## cr17314

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### Economic context and recent developments
- Prolonged stagnation has resulted in declining income relative to neighboring countries, concerns about fiscal sustainability, and a severe household debt overhang problem.
- Policy constraints: elevated public debt, limited external buffers, and a pegged exchange rate regime.
- New administration (took office in mid-May) mandates: revive growth, improve government accountability and transparency, restore fiscal discipline; committed to providing affordable health care and introducing VAT-exemptions.
- Real GDP is estimated to have contracted ¼ percent in 2016.
- Air tourist arrivals: flat in 2016; declined 6 percent year on year in the first 5 months of 2017.
- Unemployment rate: 11.6 percent in November 2016; 9.9 percent in May 2017; opening of Baha Mar created 2,000 new jobs in the three months to July.
- Inflation: ended 2016 at 0.8 percent (down from 2 percent in 2015); inflation increased to 2.8 percent in March 2017.
- Central government fiscal deficit: reached 3.2 percent of GDP for the first 10 months of FY2017 (ending in June); expected to reach 5.7 percent of GDP for the full fiscal year (up from 3½ percent of GDP in FY2016).
- Central government debt-to-GDP ratio: estimated at 73 percent of GDP in FY2017.
- In early July, Moody’s placed The Bahamas’ sovereign rating under review for a further downgrade.

### Outlook and projections
- Real GDP growth projections:
  - 1¾ percent in 2017
  - 2½ percent in 2018
  - Medium-term growth: stabilize around 1½ percent and remain low due to structural bottlenecks.
- Drivers of near-term pick up: stronger U.S. economy, phased opening of Baha Mar, related construction activity, post-hurricane reconstruction, pickup in FDI-financed investment.
- Baha Mar projected contribution: 2.5 percent to real GDP growth, cumulatively, over 2017-2019.
- Investment projects during 2017-2022: estimated 8½ percent of GDP.
- Current account:
  - declined to 12.9 percent of GDP in 2016 (from 13.6 percent of GDP in 2015)
  - expected to widen to 17¾ percent of GDP in 2017 due to surge in Baha Mar-related imports
  - projected to narrow to 7.1 percent of GDP over the medium term but remain weaker than level consistent with fundamentals and desirable policy settings.
- Credit to private sector under baseline: bank credit provision would slowly pick up to grow at annual rates of around 2.5–3.0 percent by 2021–2022.

### Financial sector developments and stability
- Financial system assets concentrated in the offshore sector; strict firewalls between domestic and offshore systems.
- Commercial banks dominate domestic financial sector; balance sheets appear sound.
- Average capital adequacy ratio as of March 2017: 27.8 percent (regulatory requirement: 17 percent).
- Liquid assets represented 25.6 percent of total assets, more than double the minimum regulatory requirement.
- Nonperforming loans (NPLs), concentrated in mortgage loans, declined to 11.1 percent of total loans at end‑March 2017, down from 14.2 percent in 2015.
  - Decline attributed to sale of part of one institution’s nonperforming mortgage portfolio, banks’ loan restructuring measures, and the Government’s Mortgage Restructuring Program (MRP).
- Bank of Bahamas (majority state-owned) continues to experience recurrent losses; new government recapitalization in late 2016.
- Offshore sector asset estimates:
  - Offshore sector assets: US$ 385 billion in 2015.
  - Onshore financial sector assets: US$20 billion in 2016.
- Banking sector indicators (selected):
  - Capital/risk-weighted assets: 2017 (end of March): 27.8
  - Excess liquid assets (in percent of statutory minimum requirement): 2017 (end of March): 131.8
  - Liquid assets/deposits: 2017 (end of March): 58.3
  - NPLs/total loans: 2017 (end of March): 11.1
  - Provisions/NPLs: 2017 (end of March): 66.8

### Banking sector: household and business credit conditions
- Bank household debt:
  - about 40 percent of GDP in 2005
  - peak of 62 percent of GDP in 2011
  - 57 percent of GDP in 2016
- Persistent weak activity and high unemployment strained household debt‑servicing capacity, constraining access to credit.
- Structural impediments to credit assessment: lack of a credit bureau; lack of a well-established book-keeping tradition.
- Banks increased the risk premium on new lending; intermediation spreads rose to levels much higher than before the global financial crisis.
- Consequence: total stock of credit to the private sector has remained flat, producing a negative credit gap.
- Central bank survey (quarterly since 2015): excessively high debt service ratio most common reason for rejecting loan applications.

### Correspondent banking relationships (CBR)
- Central bank survey (August, 2016):
  - about 26 percent of respondents indicated restrictions or termination of at least one CBR.
  - Affected institutions—mostly offshore banks—noted difficulties finding replacements but continued conducting business through existing relationships or parent companies.
  - Respondents did not report any resulting dollar-value loss in the level of correspondent banking transactions.
  - 71 percent of respondents indicated having a contingency plan in case of further losses in CBR.
- Direct contributions from the offshore sector to the economy: around 3 percent of GDP (wage bill, expenditure in local goods and services, and fees to the government).
- Full extent of impact of pressures on CBR on the offshore sector remains unclear.

### External sector position and exchange rate
- Goods imports nearly six times exports; trade deficits above 25 percent of GDP in recent years.
- Current account deficit ranged between 10 and 22 percent of GDP during the past decade.
- 2016 drivers of CA narrowing: slower construction activity, food and oil price declines (reduced trade balance by 2½ percent of GDP), temporary current transfers of 4 percent GDP from re-insurance proceeds after Hurricane Matthew.
- Reserve coverage: estimated 2.4 months of next year’s imports (end-2016: US$904 million, 2.2 months).
- Real effective exchange rate (REER):
  - currency appreciated 11¼ percent in real effective terms on average between 2014 and 2015
  - since 2015 REER virtually flat
  - staff view: currency is overvalued between 10 and 20 percent
  - model-based REER overvaluation estimates: between 8.8 and 17.6 percent; specific model finding: REER is 17.6 percent stronger in 2016 than level consistent with fundamentals.

### Fiscal sustainability and debt projections
- Central government debt-to-GDP ratio:
  - 2011: 45 percent of GDP
  - FY2016: 68 percent of GDP
  - FY2017: 72.7 percent of GDP (estimate)
  - Staff projects debt to peak at 73.3 percent of GDP in FY2018.
- Gross financing requirements:
  - 7.7 percent of GDP in FY2016
  - Projected to decline to about 4.3 percent of GDP in the medium term.
- Debt sustainability heat map: moderate to high risks to debt sustainability.
- Macro–fiscal stress test results (debt-to-GDP at end of projection period):
  - Baseline: around 73 percent of GDP.
  - Real GDP growth shock, primary balance shock, real interest rate shock: debt ≈ 78 percent of GDP.
  - Real exchange rate shock: debt ≈ 75.7 percent of GDP.
  - Combined macro–fiscal shock: debt ≈ 84.3 percent of GDP; gross financing requirements to 8.3 percent of GDP in FY 2022.
- Additional adverse scenarios:
  - Scenario A (constant primary balance): debt would rise to 91 percent of GDP in FY2022.
  - Scenario B (primary balance and growth equal to historical averages): debt close to 100 percent of GDP over the medium term; gross financing requirements rising to 11 percent of GDP.
  - Natural disaster shock (more drastic than Hurricane Matthew): debt would increase to 81 percent of GDP by FY 2022.
- Public entities debt and contingent liabilities:
  - Combined SOE debt: 18 percent of GDP in 2016.
  - Public entities debt: 18.8 percent of GDP in FY2016; 8.5 percent of GDP are guaranteed by the central government.
  - Staff assumed a contingent liability shock of 2.5 percent of GDP in FY2018 (equivalent to entire stock of NPLs at Bank of Bahamas as of end-2016); outcome: central government debt about 75 percent of GDP in FY2018; gross financing needs would rise to 11.2 percent of GDP.

