The Bahamas: Staff Concluding Statement of the 2016 Article IV Mission
March 23, 2016
Mission Concluding Statement
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
An International Monetary Fund (IMF) team led by Jarkko Turunen visited The Bahamas from March 10–23 to conduct discussions for the 2016 Article IV consultation. Mr. Turunen issued the following statement:
Recent developments and outlook
Economic growth is estimated to have slowed down in 2015, as continued growth in air travel arrivals was offset by weaker domestic demand, owing in part to uncertainty over the opening of the Baha Mar resort. Credit to the private sector continues to be restrained by the elevated share of non-performing loans (at 14.2 percent of total in December 2015). Inflation remains modest, at 1.6 percent in October, despite a temporary increase owing to VAT introduction in January 2015. Unemployment, after a brief dip earlier in the year, rose to 14.8 percent in November. Lower oil prices and the winding down of Baha Mar’s construction have helped narrow the still sizeable current account deficit. International reserves stood at $841 million in January 2016, equivalent to about 2.5 months of next years’ projected imports of goods and services. Looking forward, real GDP growth is projected to increase to about 1.5 percent in 2016, supported by the continued rise in tourism arrivals, and to receive an additional boost when Baha Mar opens.
Staff commend the authorities for the successful VAT introduction, which has made an important contribution to maintaining macroeconomic stability and strengthening policy credibility. A simple and effective tax policy framework, strong project management and a robust electronic system for registration, filing and payment created the right conditions for a smooth VAT launch. As part of the reform, the authorities eliminated the hotel room tax, reduced import tariffs and adjusted other domestic tax rates. VAT revenue over the first 12 months (at $536 million, or about 6 percent of GDP) has exceeded expectations, contributing to a decline in the FY2014/15 central government deficit to 4.4 percent of GDP (from 5.7 percent in FY2013/14). The central government debt nevertheless reached close to 68 percent of GDP in December 2015. Looking forward, strong VAT revenue is expected to support further fiscal consolidation and, when combined with efforts to constrain spending, to help stabilize central government debt.
Policy priorities
Continued fiscal consolidation is critical for rebuilding fiscal and external policy buffers and boosting investor confidence. Policy priorities include:
• Resolute implementation of the current VAT regime with few exemptions. The authorities should resist pressures to weaken the VAT regime’s efficiency through the introduction of exemptions.
A decisive shift in structural policies is needed to raise potential growth, estimated at only 1.5 percent over the medium term, to improve competitiveness and reduce high structural and youth unemployment. Staff welcome the authorities’ efforts towards completing a comprehensive National Development Plan. The authorities should finalize the plan and, acknowledging that it takes time for structural reforms to bear fruit, promptly move towards implementation. Focus should be on a comprehensive strategy aimed at diversifying the economy and lifting barriers to growth by:
Despite the prolonged low growth environment, available prudential indicators suggest that the domestic banking system as a whole is well capitalized, liquid and profitable. Building on recent progress, including implementation of the Basel II/III regime, which is welcome, the authorities should continue enhancing risk-based supervision and their framework for crisis management. The authorities should also step up efforts to facilitate the cleaning up of bank balance sheets to spur credit growth. The global trend towards reduction in financial services by international banks, commonly referred to as “de-risking”, has resulted in additional scrutiny of domestic institutions, but has not led to significant disruptions. The authorities recently underwent an assessment of their AML/CFT preparedness and have taken steps to close remaining regulatory gaps, thus further strengthening their regulatory and institutional framework.
The team met with Honorable Perry Christie, Prime Minister and Minister of Finance; Mr. John Rolle, Governor of the Central Bank of The Bahamas; Honorable Obediah Wilchcombe, Minister of Tourism; Honorable Michael Halkitis, Minister of State for Finance; and other senior government officials, representatives of the opposition, private sector and civil society. The team wishes to thank the authorities for their hospitality and for the open and constructive dialogue.
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