How bad is it? How long will it last?

By G.A. Dwyer Astaphan

“…the primary surplus (which is what is left back to pay interest from the excess of current revenue over current expenditure) is projected to decline to 2 .5 % of GDP in 2009, largely due to an expected drop in revenue without concomitant cuts in expenditure, and the debt (to GDP) ratio is expected to trend up again” above…175% ….”

And with interest payments comprising 24% of the Government’s revenues, there is “no space for fiscal policy to respond to shocks”.

Over the years, Government has run up a debt of almost twice the GDP. This debt has to be repaid, both principal and interest. And in order to pay it, Government has to raise cash.

This is where the primary surplus comes in. It tells us how much cash is available to Government to pay its debts.

Now, (barring any grants or debt forgiveness) the primary surplus of 2 .5% of GDP in 2009 is all of the cash that Government has to pay towards this massive debt. So if nothing changed, and if no further interest was charged on the Government debt, it could take the Government 70 years (70 x 2.5 = 175%) to pay off the debt.

But we know that interest is in fact charged. If it is calculated at, say, 5% per annum (I am being generous), it means that a primary surplus of 8.75% (5% of 175%) of GDP would be required just to pay just interest. But, as the IMF says, the primary surplus for 2009 would be only 2.5%, while interest owed stands at 24% of GDP. That is a big gap.

Suppose you owe $500,000.00 plus interest of 5% per annum. Your interest payments alone will add up to $25,000.00 per annum. But you only have 2.5% of the $500,000.00, which is $10,000.00 (your  primary surplus), left over from your salary after having paid for food, medical bills, insurance, school fees, car expenses, etc.).You are $15,000.00 short in your interest payment obligation, and you are in trouble.

You therefore have to urgently increase your revenue and/or to reduce your expenditure. Otherwise, the debt will spiral out of control. Maybe it already has.

And that is why the IMF has been pressing the Government to take certain steps, including the development of “a full-fledged contingency and crisis preparedness plan”.

That is very strong language coming from the IMF. Our situation is extremely serious

Clearly, our GDP growth over the years has not been accompanied by the appropriate tax revenues that normally go along with that growth, and our failure to generate revenues concomitant with that growth has put us in hot water.

It is all very troubling. And as we rush to VAT, we must ensure that the people of this country are made fully aware of where we are and what got us here. No spin, no ‘bull’, no deceit, no sugar coating. After all, while they may not have knowingly put themselves in this debt, it is they who will have to repay it, now and for some time to come.

To further emphasize its concern, the IMF said:

“… should the global slowdown be prolonged, the adverse impact could spread to the banking sector through a rise in non-performing loans” above the accepted level of 5%, with the level already being 5.2%.

Let us remind ourselves at this point that the global slowdown could be prolonged by the volcanic activity in Iceland, and that the prospect of such activity continuing, even worsening, is quite real.

And that is but one of the natural disasters that seem to be coming at us in bunches these days.

And look at what is happening in Greece.

That country is in deep trouble, and it has gone to the IMF and the European Union for a bail-out. Its national debt is US$395 billion, which is about 120% of its GDP. Its credit rating has been downgraded twice in the past two weeks, now falling to “junk” status.

This not only makes it harder and more expensive for Greece to borrow money, but it is also raising fears for the currency of the European Union, the euro.

Does any of this sound familiar?

And that is only the tip of the iceberg, because the economies of Portugal, Ireland and Spain may be in similar trouble, and experts and decision makers are extremely anxious.
Imagine the shocking consequences that would be suffered by Europe, and us, and the rest of the world, if Portugal, Ireland, Spain, and perhaps other European countries, were to follow in Greece’s path.

Under the bail-out arrangements, Greece will have to take some painful austerity measures, such as, streamlining its civil service, cutting civil servants’ salaries, freezing pay increases, reducing pension payments, introducing other deep budget cuts, changing tax rates, increasing its VAT, and so on.

Sounds familiar?

And if Greece, sitting amidst the wealth of Europe and a member of the world’s most powerful trading bloc, the European Union, is in deep, deep trouble with a debt-to-GDP ratio of 120%, and has to be bailed out by its brethren, what, Lord help us, is to happen to fragile, little St.Kitts & Nevis, a member of the poor people’s clubs named CARICOM and OECS, with our debt-to-GDP ratio of upwards of 175%?