### Key quantitative indicators (selected figures preserved exactly)
- GDP (US$ millions), 2015: 8,854
- GDP per capita (US$), 2015: 24,310
- Population (thousands), 2015: 364
- Poverty rate (percent), 2013: 12.8
- Unemployment rate (percent), April 2017: 9.9
- Infant mortality rate (per 1,000 live births), 2015: 9.9
- Life expectancy at birth (years), 2015: 75.6
- Human development index (rank), 2015: 58
- Adult literacy rate, 15 & up (percent), 2007: 95.6
- Real GDP (annual percent changes): 2013: 0.0; 2014: -0.5; 2015: -1.7; 2016: -0.3; 2017: 1.8; 2018: 2.5
- Nominal GDP (annual percent changes): 2013: 1.5; 2014: 1.1; 2015: 2.7; 2016: -1.5; 2017: 4.7; 2018: 4.2
- Consumer price index (annual average): 2013: 0.4; 2014: 1.2; 2015: 1.9; 2016: 0.8; 2017: 2.4; 2018: 2.2
- Unemployment rate (in percent): 2013: 15.8; 2014: 14.6; 2015: 13.4; 2016: 12.2; 2017: 10.0; 2018: 9.7
- Saving rate (percent of GDP): 2013: 10.8; 2014: 9.3; 2015: 13.6; 2016: 13.4; 2017: 8.6; 2018: 11.8
- Investment rate (percent of GDP): 2013: 27.7; 2014: 31.2; 2015: 27.2; 2016: 26.3; 2017: 26.4; 2018: 25.8
- Current account balance (percent of GDP): 2013: -16.9; 2014: -21.9; 2015: -13.6; 2016: -12.9; 2017: -17.8; 2018: -14.0
- Gross international reserves (End of period; millions of U.S. dollars): 2013: 742; 2014: 788; 2015: 812; 2016: 904; 2017: 960; 2018: 982
- Reserves in months of next year's G&S imports: 2013: 1.8; 2014: 2.2; 2015: 2.2; 2016: 2.2; 2017: 2.4; 2018: 2.5
- Central government debt (percent of GDP): 2013: 55.4; 2014: 60.2; 2015: 64.5; 2016: 68.0; 2017: 72.7; 2018: 73.3

### Natural disaster exposure and resilience
- The Bahamas disproportionately exposed to natural disasters:
  - Annual damage averaged about 2.0 percent of GDP for The Bahamas compared to an average of 1¼ percent of GDP for the Caribbean region.
  - Probability of a storm disaster in any given year for The Bahamas: 30 percent relative to 20 percent for the Caribbean region.
- Natural disaster damage averages (percent GDP):
  - The Bahamas: 1990-2016: 1.8 | 2000-2016: 2.0 | 2010-2016: 1.2
  - Caribbean average: 1990-2016: 1.2 | 2000-2016: 1.3 | 2010-2016: 0.5
- Insurance market and gaps:
  - Eight active locally capitalized personal and commercial insurance companies representing total of $300 million in gross premiums (3½ percent of GDP).
  - Costs associated with Hurricane Matthew: estimated 6¾ percent of GDP with about 4 percent of GDP of insurance reflows received by end-2016.
  - About 90-95 percent of claims following Hurricane Matthew had been resolved as of July, 2017.
  - Estimated 60 percent of households are without insurance or underinsured.
- Policy recommendations on disasters:
  - Integrate a natural disasters savings arrangement into the fiscal framework.
  - Increase reliance on market-based insurance and insure selected public assets.
  - Incentivize private insurance uptake, including targeted subsidies for affordability for low‑income households.
  - Review and update building regulation, land use, and zoning guidelines frequently.
  - Prioritize ex‑ante mitigation infrastructure (e.g., storm‑surge protection strategy).

### Key policy advice and recommendations (staff and Directors)
- Fiscal policy:
  - Resume fiscal consolidation focusing on reducing current expenditure to ensure public debt sustainability and strengthen external buffers.
  - Consolidation should prioritize cutting current expenditures, in particular reducing the wage bill and making state-owned enterprises self-sufficient.
  - Reform National Insurance Board and civil servants’ pension system to support fiscal adjustment and reduce long-term fiscal risks.
  - Introduce a low-rate income tax over the medium-term to make the system more progressive as import duties are reduced.
  - Avoid introducing exemptions from VAT; use planned expenditure review to create space for better-targeted tools to protect vulnerable households.
  - Adopt a fiscal rule as part of a medium-term fiscal framework and integrate a well-designed savings arrangement for disaster shocks.
- Structural reforms:
  - Create a credit bureau to improve access to credit (legislation for the credit bureau is ready and expected to be submitted to Parliament this fall).
  - Energy sector reforms: upgrade generation, transmission, and distribution; exploit wind and solar; issue rate-reduction bond and adjust rates to cost recovery; assign a single lead energy policy entity; use public-private partnerships where appropriate.
  - Improve business environment: modernize registration/filing, establish “one-stop shop,” streamline approval processes at The Bahamas Investment Authority, fight corruption and crime.
  - Reduce labor market inefficiencies: establish skills-matching database, streamlined arbitration, expand vocational and apprenticeship programs.
- Monetary and financial policies:
  - Reduce central bank holdings of government bonds to strengthen credibility of the peg (CBOB increased long-term government bond holdings by BH$200 million after Hurricane Matthew, about 2 percent of GDP, breaching statutory limits).
  - Encourage banks to intensify restructuring of NPLs; faster resolution of NPLs should strengthen financial stability and support recovery.
  - Restructure the state-owned Bank of Bahamas to reduce fiscal contingencies; recent transfer of about 70 percent of total NPLs to a government-owned SPV at gross book value announced on August 3.
  - Maintain strong compliance with AML/CFT and tax transparency standards to stem withdrawal of correspondent banking relationships; work with CFATF and FATF to address strategic deficiencies.
- Quantified fiscal savings (percent of GDP) — three priority areas:
  - Wage bill rationalization: savings of 0.8 percent of GDP relative to FY2018.
  - SOE reform and tariff adjustment: up to 1.3 percent of GDP relative to FY2018.
  - Civil servants' pension reform: 0.3 percent of GDP.
  - Aggregate potential savings: Total: up to 2.4 (percent of GDP).
- Staff recommended reversing increases in central bank holdings of government bonds and introducing stricter limits (draft amendments to central bank law prepared for Parliament by end-2017).

### Risks to the outlook
- Downside risks:
  - Weaker-than-projected U.S. growth or weaker tourism boost.
  - Tightening of global financial conditions reducing foreign investment inflows.
  - Further appreciation of the U.S. dollar eroding competitiveness.
  - Natural disasters.
  - Intensification of pressures on CBR.
  - Potential emergence of Cuba as a competitor for U.S. tourists.
  - Domestic policy slippages (failure to implement fiscal consolidation).
- Upside risks:
  - Higher-than-projected U.S. growth, FDI flows, or a larger boost from Baha Mar.

### Governance, data, and institutional reforms
- Fiscal responsibility law and medium-term fiscal framework recommended, with elements:
  - simple fiscal rule with permanent ceiling on the deficit and cap on current expenditure growth;
  - requirement to incorporate fiscal risk assessment (including natural disaster risks);
  - requirement to develop medium-term fiscal projections and exceptional circumstances clauses.
- Data and transparency improvements recommended:
  - Produce quarterly GDP and labor market data.
  - Develop an estimate of the International Investment Position.
  - Move forward with adoption of IPSAS on an accrual basis and produce general government fiscal accounts.
- Progress on past recommendations (2013 FSAP) summarized with items completed, in progress, and pending across banking, insurance, pensions, capital markets, and crisis management.

*Source: THE BAHAMAS — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17314).*

### 11.1 percent of total loans, down from 14.2 percent in 2015. However, banks have maintained

### cr17314 - 11.1 percent of total loans, down from 14.2 percent in 2015. However, banks have maintained

### Economic context and recent developments
- A prolonged period of stagnation has resulted in declining income relative to neighboring countries, concerns about fiscal sustainability, and a severe household debt overhang problem.
- Elevated public debt, limited external buffers, and a pegged exchange rate regime constrain policy space.
- A new administration took office in mid-May with mandates to revive growth, improve government accountability and transparency, and restore fiscal discipline; it has also committed to providing affordable health care and introducing VAT-exemptions.
- Real GDP is estimated to have contracted ¼ percent in 2016.
- Air tourist arrivals were flat in 2016 and declined 6 percent year on year in the first 5 months of 2017.
- Unemployment rate: 11.6 percent in November 2016; 9.9 percent in May 2017; opening of Baha Mar created 2,000 new jobs in the three months to July.
- Inflation: ended 2016 at 0.8 percent (down from 2 percent in 2015); inflation increased to 2.8 percent in March 2017.
- Central government fiscal deficit reached 3.2 percent of GDP for the first 10 months of FY2017 (ending in June); expected to reach 5.7 percent of GDP for the full fiscal year (up from 3½ percent of GDP in FY2016).
- Central government debt-to-GDP ratio estimated at 73 percent of GDP in FY2017.
- In early July, Moody’s placed The Bahamas’ sovereign rating under review for a further downgrade.

