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

August 27, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On August 3, 1999, the Executive Board concluded the Article IV consultation with The Bahamas.1


Following a period of very slow growth in the late 1980s and early 1990s the Bahamian economy began to recover in 1995 in response to the government's policies aimed at strengthening fiscal management and attracting new investment into tourism and other sectors. Real GDP growth accelerated from less than 1 percent a year in 1994-95 to 4 percent in 1996, but slowed somewhat in 1997-98 as construction work on a second phase of tourism projects led to a decline in the number of available hotel rooms and in tourist arrivals. Following the completion of the expansion projects in November-December 1998, tourist arrivals rose sharply in the first quarter of 1999, and real GDP growth is expected to rebound to 6 percent for the year as a whole. The economic recovery has been accompanied by declines in unemployment and inflation, a strengthening of the international reserve position, and an improvement in social indicators, which are among the most favorable in the Caribbean and Latin American region.

Imports of equipment and services related to investment projects in tourism, shipping, and construction, as well as a slowdown in net tourism receipts--reflecting the temporary closure of rooms during the construction phase--led to a marked widening of the external current account deficit in 1997-98. However, the deficit is expected to begin to narrow in 1999. Following a tightening of prudential guidelines in consumer credit in mid-1998, the liquidity situation in commercial banks eased, and there has been a downturn in interest rates in recent months.

The government's fiscal policy has been a key factor behind the recovery in economic activity and investor confidence. Since 1994-95 the overall deficit of the central government has been contained to about 1½ percent of GDP, and the authorities have announced their commitment to eliminate the deficit by 2001. Central government saving however, has been low-averaging about 1½ percent of GDP. The budget for FY 1999/2000 envisages an overall deficit in line with that of recent years, and proposes a number of revenue measures (including increases in rates of the hotel occupancy tax, the production tax on beer, and the stamp duty on real estate transactions, as well as the elimination of certain import duty exemptions) aimed at strengthening further the fiscal position.

Over the past 3-4 years the government has implemented a number of reforms in the areas of privatization and the financial system. All but one of the major government-owned hotels have been sold, and the state has been reducing steadily its share holding in the Bank of The Bahamas. Also, steps have been taken to increase private sector participation in the public utilities, with the bidding process for shares in the state-owned telecommunications company expected to begin this year, and a similar process for the electricity company scheduled to be completed in 2000.

Executive Board Assessment

Executive Directors commended the authorities' adherence to policies that had attracted substantial flows of private investment, maintained low inflation, and delivered marked increases in per capita income and employment, as well as improved social indicators. Directors encouraged the authorities to build on these achievements to ensure a basis for sustained, noninflationary growth in the medium term, and for further progress in raising social welfare.

Directors considered that appropriate fiscal and monetary policies and effective oversight of financial institutions would continue to play a key role in preserving macroeconomic stability and the exchange rate peg. They commended the authorities' commitment to a low budget deficit. Directors welcomed the steps proposed in the fiscal year 1999-2000 budget to strengthen the revenue base by increasing certain tax rates and reducing tax exemptions, but considered that these efforts should be complemented by a full review of the tax structure. Such a review should include an assessment of the desirability of lowering import duty rates, introducing a value-added tax, or sales tax, and of increasing revenue from property taxes.

Both with a view to strengthening public finances and raising economic efficiency, Directors saw scope for expenditure savings, mainly through containing the growth of the wage bill and reducing subsidies and support to public enterprises. They considered that containment of the wage bill, which could be facilitated by a review of the civil service structure, would help ease wage pressures and promote competitiveness.

Directors welcomed the Government's commitment to move forward quickly to invite private sector participation in the telecommunications and electricity sectors, and looked forward to similar initiatives with respect to other publicly-provided services. In general, Directors considered that development policies should address shortages of labor in key areas, and continue to focus on efforts to broaden the base of the economy beyond tourism. In this connection, they noted the importance of improved training and measures to tackle rigidities in labor arrangements.

Directors welcomed the recent steps taken by the central bank to strengthen prudential credit guidelines, and more generally to modernize the regulatory framework for the financial system in line with international standards. They urged the authorities to remain vigilant concerning the threat of money laundering.

Directors commended the quality and range of most published economic statistics. However, noting the widening external current account deficit, and the importance of capital flows in the balance of payments, Directors urged the authorities to try to identify the nature and origin of unexplained capital inflows, and to monitor the external situation carefully. They also encouraged further improvement in the national accounts.

Directors welcomed the authorities' intention to release the Article IV staff report under the pilot project.

The Bahamas: Selected Economic Indicators

  1995 1996 1997 Prel.

Domestic Economy
Change in real GDP 1/ 0.3 4.2 3.3 3.0
Change in number of stopover visitor days 2/ 2.9 4.7 0.6 -4.4
Change in consumer price index (end of period) 1.7 1.1 0.8 1.9
Unemployment rate (in percent of labor force) 10.9 11.5 9.8 7.8
(In percent of GDP at market prices)
Financial variables
Central government overall balance 3/ -1.3 -3.8 -1.8 -1.3
Central government savings 3/ 1.2 0.2 1.3 1.7
Change in broad money (in percent) 6.0 6.2 11.2 14.8
(In millions of U.S. dollars)
External sector
Current account balance -143 -271 -658 -943
Overall balance -3 -8 56 119
Gross international reserves 171 163 220 339
Debt service ratio 4/ 4.3 3.7 4.9 3.8
Percentage change in real effective exchange rate (depreciation -) 5/ -3.4 0.5 2.2 1.9

Sources: The Central Bank of the Bahamas; Ministry of Finance; and IMF staff estimates.

1/ Estimated on the basis of partial indicators.
2/ Calculated as the number of stopover visitors times the estimated average length of stay.
3/ Corresponds to the fiscal year beginning July 1.
4/ Public sector debt service in percent of receipts from merchandise exports and tourism.
5/ Annual averages.

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. In this PIN, the main features of the Board's discussion are described.


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