In its Report on us, the IMF expressed its concern regarding the “high risk that current fiscal policies will contribute to an explosive public debt path. And while strong fiscal and structural adjustments could place debt on a downward trajectory, debt will remain at uncomfortably high levels over the medium term”.

No quick fixes here. The IMF laid out an active scenario and a baseline scenario.
In the former, barring delays, setbacks and, of course, further shocks, Government could by the year 2014, achieve a rising primary balance, reaching nearly 8%, as well as 4% real growth  and a reduction in debt–to-GDP ratio  to 140% (yes, that’s right),if it took steps to accelerate the following reforms:

1. land and assets sales of 3% of GDP per year from 2010 with the proceeds going straight to paying down the debt (a tough ask now);
2. Introduce VAT by late 2010 and consider  personal income tax; if the latter might be too difficult politically, then  expand  the revenue base of the Social Services and Housing Levy to include non-wage and non-salary incomes;
3. Contain and control tax concessions , tightly control borrowing, and strengthen efforts to collect tax arrears;
4. Corporatize the Electricity service in 2010;
5. Cap the public sector wage bill in line with inflation;
6. Finance capital expenditures  solely by resources freed up by the European Union through its Sugar Grant (and other grants and soft loans, if available); and
7. Strictly enforce the Finance Administration Act (relating to financial reporting, etc by public enterprises, e.g. Port, La Vallee, NHC, etc.).

In addition, it is to be noted that the success of these efforts would to some extent also hinge on the success of tourism and other projects in St. Kitts, and on the fate of the geothermal project and the Four Seasons Hotel in Nevis.

In the baseline scenario, if land sales are sluggish, if VAT is introduced, not in 2010, but in 2011, if Electricity is not corporatized before 2011, if tax concessions are not controlled, if the wage bill continues as is in relation to GDP, if the debt-to-GDP ratio trends up again in 2010,  if public enterprise borrowing is not reined in, and the Finance Administration Act is not strictly enforced, then Government’s primary surplus would  “hover around 1 ½% of GDP resulting in large financial gaps”, and the public debt-to-GDP ratio would again soar to over 200% by 2014.

A bitter dose of reality, indeed. Any way you look at it.

Will we be able to maintain and improve our health, education and other social services? Will we be able to upgrade national security, fire services and justice, and so make our society and economy safer? Will we be able to maintain and improve our roads (many of which are already substandard), ports, public buildings, facilities, equipment and vehicles? Will we be able to maintain our diplomatic apparatus and our membership in regional and international organizations and institutions?

And given the fact that, with 4,700 acres of former sugar lands sitting in hock to the National Bank because of Government debt, plus perhaps another 2,000 acres sold, or otherwise disposed of, to tourism-related and other projects, does the argument that the Government is land rich still hold water? And is there sufficient arable land remaining to launch and sustain a program that could produce and provide basic food and nutrition to our people at affordable prices?

Is there any possibility now to help cut down on imports, empower some local farmers, maybe even export some produce to nearby islands,  and soften the blow on all of us as we try to get through what is likely to be a long and painful purgatory, maybe even a hell?

Perhaps most importantly, are we Kittitians and Nevisians ready to gird our loins, re-assess our values and lifestyles, and, in the midst of this enormous challenge, find ways to improve our creativity, our judgment and our choices? Can it be business as usual and politics as usual for us after this?

Is VAT the problem? No. Instead, it is intended to be part of the solution. But it will bring challenges. Especially in the first few years, as people and institutions get to understand it, and as the time is taken to spread the net to capture as much tax as possible.

It is said that a country ideally needs up to three years to be properly prepared for VAT. In St. Kitts & Nevis, we were given two months to discuss it before the law is passed, then another six months before it goes into effect.

That is a shame, and in my opinion, and act of great disrespect, because the Government had been advised on this years before.

Government did not want to make the move before the 2004 elections; and its top political strategists may have felt that the closure of the Sugar Industry and VAT together, right after those elections, might have been too much. So he waited.

And seeing it as politically helpful to introduce it within a two-year period before the last elections, they again waited.

But while all of that strategizing and waiting was taking place, the debt spiraled, and the country’s fiscal situation further deteriorated.

So now, the mad rush is on. Jesus, Jah, Allah and Yaweh, please help us. Most of all, Father, we know that You don’t sleep, and You never give us more than we can take, so  help us to understand that the less we think, and the less we work purposefully and together as a loving, caring, enlightened and focused people, the more easily we are going to be manipulated, disempowered and endangered.

Next time, more on the VAT.