### Outlook and projections
- Real GDP growth is projected to pick up to 1¾ percent in 2017 and to 2½ percent in 2018, driven by a stronger U.S. economy, the phased opening of Baha Mar, and related construction activity.
- Post-hurricane reconstruction and a pickup in FDI-financed investment should support the recovery.
- Medium-term growth would remain low, reflecting significant structural bottlenecks.
- Current account deficit: estimated to have declined to 12.9 percent of GDP in 2016 (down from 13.6 percent of GDP a year earlier) due to lower oil prices and a temporary increase in current transfers associated with payments of re-insurance claims from Hurricane Matthew.
- Current account deficit expected to widen to 17¾ percent of GDP in 2017 due to a surge in Baha Mar-related imports; over the medium term projected to narrow to 7.1 percent of GDP but remain weaker than the level consistent with fundamentals and desirable policy settings.

### Financial sector developments and stability
- Financial system assets are concentrated in the offshore sector, with strict firewalls between the domestic and offshore financial systems.
- Commercial banks dominate the domestic financial sector; balance sheets appear sound.
- Average capital adequacy ratio as of March 2017: 27.8 percent (regulatory requirement: 17 percent).
- Liquid assets represented 25.6 percent of total assets, more than double the minimum regulatory requirement.
- Nonperforming loans (NPLs), concentrated in mortgage loans, declined to 11.1 percent of total loans at end-March 2017, down from 14.2 percent in 2015.
- Decline in NPLs attributed to sale of part of one institution’s nonperforming mortgage portfolio, banks’ loan restructuring measures, and the Government’s Mortgage Restructuring Program (MRP).
- The Bank of Bahamas (majority state-owned) continues to experience recurrent losses, prompting a new government recapitalization in late 2016.

### Executive Board Assessment (summary of Directors’ views)
- Directors welcomed the expected near-term growth pick up but noted significant challenges from structural bottlenecks and rising public debt.
- Restoring fiscal sustainability is a top priority.
- Directors encouraged adherence to the authorities’ fiscal consolidation plan to reduce public debt and strengthen external buffers.
- Consolidation should focus on cutting current expenditures, in particular reducing the wage bill and making state-owned enterprises self-sufficient.
- Reforming the National Insurance Board and the civil servants’ pension system should support fiscal adjustment and reduce long-term fiscal risks.
- Directors commended efforts to strengthen fiscal revenues and highlighted that introducing a low-rate income tax over the medium-term would help make the system more progressive and protect needed infrastructure and social spending.
- Directors advised against introducing exemptions from VAT and recommended using the planned expenditure review to create space for better-targeted tools to protect vulnerable households.
- Adopting a fiscal rule as part of a medium-term fiscal framework should enhance fiscal discipline.
- Directors recommended integrating a well-designed savings arrangement into the fiscal framework as an additional buffer against recurring natural disaster shocks.
- Finding a permanent solution for the Bank of Bahamas is necessary to reduce fiscal contingencies.
- Directors called for faster resolution of nonperforming loans to strengthen financial stability and support recovery.
- Strong compliance with AML/CFT and tax transparency standards should help stem withdrawal of correspondent banking relationships.
- Directors recommended reducing central bank holdings of government bonds to strengthen the credibility of the peg and support financial stability.
- Directors encouraged stronger structural reforms: introduction of a credit bureau; energy sector reforms; streamlining administrative processes to improve the business environment; and reducing labor market inefficiencies.

### Key quantitative indicators (selected figures preserved exactly)
- GDP (US$ millions), 2015: 8,854
- GDP per capita (US$), 2015: 24,310
- Population (thousands), 2015: 364
- Poverty rate (percent), 2013: 12.8
- Unemployment rate (percent), April 2017: 9.9
- Infant mortality rate (per 1,000 live births), 2015: 9.9
- Life expectancy at birth (years), 2015: 75.6
- Human development index (rank), 2015: 58
- Adult literacy rate, 15 & up (percent), 2007: 95.6

- Real GDP (annual percent changes): 2013: 0.0; 2014: -0.5; 2015: -1.7; 2016: -0.3; 2017: 1.8; 2018: 2.5
- Nominal GDP (annual percent changes): 2013: 1.5; 2014: 1.1; 2015: 2.7; 2016: -1.5; 2017: 4.7; 2018: 4.2
- Consumer price index (annual average): 2013: 0.4; 2014: 1.2; 2015: 1.9; 2016: 0.8; 2017: 2.4; 2018: 2.2
- Unemployment rate (in percent): 2013: 15.8; 2014: 14.6; 2015: 13.4; 2016: 12.2; 2017: 10.0; 2018: 9.7
- Saving rate (percent of GDP): 2013: 10.8; 2014: 9.3; 2015: 13.6; 2016: 13.4; 2017: 8.6; 2018: 11.8
- Investment rate (percent of GDP): 2013: 27.7; 2014: 31.2; 2015: 27.2; 2016: 26.3; 2017: 26.4; 2018: 25.8

- Credit to the nonfinancial public sector (annual percent changes): 2013: 23.6; 2014: 4.0; 2015: 7.7; 2016: 12.3; 2017: 8.1; 2018: 5.0
- Credit to the private sector (annual percent changes): 2013: -1.2; 2014: -2.8; 2015: -1.1; 2016: -2.0; 2017: -1.0; 2018: 0.3
- Liabilities to the private sector (annual percent changes): 2013: 0.2; 2014: 1.2; 2015: -0.3; 2016: 8.7; 2017: 4.7; 2018: 4.2

- Exports of goods and services (annual percent changes): 2013: -1.3; 2014: -1.9; 2015: -4.0; 2016: -0.1; 2017: 4.3; 2018: 7.6
- Travel receipts (gross) (annual percent changes): 2013: -1.1; 2014: 1.3; 2015: 9.5; 2016: 2.1; 2017: 3.9; 2018: 9.0
- Imports of goods and services (annual percent changes): 2013: -2.6; 2014: 5.8; 2015: -16.6; 2016: 3.5; 2017: 10.7; 2018: -2.1

- Central government revenue and grants (percent of GDP): 2013: 16.0; 2014: 16.9; 2015: 19.5; 2016: 22.0; 2017: 21.8; 2018: 22.7
- Central government expenditure (percent of GDP): 2013: 22.4; 2014: 22.5; 2015: 24.4; 2016: 25.5; 2017: 27.5; 2018: 26.4
- Overall balance (percent of GDP): 2013: -6.4; 2014: -5.6; 2015: -4.9; 2016: -3.5; 2017: -5.7; 2018: -3.7
- Primary balance (percent of GDP): 2013: -4.1; 2014: -3.1; 2015: -2.2; 2016: -0.4; 2017: -2.6; 2018: -0.6
- Central government debt (percent of GDP): 2013: 55.4; 2014: 60.2; 2015: 64.5; 2016: 68.0; 2017: 72.7; 2018: 73.3

- Current account balance (percent of GDP): 2013: -16.9; 2014: -21.9; 2015: -13.6; 2016: -12.9; 2017: -17.8; 2018: -14.0
- Change in net international reserves (Increase -) (percent of GDP): 2013: 0.8; 2014: -0.5; 2015: -0.3; 2016: -1.1; 2017: -0.6; 2018: -0.2
- External public debt (end of period) (percent of GDP): 2013: 19.0; 2014: 24.3; 2015: 24.7; 2016: 28.0; 2017: 27.4; 2018: 27.5

- Gross international reserves (End of period; millions of U.S. dollars): 2013: 742; 2014: 788; 2015: 812; 2016: 904; 2017: 960; 2018: 982
- Reserves in months of next year's G&S imports: 2013: 1.8; 2014: 2.2; 2015: 2.2; 2016: 2.2; 2017: 2.4; 2018: 2.5
- Reserves in percent of reserve money: 2013: 80; 2014: 80; 2015: 83; 2016: 70; 2017: 71; 2018: 70
- GDP (in millions of Bahamian dollars): 2013: 8,522; 2014: 8,618; 2015: 8,854; 2016: 8,717; 2017: 9,127; 2018: 9,515

