Public Information Notice No. 08/04

Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with The Bahamas

January 17, 2008

On November 26, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Bahamas.¹

Background

Helped by prudent economic management over the past 30 years, The Bahamas enjoys the third highest per capita GDP among Western Hemisphere countries and social development indicators that compare favorably with other countries in the region. Tourism and related activities account for roughly one-third of Bahamian GDP, and the financial sector, including a dynamic offshore center, account for over 20 percent of GDP.

Macroeconomic performance has been solid. Led by construction on new resort and second-home projects, the economy grew by close to 3½ percent in 2006; growth is expected to moderate slightly to 3 percent this year. Inflation remains low at around 2½ percent. The current account deficit increased sharply to 25½ percent in 2006, reflecting imports related to the resort investments and higher oil imports. The rise in imports has been largely financed by foreign direct investment but because of a decline in tourist arrivals, there has also been some draw down in international reserves.

Macroeconomic policies have been tightened this year. The growth of credit has declined from over 14 percent in 2006 to 10 percent in September in part because of moral suasion by the authorities. In addition, the budget deficit target for FY 2007/08 (ending June 30) is 1¾ percent of GDP compared with a preliminary outturn of about 2½ percent of GDP in FY 2006/07.

The authorities' see the maintenance of macroeconomic stability and a positive investment climate as the best way to encourage private investment and ensure continued growth in employment and standards of living. Against this background, discussions focused on the economic outlook, policies to maintain macroeconomic stability, and structural reforms to enhance overall efficiency.

Executive Board Assessment

Executive Directors commended the authorities' solid track record of prudent macroeconomic management, which has helped The Bahamas attain the highest standard of living in the Caribbean. Despite a recent decline in tourist arrivals, macroeconomic performance continues to be favorable, with strong growth, low inflation, and a relatively small fiscal deficit and public debt. The sharp increase in the external current account deficit mainly reflects construction-related imports that are financed by foreign direct investment.

At the same time, Directors observed that the external environment poses several challenges and risks going forward, including the relatively slow economic growth projected for the United States next year, a highly competitive regional tourism market, high oil prices, and the country's vulnerability to natural disasters. In this context, they welcomed the authorities' strong commitment to maintaining macroeconomic stability, which is backed by the supportive macroeconomic policy framework in place. Directors also noted that the business climate remains very attractive, and that there is substantial ongoing and planned investment in the tourism sector. In light of this, Directors generally considered that overall The Bahamas' medium-term economic prospects remain favorable. However, Directors reiterated that diversification of both the tourism product and the overall economy will be crucial for strong and sustained economic growth.

Directors supported the government's goals of balancing the budget and reducing debt to 30-35 percent of GDP by 2012. To ensure the achievement of these targets, Directors welcomed the authorities' commitment to control current spending, tighten budget constraints on public entities, and improve tax administration; and they commended the authorities' intention to privatize the telecommunications and electricity companies. Directors welcomed the authorities' plans to streamline import duty and tax concessions, and encouraged the authorities to consider the progressive introduction of a value added tax or a domestic consumption tax to replace trade taxes.

Directors were of the view that the fixed exchange rate has served The Bahamas well, particularly by enhancing the investment climate and keeping inflation low. They welcomed the indications that competitiveness is adequate, and noted the strong national consensus in favor of safeguarding the peg.

Directors welcomed the authorities' plans to gradually remove exchange controls. They emphasized that this process will need to be supported by an appropriate macroeconomic policy framework, an adequate level of international reserves, and a strong financial regulatory and prudential framework. In this regard, Directors welcomed the central bank's actions to curb credit growth, both to allow a build-up of international reserves and to reduce the economy's vulnerability to shocks. Directors encouraged the use of market-based monetary policy instruments to improve the effectiveness of monetary policy, make credit allocation more efficient, and help develop the domestic capital market. They supported continued technical assistance from the IMF and the Caribbean Regional Technical Assistance Center to improve the central bank's operational framework.

Directors observed that The Bahamas' financial system remains sound and well regulated. They commended the authorities' efforts to further strengthen the regulatory and supervisory framework and bring it to international standards, including by modernizing the regime to combat money laundering and terrorism financing and introducing a risk-based approach to supervision.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.