customs-related transactions.

I fully believe that the best results of the project are yet to come, with business licence payments due by March 31st and the first quarterly VAT filings for the calendar year due on April 21st of this year. Even with the tremendous negative impact of the storm, year-to-date revenue is now ahead of last year, for a $62 million improvement since December. So it stands to reason that, if this trend continues, total projected revenue would be equivalent to the previous years’ intake. This would be a remarkable achievement.

Mr. Speaker,

Much has been said about the negative rate of economic growth over the last three calendar years and, rightly so, as the official growth levels in The Bahamas lagged its peers in the region. In this respect, I can advise that the Department of Statistics has embarked on an exercise to update its methodology
and incorporate new data sources and a Supply and Use Table. While these initiatives would delay the publication of the National Accounts until June, they will result in a new current and constant price series for the Gross Domestic and National Products and allow The Bahamas to continue to produce technically accurate and comprehensive national accounts statistics.

Appended to this statement is detailed data on the fiscal performance in the first half of FY2016/17 compared to both the Budget projection and performance in the 1st half of FY2015/16.

As depicted in the data, Recurrent Revenue in the first half of 2016/17 amounted to some $856 million, fully $142 million below the Budget projection for that period. The main components of this decline were as follows:

Customs Duties -$30M
Excise Duties -$32M
Property Tax -$47M
VAT -$27M
Business License Fees -$11M

Stamp taxes were up from forecast by $5 million, largely reflecting higher remittances from banks on realty transactions on over $250,000 mortgages.

Mr. Speaker,

Again, it is important to note that, since this time, we have experienced a significant recovery in revenue yield in the first two and a half months of this year. Indeed, revenue collections for both January and February exceeded the previous years’ level, by some $25 million and $26 million, or 17% and 18%, respectively.

Recurrent Expenditure in the first half of 2016/17 amounted to $1,242 million, representing roughly 54 per cent of the full fiscal year forecast. In comparison, Recurrent Expenditure during the 1st half of 2015/16, at $1,084 million, approximating just over 50 per cent of the full year forecast.

Capital Expenditure over the July-December 2016 period amounted to $135 million, up $44 million from the level recorded in the first half of 2015/16. This year’s total also constitutes 56 per cent of the full year projection.

Consequent on these developments, the GFS Deficit in the 1st half of 2016/17 was $275 million, as compared to $157 million in the corresponding period of 2015/16.

Mr. Speaker,

This GFS deficit exceeds the annual target and this is solely because of the impact of Hurricane Matthew. In total the Ministry of Finance now projecting a deficit of $350 million which is $40 million dollars more than the last fiscal period. This is primarily due to $300 million fiscal impact of Hurricane Matthew of which $200 million is revenue foregone.

Conclusion

Mr. Speaker,

In conclusion, Hurricane Matthew has been a major disrupter of the Government’s fiscal plans, with the increase in the first half year deficit above target being more an aberration than a deliberate deviation from the previously announced budgetary objectives. The intensified efforts on enhancing revenue administration are paying important dividends and, with the pending opening of Baha Mar, confidence in the Bahamian economy is perhaps at the highest level
in years.

I firmly believe that the fiscal consolidation plans laid out by my Government, five years ago, will contribute to a more durable and sustainable economic growth path, in the months ahead, for the benefit of our country and all Bahamians.

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