- Financial Soundness Indicators (Domestic commercial banks, selected): Capital/risk-weighted assets: 2012: 26.1; 2013: 31.7; 2014: 31.2; 2015: 30.9; 2016: 27.9; 2017 (end of March): 27.8
- Excess liquid assets (in percent of statutory minimum requirement): 2012: 99.6; 2013: 115.1; 2014: 112.8; 2015: 126.1; 2016: 134.9; 2017 (end of March): 131.8
- Liquid assets/deposits: 2012: 41.2; 2013: 45.7; 2014: 49.8; 2015: 55.0; 2016: 57.9; 2017 (end of March): 58.3
- NPLs/total loans: 2012: 13.6; 2013: 15.3; 2014: 15.3; 2015: 14.2; 2016: 11.4; 2017 (end of March): 11.1
- Provisions/NPLs: 2012: 43.0; 2013: 39.2; 2014: 51.2; 2015: 58.5; 2016: 70.6; 2017 (end of March): 66.8

### Key policy advice and recommendations (staff summary)
- Fiscal policy:
  - Resume fiscal consolidation with a strong focus on reducing current expenditure to ensure public debt sustainability and strengthen external buffers.
  - Introduce a fiscal rule as part of a medium-term fiscal framework to enhance fiscal discipline.
  - Increase reliance on ex-ante insurance and mitigation policies against natural disaster risk to strengthen fiscal and economic resilience.
- Structural reforms:
  - Create a credit bureau to improve access to credit.
  - Pursue energy sector reforms to lower electricity costs and improve power supply reliability.
  - Streamline administrative processes to improve the ease of doing business.
  - Develop skills-matching databases and alternative dispute-resolution mechanisms to reduce labor market inefficiencies.
- Monetary and financial policies:
  - Reverse recent increases in central bank holdings of government bonds to strengthen the credibility of the peg.
  - Encourage banks to step up efforts to restructure nonperforming loans to support the recovery.
  - Restructure the state-owned Bank of Bahamas to reduce fiscal contingencies.
  - Maintain strong compliance with AML/CFT and tax transparency standards to help stem the withdrawal of correspondent banking relationships.

*Source: THE BAHAMAS — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17314).*

### 7.      Despite ample capital and liquidity, banks remain reluctant to lend in an environment

### 7.      Despite ample capital and liquidity, banks remain reluctant to lend in an environment

### Banking sector: household and business credit conditions
- Households have not fully repaired balance sheets following the global financial crisis; bank household debt:
  - about 40 percent of GDP in 2005
  - peak of 62 percent of GDP in 2011
  - 57 percent of GDP in 2016
- Persistent weak economic activity and high unemployment have strained household debt‑servicing capacity, constraining access to credit.
- Businesses’ profitability has been weakened by slow activity, reinforcing banks’ cautious lending stance.
- Structural impediments to credit assessment:
  - lack of a credit bureau
  - lack of a well-established book-keeping tradition
- Banks increased the risk premium on new lending; intermediation spreads rose to levels much higher than before the global financial crisis.
- Consequence: total stock of credit to the private sector has remained flat, producing a negative credit gap.
- Central bank survey (quarterly since 2015) shows an excessively high debt service ratio as the most common reason for rejecting loan applications.

### Correspondent banking relationships (CBR)
- Central bank survey conducted in August, 2016:
  - about 26 percent of respondents indicated having faced restrictions or termination of at least one CBR.
  - Affected institutions—mostly offshore banks—noted difficulties finding replacements but continued conducting business through existing relationships or parent companies.
  - Respondents did not report any resulting dollar-value loss in the level of correspondent banking transactions.
  - 71 percent of respondents indicated having a contingency plan in case of further losses in CBR.
- Direct contributions from the offshore sector to the economy (wage bill, expenditure in local goods and services, and fees to the government) appear broadly stable at around 3 percent of GDP.
- The full extent of impact of pressures on CBR on the offshore sector remains unclear.

### External sector position and exchange rate
- Current account:
  - declined to 12.9 percent of GDP in 2016 (from 13.6 percent of GDP in 2015), reflecting lower oil prices and a temporary increase in current transfers (4 percent GDP) associated with payments of re‑insurance claims from Hurricane Matthew.
  - expected to widen to 17¾ percent of GDP in the current year due to a surge in Baha Mar‑related imports to complete the resort.
  - projected to narrow to 7.1 percent of GDP over the medium term but would still be above the estimated norm (Annex I).
- Exchange rate and competitiveness:
  - currency appreciated 11¼ percent in real effective terms on average between 2014 and 2015, reflecting a strengthening of the U.S. dollar and the introduction of the VAT in January 2015.
  - since 2015, the real effective exchange rate (REER) has remained virtually flat.
  - Staff view: the currency is overvalued between 10 and 20 percent.
- Reserves:
  - reserve coverage at an estimated 2.4 months of next year’s imports of goods and services, below traditional adequacy benchmarks.
- Tourism:
  - The Bahamas’ share of total tourism receipts among Caribbean countries that cater to the high‑end tourism segment has been on a declining trend.

### Outlook and projections
- Real GDP growth projections:
  - 1¾ percent in 2017
  - 2½ percent in 2018
  - stabilize at around 1½ percent over the medium term
- Baseline scenario assumptions:
  - expected acceleration in U.S. growth in 2017
  - phased opening of Baha Mar and related construction activity
  - Baha Mar projected to contribute 2.5 percent to real GDP growth, cumulatively, over 2017-2019
  - post‑hurricane reconstruction and pickup in FDI‑financed investment to boost growth and employment
  - Investment projects during 2017-2022 amount to an estimated 8½ percent of GDP
- Credit flow to private sector:
  - expected to improve gradually in baseline
  - under baseline, bank credit provision to the private sector would slowly pick up to grow at annual rates of around 2.5–3.0 percent by 2021–2022, leading to gradual closing of the credit gap
- Banks have the balance sheet space to support a pickup in credit demand; improving conditions should support faster reduction in banks’ NPLs.

### Risks to the outlook
- Risks skewed to the downside:
  - weaker‑than‑projected U.S. growth or weaker tourism boost
  - tightening of global financial conditions reducing foreign investment inflows
  - further appreciation of the U.S. dollar eroding competitiveness
  - natural disasters
  - intensification of pressures on CBR
  - potential emergence of Cuba as a competitor for U.S. tourists
  - domestic policy slippages (failure to implement fiscal consolidation) undermining investor confidence and foreign investment
- Upside risks:
  - higher‑than‑projected U.S. growth, FDI flows, or a larger boost from Baha Mar

### Fiscal sustainability: current stance and risks
- Sharp increases in public debt require decisive fiscal consolidation to ensure sustainability and strengthen external buffers.
- Staff baseline scenario:
  - sharp increase in the deficit to 5.7 percent of GDP would bring central government debt to 73 percent of GDP in FY2017 (up from 45 percent of GDP in FY2011).
  - under modest consolidation (deficit down to about 2¼ percent of GDP in the medium term), debt would stabilize at around 73 percent of GDP in 2022.
- Baseline assumptions include dissipation of hurricane‑related spending, expiration of temporary tax relief measures, restraints in current expenditure, and revenue increases from improved tax administration and collection.
- Debt sustainability heat map: points to moderate to high risks to debt sustainability.
- FY2018 budget:
  - envisages reduction in the deficit to 3½ percent of GDP in FY2018
  - sets deficit targets of 2.3 percent and 1.1 percent of GDP for the two subsequent fiscal years
  - deficit reduction for the current fiscal year would result primarily from dissipation of one‑off hurricane‑related expenditure and revenue measures plus revenue improvements from tax administration and collection reforms
  - announced measures: hiring freeze, across‑the‑board budget cuts, in‑depth expenditure review, draft legislation to improve governance and procurement rules, and fiscal discipline

### Staff fiscal recommendations and quantified savings
- Focus on reducing current expenditures; staff noted meeting authorities’ deficit targets would put central government debt on a firmly downward trajectory under staff baseline growth.
- Three priority areas and estimated savings (percent of GDP):
  - Wage bill rationalization: reduce wage bill to at most FY2016 level → savings of 0.8 percent of GDP relative to FY2018 (including reducing non‑essential temporary workers, enacting a hiring freeze, capping compensation for re‑hired pensioners)
  - SOE reform and tariff adjustment: reducing subsidies/transfers to historical average could yield up to 1¼ percent of GDP relative to FY2018; SOE transfers reached 2.1 percent of GDP in FY2016 and combined SOE debt reached 18 percent of GDP in 2016
  - Civil servants’ pension reform: transforming to a contributory regime and setting contributions at 5 percent of wages for pensionable employees could yield revenues of 0.3 percent of GDP
- Aggregate potential savings:
  - Civil servants' pension reform: 0.3
  - SOEs reform and tariff adjustment: up to 1.3
  - Wage bill rationalization: up to 0.8
  - Total: up to 2.4 (percent of GDP)
- Additional fiscal revenue measures:
  - continue strengthening revenue administration
  - over the medium term, introduce a low‑rate income tax as import duties are further reduced to make the system more progressive and protect infrastructure and social spending
  - staff advised against introducing VAT exemptions; instead use planned expenditure review to create space for better‑targeted tools to protect vulnerable households
  - expanding National Health Insurance (NHI) is not affordable without new revenues

### Social insurance and natural disaster resilience
- National Insurance Board (NIB):
  - provides pensions, unemployment insurance, and other short‑term benefits
  - total expenses in benefits surpassed total income in 2016
  - under current policies, NIB’s reserves would be depleted by 2029
  - staff urged adoption of actuarial report recommendations with parametric reforms and raising pension contribution ceiling; move toward a defined‑contribution regime over the medium term
- National Health Insurance (NHI):
  - began providing free primary care to all legal citizens in May 2017 with plan to expand to full coverage within 5 years
  - current administration capped allocation to NHI in the FY2018 budget to BH$40 million (about 0.4 percent of GDP)
  - expanding coverage could lead to annual fiscal costs in the range of 6½ and 10½ percent of GDP
- Natural disaster mitigation and insurance:
  - Bahamas has absorbed natural disaster shocks ex post through the public balance sheet
  - staff recommended integrating a natural disasters savings arrangement into the fiscal framework; insuring public assets via private natural disaster insurance; incentivizing population to use insurance including targeted subsidies for affordability for low‑income households
  - building regulation, land use, and zoning guidelines should be reviewed and updated frequently
  - insurance penetration is relatively low; public assets largely uninsured; an estimated 60 percent of households are without insurance or underinsured
  - authorities: Ministry of Public Works engaging consultants for a storm‑surge protection strategy; coastal protection unit established to prioritize ex‑ante mitigation infrastructure

### Governance, fiscal framework, and authorities’ commitments
- Staff support for medium‑term fiscal framework enshrined in fiscal responsibility law; key elements recommended:
  - simple fiscal rule with a permanent ceiling on the deficit and a cap on current expenditure growth, consistent with putting public debt‑to‑GDP on a downward path
  - requirement to incorporate fiscal risk assessment in the budget (including natural disaster risks) and mitigating policies
  - requirement to develop medium‑term fiscal projections
  - exceptional circumstances clauses to avoid procyclicality
  - complete public financial management modernization as first step
- Authorities’ views and actions:
  - concurred broadly with staff projections and risk assessment; committed to reduce the fiscal deficit and put debt on a downward trajectory
  - plan to appoint a committee to advise on SOE restructuring and to undertake a public employees’ verification exercise to trim the wage bill
  - agreed on need to transform public employees’ pension system into a contributory regime
  - will continue strengthening revenue administration and compliance; decision on VAT exemptions to be informed by fiscal risk assessment
  - capped NHI allocation at BH$40 million (about 0.4 percent of GDP) in FY2018 budget
  - agreed NIB reforms are required and will send last actuarial report to Parliament
  - committed to introduce fiscal responsibility legislation and work with the Fund on draft legislation
  - acknowledged merits of a natural disaster saving fund and ongoing risk mitigation work

### Structural impediments and competitiveness
- Structural constraints and erosion of cost competitiveness have constrained growth:
  - The Bahamas ranks 121st among 190 countries on the World Bank’s ease of doing business index, behind Caribbean peers
  - Deterioration in most categories: onerous administrative processes (property and construction), inadequate access to credit, difficulties in trading across borders, lack of reliable and affordable electricity
  - From a cost perspective, The Bahamas is among the most expensive tourism destinations; share in the “exclusive” Caribbean tourism market has been declining
  - real effective currency strength and real wages growing faster than productivity have eroded competitiveness
- Need to strengthen competitiveness as a complement to fiscal consolidation to enhance economic resilience.

*Source: IMF staff report (chapter content as provided).*

### 25.      Staff urged the authorities to address longstanding structural impediments to improve

### 25.      Staff urged the authorities to address longstanding structural impediments to improve

### Structural reform priorities (staff recommendations)
- Enhancing access to credit
  - Move forward with introducing a credit bureau to address information asymmetries, improve pricing of risk, and expand access to credit.
- Reforming the energy sector (see Box 1)
  - Upgrade infrastructure in electricity generation, transmission, and distribution.
  - Incentivize energy efficiency among businesses and the population.
  - Exploit potential for cleaner energy sources, including wind and solar power, to improve reliability and reduce costs.
  - Move ahead with the planned issuance of the rate-reduction bond by the electricity company alongside a rate adjustment to cost recovery levels as critical steps.
  - Use public-private partnerships, if done effectively, to help fund additional infrastructure, particularly as SOE reforms progress.
  - Assign a leading role in planning and implementing energy policy to one institution to facilitate interagency coordination.
- Improving the business environment
  - Modernize government registration/filing processes and establish intra-agency information exchange systems to enable a “one-stop shop” for businesses.
  - Streamline review and approval processes at The Bahamas Investment Authority.
  - Rationalize regulatory requirements for starting a business.
  - Implement planned measures to fight corruption and crime to improve the business environment.
- Reducing labor market inefficiencies
  - Establish a comprehensive skills-matching database to resolve information asymmetries between labor supply and demand.
  - Create a streamlined arbitration process for labor disputes.
  - Expand vocational and apprenticeship programs—in schools and for displaced workers—to reduce skills mismatch in specialized trade professions.

### Authorities’ responses to structural priorities
- Credit bureau
  - Legislation for the credit bureau is ready and expected to be submitted to Parliament this fall.
- Energy
  - Government established a committee to produce a concrete action plan over the next few months, particularly regarding the future role of Bahamas Power and Light (BPL).
  - Authorities see merit in assigning a clear leading role for energy policy to one entity and plan to rely on public-private partnerships where feasible.
- Business environment and labor
  - Established an Ease of Doing Business Committee; working with the Chamber of Commerce to advance “one-stop shop” yardsticks and reduce regulatory overreach.
  - Ministry of Labor implementing two pilot programs for training and apprenticeship placement to develop a national apprenticeship framework.
- Anti-corruption and governance (plans noted)
  - The new government pledged to table an anti-corruption law in the fall of 2017; intends to amend the Public Disclosure Act to include a campaign finance component; give the Office of the Auditor General more autonomy; enact legislation to establish an independent Office of the Director of Public Prosecutions; and implement social intervention and training programs to combat crime along with good policing and a more efficient judicial system.

### Box 1 — Energy reforms: state of play and way forward
- Current electricity sector structure and metrics
  - Fuel mix for generation: imported diesel (56.5 percent) and heavy fuel oil (43.5 percent).
  - Two entities concentrate 90 percent of generation capacity:
    - Bahamas Power and Light (BPL), state-owned, controls 438 megawatts (MW) and is responsible for transmission and distribution in New Providence and most Family Islands.
    - Grand Bahama Power Corporation (GBPC), privately-owned, controls 98 MW and is responsible for Grand Bahama.
  - Transmission and distribution losses: 12.3 percent of generated electricity.
  - Average electricity cost: US$ 0.32 per kilowatt-hour (kWh) — about the Caribbean average and well above the cost in the United States.
- Reforms already taken
  - National energy policy with renewable energy goals.
  - Electricity Act of 2015 expanded URCA’s mandate to cover the energy sector.
  - Adopted “net billing” allowing users to sell excess power to BPL.
  - Initiated restructuring of the state-owned electricity company in 2016, signing a management services agreement (MSA) with a private company with clear cost-reduction and reliability targets along with renewable energy and customer service initiatives.
  - As part of restructuring, the state-owned electricity company plans to issue US$600 million in rate reduction bonds (RRB) to refinance legacy debts and fund new investment; the Electricity Rate Reduction Bond Act of 2015 stipulates RRB backed with revenues from a bond fee charged directly to customers through their electricity bill.
- Recommended way forward
  - Assign a clear leading role for energy policy to one entity.
  - Ensure proper functioning of the regulatory framework and licensing system.
  - Exploit renewable potential by developing solar power facilities in the Family Islands and incentivizing cost-effective renewables among population and businesses.
  - Facilitate net billing opportunities, including revisiting caps on private sector solar production.
  - Promote energy-saving technologies through building codes and consumption standards and incentivize energy efficiency.
  - Consider cost-effective public-private partnerships to enhance generation capacity through cleaner sources at larger scale.
  - Complete restructuring of the state-owned electricity company, including moving forward with issuance of the rate-reduction bond to upgrade infrastructure and resolve legacy debt.
- Potential impact (study findings)
  - IADB study: if renewable energy increases to 30 percent of total electricity generation:
    - Fuel imports could fall by 17 percent.
    - Electricity prices could decline by 11 percent.
    - Real GDP could increase by 1 percent over the medium- to long-term.
  - McIntyre and others (2016): a 10 percent improvement in energy efficiency (measured as a reduction in consumption of energy per unit of GDP) is associated with a 2-percent increase in real GDP in the long term.

### Strengthening monetary and financial stability
- Central bank holdings of government bonds and peg credibility
  - Staff noted reducing central bank holdings of government bonds would strengthen the credibility of the peg.
  - After Hurricane Matthew, Central Bank of The Bahamas (CBOB) increased long-term government bond holdings by BH$200 million, about 2 percent of GDP, breaching statutory limits.
  - CBOB’s main target—reserves of at least 50 percent of the monetary base—continued to be met, with smaller margins.
  - Staff recommended reversing increases in holdings to ensure compliance with statutory limits.
- Bank of Bahamas and nonperforming loans (NPLs)
  - Staff recommended banks intensify restructuring of NPLs and address permanently the challenges at the Bank of Bahamas.
  - Additional restructuring including through the government’s Mortgage Relief Program would help reduce household debt overhang and free balance sheet space.
  - Recent transfer of a large fraction of NPLs from Bank of Bahamas to a special purpose vehicle (SPV) is a welcome first step.
  - As of end-2016:
    - Total amount of NPLs at the Bank of Bahamas reached about 2.5 percent of GDP.
    - Loan loss reserves reached 1.1 percent of GDP.
  - On August 3, authorities announced the transfer of about 70 percent of total NPLs to a government-owned SPV at gross book value in exchange for promissory notes issued by the SPV.
  - A permanent solution is needed: resolve NPLs in the SPV, restructure remaining NPLs at the bank, strengthen capital and liquidity, and restructure the institution to isolate business decisions from political interference.
- Regulatory and supervisory progress (Box 2 highlights)
  - CBOB strengthening risk-based supervisory framework; introduced “evergreening” concept; framework expected to be fully implemented by August 2017.
  - Progress on enhancing legislative framework for bank resolution and finalizing a National Financial Crisis Management Plan; draft amendments expected to be enacted by end-2017.
  - Banks’ stress tests: even under a 200 percent increase in NPLs for 3 years, the banking system’s capital adequacy ratio would remain above the 17 percent regulatory minimum, with differing outcomes across banks.
  - Liquidity stress tests show no material impact because of excess liquidity.
  - Basel II/III: Basel II implementation completed; capital component of Basel III implemented with commercial banks subject to Basel III capital reporting since 2013; second-round Quantitative Impact Study in Q1 2016 showed only one bank would fall short assuming full implementation of the capital conservation buffer (CCB) and total eligible capital.
  - CBOB considering countercyclical capital buffer and liquidity coverage ratio; no formal timeline yet.
  - Insurance Commission introduced a risk-based capital regime with implementation expected to be completed by end-2017.
- AML/CFT and tax transparency
  - Strong compliance with AML/CFT and tax transparency standards should help mitigate withdrawal of correspondent banking relationships (CBR) and safeguard financial sector integrity.
  - Staff emphasized the need to work closely with CFATF and FATF to address strategic deficiencies identified in the Mutual Evaluation Report (MER) to avoid public listing as noncompliant and to comply with international tax transparency standards such as the OECD’s Common Reporting Standard.
- Authorities’ related actions
  - CBOB plans to reduce holdings of government bonds and has prepared draft amendments to central bank law to introduce stricter limits on holdings of government securities, intended for Parliament by end-2017.
  - Authorities view recent NPL transfer as a first step toward ultimately privatizing the Bank of Bahamas.
  - CBOB published an updated guidance note for FATF compliance, stepped up monitoring and engagement to remediate low-risk, low-value unverified accounts by next year, and is working with the Securities Commission and Insurance Commission to develop a penalties regime for AML/CFT breaches.

### Data, transparency, and past policy advice
- Data improvements recommended
  - Produce quarterly GDP and labor market data.
  - Develop an estimate of the International Investment Position.
  - Move forward with adoption of International Public Sector Accounting Standards (IPSAS) on an accrual basis and produce general government fiscal accounts.
- Past Article IV advice implemented
  - Introduced value-added-tax (VAT) in 2015.
  - Implemented key FSAP recommendations.
  - Strengthened tax revenues through enhanced enforcement and revenue administration reforms.

### Staff appraisal — macroeconomic outlook and policy priorities
- Growth outlook and constraints
  - After 4 years of stagnation, growth is projected to pick up to 1¾ percent this year and to 2½ percent in 2018, driven by a stronger U.S. economy and the phased opening of Baha Mar—a mega resort with the potential to employ 2 percent of the labor force.
  - Significant macroeconomic challenges remain: unaddressed structural bottlenecks constrain medium-term growth; persistently weak activity and high fiscal deficits have sharply increased public debt burden and complicated resolution of banks’ high NPLs; external position remains weaker than suggested by fundamentals and desirable policies.
- Fiscal policy recommendations
  - Adhere to the announced fiscal consolidation path to place public debt-to-GDP on a downward trajectory and strengthen external buffers.
  - Focus consolidation on cutting current expenditures, emphasizing reducing the wage bill and turning state-owned enterprises self-sufficient to reduce their drain on the budget.
  - Turn the civil servants’ pension system into a contributory regime as a critical element of fiscal consolidation.
  - National Insurance Board should adopt parametric reforms to ensure pension sustainability and reduce long-term fiscal risks, with a view to move toward a defined-contribution scheme over the medium term.
  - Continue revenue-strengthening efforts; revenue administration reforms are commendable.
  - Over the medium term, introduce a low-rate income tax as import duties are further reduced to make the tax system more progressive and protect infrastructure and social spending.
  - Avoid introducing exemptions from VAT; instead use the intended expenditure review to create space for better-targeted tools to protect vulnerable households.
  - Adopt a fiscal rule within a medium-term fiscal framework to constrain current expenditure growth and the headline deficit, include escape clauses for significant negative shocks, and require medium-term fiscal projections and fiscal risk assessment.
  - Integrate a well-designed savings arrangement into the framework as an additional buffer against recurring natural disaster shocks and incentivize ex-ante private insurance and risk mitigation investments to reduce fiscal contingencies.
  - A permanent solution for the Bank of Bahamas is necessary to reduce fiscal contingencies.
- Structural reform priorities reiterated
  - Introduce a credit bureau to enhance access to credit.
  - Step up energy sector reforms to improve reliability and reduce costs.
  - Streamline administrative processes to improve the business environment.
  - Reduce labor market inefficiencies to enhance competitiveness and medium-term growth.
  - Emphasize that the exchange rate peg places a premium on prudent fiscal policy and structural reforms to enhance resilience and competitiveness.

*International Monetary Fund: Section 25 of country report (The Bahamas).*

### 42.      A faster resolution of nonperforming loans should strengthen financial stability and

### A faster resolution of nonperforming loans should strengthen financial stability and support the recovery

### Nonperforming loans (NPLs) and financial stability
- NPLs "have declined, but remain elevated."
- "NPLs are concentrated in mortgages."
- "Three banks out of 7 have NPLs above 10 percent."
- Comparative context: "Bahamas' NPLs are high compared to peers."
- Financial system structure snapshot:
  - Offshore sector assets estimated at US$ 385 billion in 2015.
  - Onshore financial sector assets estimated at US$20 billion in 2016.
  - Offshore sector composition (US billion): Banks, $111.7; Bank/Trusts, $72.6; Trusts, $0.1; Insurance, $1.2; Investment Funds, $135.0.
  - Onshore sector composition (US billion): Domestic-owned banks, $6.1; Foreign-owned banks, $8.8; Credit Unions, $0.4; Wealth management, $2.9; Insurance companies, $1.1; Private Pension Funds, $1.0.

### Policy measures to reduce household debt overhang and strengthen recovery
- Recommendation: "Additional restructuring of distressed debt, including through the government’s Mortgage Relief Program, would help reduce the household debt overhang problem and would free up additional balance sheet space to support the economic recovery."
- Expected effect: Faster resolution of NPLs "should strengthen financial stability and support the recovery."

### AML/CFT, tax transparency, and central bank balance sheet
- Observation: "While the loss of CBR has not led to major disruptions so far, strong compliance with AML/CFT and tax transparency standards should help stem their withdrawal."
- Recommendation: "Reducing central bank holdings of government bonds would strengthen the credibility of the peg and support financial stability."

### Other relevant macro-financial context from the source
- Real GDP: "Real GDP has contracted since 2012."
- Labor market: "Unemployment remains high."
- Inflation: "Inflation declined following the dissipation of one-off effects of the VAT and lower oil prices, but rebounded as oil prices recovered."
- Monetary/financial conditions:
  - "Capital buffers remain high."
  - "Interest rate spreads have remained high since 2012."
  - "Bank liquidity is high and increasing."
  - Credit provision described as: "...while credit provision remains weak."

### Institutional timing
- "It is proposed that the next Article IV consultation take place on the standard 12-month cycle."

*Source: IMF staff chapter text as provided.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### A. Context and Recent Developments
- The 2016 external sector position is assessed as weaker than suggested by fundamentals and desirable policy settings.
- Key drivers of external weakness:
  - Hurricane shocks and deteriorating competitiveness, in part due to an appreciated U.S. dollar, have collectively affected reserve accumulation.
  - Capital Flow Management (CFM) regime helps contain risks, but external buffers remain thin given exposure to external shocks, including natural disasters.
- Structural policy stance:
  - Given The Bahamas’ strong commitment to a currency peg, structural reforms to improve competitiveness alongside fiscal consolidation are the primary policy tools to strengthen external buffers.
- Current account and trade structure:
  - Goods imports have steadily increased to nearly six times that of exports, resulting in trade deficits above 25 percent of GDP in recent years.
  - Machinery & equipment and manufactured goods imports comprise about half of all imports; oil and food imports amount to another 30 percent.
  - Net services inflows (mainly tourism receipts) have averaged about 15 percent of GDP.
  - The current account deficit ranged between 10 and 22 percent of GDP during the past decade, with financing shifting away from FDI in favor of other private capital inflows in recent years.
  - Since 2014, reserve accumulation has been modest.
- 2016 developments:
  - The current account deficit declined to 12.9 percent of GDP in 2016.
  - Drivers of the 2016 narrowing:
    - Slower pace of construction activity following the 2014 peak (Baha Mar-related).
    - Significant food and oil price declines reduced the trade balance by 2½ percent of GDP.
    - A temporary sharp increase in current transfers of 4 percent of GDP associated with sizable re-insurance proceeds after Hurricane Matthew.
    - These more than offset a 1½ percent contraction in net tourism receipts.
  - Overall capital and financial inflows increased by 1¼ percent of GDP in 2016, resulting in a modest accumulation of reserves of $92 million or 1 percent of GDP.
- Medium-term outlook:
  - External accounts are expected to strengthen gradually as Baha Mar opening and stronger U.S. growth boost tourism receipts, and a modest recovery in oil and commodity prices helps the trade balance.
  - The current account deficit is projected to gradually converge to around 7 percent of GDP over the medium term.
  - Reserve coverage is projected to improve to 3-months of projected imports by 2022.

### B. External Stability Assessments (Model-based)
- EBA-lite panel regressions of the current account and real exchange rate estimate norm values consistent with fundamentals and desirable policies.
- Model results indicate an overvalued currency; magnitude estimates range between 8.8 and 17.6 percent (see Table 1 summary).

### C. The Current Account (CA) Model
- Limitations:
  - The CA model is limited in analyzing countries heavily dependent on tourism income; it does not effectively capture potentially strong and sustained future tourism inflows that could justify large infrastructure-driven CA deficits near-term.
  - To correct for this, FDI-related goods and services imports are excluded.
- Adjusted 2016 CA figures:
  - Adjusted CA deficit is 6½ percent of GDP in 2016 after excluding FDI-related goods and services imports (adjustment assumes 80 percent of capital goods imports and 100 percent of construction services imports are related to FDI).
- Cyclically-adjusted estimates:
  - Cyclically-adjusted CA balance: -7.1 percent of GDP.
  - Cyclically-adjusted CA norm: -4.5 percent of GDP.
  - Resulting CA gap: -2.6 percent of GDP (after accounting for desirable macroeconomic policies, which include fiscal consolidation, modest reserve accumulation, increased financial deepening, and modest relaxation of the CFM system).
  - The model estimates that a REER adjustment of 8.8 percent is needed to align the current account balance with fundamentals.

### D. The Real Effective Exchange Rate Index (I-REER) Model
- Overall staff assessment: REER is overvalued by around 9 to 18 percent in 2016.
- Model finding: REER is 17.6 percent stronger in 2016 than the level consistent with fundamentals and desired policies.
- Drivers of REER appreciation:
  - The Bahamian dollar appreciated 11¼ percent in real effective terms on average during 2014-2016, attributed largely to the appreciation of the U.S. dollar.
  - Introduction of the VAT in early 2015 accounted for about 2 percentage points of REER strengthening.
  - Current REER level is around 11 percent higher than the long-term average.

### E. Cost and Structural Competitiveness
- Indicators point to erosion in cost and structural competitiveness:
  - The Bahamas’ REER value is relatively high compared to key tourism competitors (Jamaica and the Dominican Republic) with more flexible exchange rate arrangements.
  - REER based only on tourism weights has been more stable and has increased only 2 percent since 2014.
  - Specific competitiveness observations:
    - “Week at the Beach” index estimates indicate nominal costs of an average one week beach holiday in The Bahamas are among the highest in the world.
    - The Bahamas’ share in the Caribbean market focusing on exclusive tourism experiences has been declining.
    - Real wages have risen faster than labor productivity in recent years; electricity costs are relatively high.
    - World Bank “Doing Business Indicators” show steady deterioration in business climate relative to key competing tourism markets: poor rankings in administrative processes, infrastructure, access to credit, ease of trading across borders, and protecting minority investors.

### F. Reserve Adequacy
- End-2016 reserves and conventional benchmarks:
  - International reserves stood at US$904 million (2.2 months of next-year’s imports) at end-2016.
  - This is below widely accepted benchmarks of 3-months of next year’s goods and services imports and 20 percent of broad money (US$1.4 billion).
  - Reserves coverage reaches 3-months of imports when FDI-related goods and services imports are excluded.
  - Reserves are well above 100 percent of short-term debt.
- Risk-weighted and SIDS-specific metrics:
  - Fund’s risk-weighted metric (covering medium and long-term external liabilities in addition to short-term debt and broad money) places reserves at around 75 percent of the suggested level.
  - Accounting for the CFM system, the revised risk-weighted measure assesses reserve coverage at 105 percent, within the recommended 100-150 percent range.
  - Mwase (2012) framework for SIDS and natural disaster exposure suggests reserves are less than half of recommended levels.
- Policy implication:
  - Structural reforms to improve the business climate and cost competitiveness, together with continued fiscal consolidation, are a policy priority to strengthen reserves and external buffers.
- Additional note on CFM:
  - The CFM system mitigates risks; net portfolio investment and other private capital flows have generally been positive (apart from 2009), supporting reserves accumulation.
  - Outward capital transfers require Exchange Control approval and outflows on resident-owned capital are restricted; Central Bank approval is required for nonresident sale and issuance of capital and money market instruments in the local market.

*Source: Annex I. External Sector Assessment (cr17314).*

### Annex IV. Public and External Sector Debt Sustainability Analysis

### Annex IV. Public and External Sector Debt Sustainability Analysis

### Summary assessment and policy implication
- The central government debt-to-GDP ratio has risen more rapidly than in other Caribbean tourism-intensive economies.
- A projected sharp increase in the fiscal deficit in FY 2017, due partially to post-hurricane reconstruction expenditure, and large increases in the wage bill, would push central government debt to 73 percent of GDP and would stay around this level over the medium-term under modest consolidation efforts.
- The debt sustainability heat map points to moderate to high risks to debt sustainability, with a combination of adverse shocks putting the debt on an upward trajectory.
- Risks to debt sustainability, including due to sizable fiscal contingencies, underscore an urgent need to implement fiscal consolidation, complemented with structural reforms to lift potential growth.

### 1. Debt stock and gross financing requirements
- Central government debt reached 68 percent of GDP in FY2016 (ending in June), up from 45 percent in FY2011.
- Under the baseline scenario, staff projects debt to peak at 73.3 percent of GDP in FY2018.
- Debt is projected only to fall by ½ percentage point over the medium term under modest consolidation efforts.
- Gross financing requirements:
  - 7.7 percent of GDP in FY2016.
  - Projected to decline to about 4.3 percent of GDP in the medium term due to lower fiscal deficits and amortization needs.

### 2. Debt profile and vulnerabilities
- Currency composition and maturity:
  - 77 percent of total debt is denominated in local currency.
  - Short-term debt is 16 percent of total debt and is entirely denominated in Bahamian dollars.
  - Weighted average maturity: domestic bonds 12.5 years; external bonds 9.3 years.
- Mitigating factors:
  - Ample liquidity in the domestic banking system and a captive investor base mitigate rollover concerns.
- Remaining risks:
  - Under the baseline, total debt would remain above 70 percent of GDP over the projection period.
  - External financing requirements are close to the benchmark for emerging market comparators due to a still sizable current account deficit and remain a significant risk to the debt profile.
  - Overall heat map: moderate to high risks to debt sustainability.

### 3. Realism of baseline assumptions
- Staff macro assumptions:
  - Real GDP growth: average 1.7 percent over the medium term.
  - Inflation: average 1.7 percent.
  - Primary balance: projected to gradually improve to 1 percent of GDP at the end of the forecast period.
- Historical forecast performance:
  - Staff’s recent growth forecast errors do not show a systematic bias.
  - Past projections for the primary balance appear to have been relatively optimistic, while inflation has turned out better than expected.
- Feasibility:
  - The projected primary balance path is feasible; the projected primary deficit reduction between 2017 and 2022 is lower than the reduction observed between 2013 and 2016.

### 4. Macro–fiscal stress test results
- Shock scenarios simulated: real GDP growth shock, primary balance shock, real interest rate shock, real exchange rate shock. (Shock definitions: 1) a half-standard deviation reduction in real GDP growth, 2) a one-standard deviation increase in the primary deficit, 3) 400 basis points increase in projected interest rates from the average for the past 6 years, and 4) a one-percent real exchange rate shock.)
- Results (debt-to-GDP at end of projection period):
  - Baseline: around 73 percent of GDP.
  - Real GDP growth shock, primary balance shock, real interest rate shock: debt ≈ 78 percent of GDP.
  - Real exchange rate shock: debt ≈ 75.7 percent of GDP.
  - Combined macro–fiscal shock: debt ≈ 84.3 percent of GDP; gross financing requirements to 8.3 percent of GDP in FY 2022.
- Sensitivities:
  - Gross financing requirements are most sensitive to the real interest rate.
  - Exchange rate shocks are least significant given the bulk of debt is denominated in local currency.

### 5. Additional adverse scenarios and impacts
- Failure to consolidate and persistent economic weakness:
  - Scenario A (constant primary balance): primary balance remains at projected FY2017 level (-2.6 percent of GDP); other variables as in baseline except real effective interest rate. Outcome: debt would rise to 91 percent of GDP in FY2022.
  - Scenario B (primary balance and growth equal to historical averages): from FY2018 onwards, real GDP growth = -0.1 percent, primary balance = -2.1 percent of GDP; real effective interest rate increases by 122 basis points. Outcome: debt close to 100 percent of GDP over the medium term; gross financing requirements rising to 11 percent of GDP.
- Natural disasters:
  - Staff simulated a shock more drastic than Hurricane Matthew: temporary reduction in real GDP growth of 0.5 percent for FY 2018 and FY2019.
  - Primary balance would worsen by 3.7 percent and 0.8 percent of GDP over the same period.
  - Outcome: debt would increase to 81 percent of GDP by FY 2022.
- Fiscal contingent liabilities:
  - Analysis limited to central government due to lack of consolidated general government and public sector data.
  - Debt of public entities amounted to 18.8 percent of GDP in FY2016, of which 8.5 percent of GDP are guaranteed by the central government.
  - Staff assumed a contingent liability shock of 2.5 percent of GDP in FY2018 (equivalent to the entire stock of nonperforming loans at the Bank of Bahamas as of end-2016 or to slightly less than a third of SOE debt guaranteed by the central government).
  - Outcome: central government debt to about 75 percent of GDP in FY2018; gross financing needs would rise to 11.2 percent of GDP.
  - National Insurance Board (NIB) actuarial report: without reform, the reserve of the NIS will be depleted within 10 years, further increasing government contingent liabilities under passive policies.

*Annex IV. Public and External Sector Debt Sustainability Analysis — IMF staff assessment*

### 6. External Debt.

### 6. External Debt.

### Overview and recent developments
- The stock of public external debt has increased by 6½ percentage points since 2012, to an estimated 28 percent of GDP at end 2016.
- Increase driven by Central Government debt rising by nearly 19 percent of GDP during this period, which comprises about 87 percent of public external debt.
- Public sector is defined as central government; private-sector external debt stock is not available.

### Baseline projections (selected figures)
- External debt is projected to reach 27½ percent of GDP in 2018 and decrease modestly to 25 percent of GDP at the end of the forecast horizon.
- Baseline external debt path (selected years, in percent of GDP):  
  - 2012: 17.4  
  - 2013: 19.0  
  - 2014: 24.3  
  - 2015: 24.7  
  - 2016: 28.0  
  - 2017: 27.4  
  - 2018: 27.5  
  - 2019: 26.4  
  - 2020: 25.9  
  - 2021: 25.4  
  - 2022: 24.8

- Change in external debt (selected years, in percent of GDP):  
  - 2012: 4.2  
  - 2013: 1.5  
  - 2014: 5.3  
  - 2015: 0.4  
  - 2016: 3.3  
  - 2017: -0.6  
  - 2018: 0.1  
  - 2019: -1.2  
  - 2020: -0.5  
  - 2021: -0.4  
  - 2022: -0.6

### Identified external debt-creating flows and drivers (selected figures)
- Identified external debt-creating flows (sum of components) (selected years, in percent of GDP):  
  - 2012: 10.2  
  - 2013: 12.3  
  - 2014: 19.0  
  - 2015: 12.3  
  - 2016: 12.7  
  - 2017: 14.4  
  - 2018: 9.3  
  - 2019: 5.4  
  - 2020: 5.0  
  - 2021: 4.2  
  - 2022: 3.8

- Current account deficit, excluding interest payments (selected years, in percent of GDP):  
  - 2012: 16.3  
  - 2013: 16.0  
  - 2014: 20.8  
  - 2015: 12.4  
  - 2016: 11.6  
  - 2017: 16.4  
  - 2018: 12.7  
  - 2019: 9.6  
  - 2020: 7.4  
  - 2021: 6.8  
  - 2022: 6.1

- Deficit in balance of goods and services (selected years, in percent of GDP):  
  - 2012: 14.8  
  - 2013: 13.7  
  - 2014: 17.6  
  - 2015: 9.2  
  - 2016: 11.1  
  - 2017: 14.1  
  - 2018: 9.7  
  - 2019: 6.7  
  - 2020: 4.6  
  - 2021: 4.2  
  - 2022: 3.7

- Exports and imports (selected years, in percent of GDP):  
  - Exports: 2012: 43.8; 2016: 39.1; 2018: 40.2; 2022: 42.5  
  - Imports: 2012: 58.6; 2016: 50.2; 2018: 49.9; 2022: 46.2

- Net non-debt creating capital inflows (negative values are shown):  
  - 2012: -6.1  
  - 2013: -4.3  
  - 2014: -2.7  
  - 2015: -0.6  
  - 2016: -0.6  
  - 2017: -2.9  
  - 2018: -4.0  
  - 2019: -4.9  
  - 2020: -3.2  
  - 2021: -3.4  
  - 2022: -2.9

- Automatic debt dynamics contribution (selected years, in percent of GDP):  
  - 2012: 0.0  
  - 2013: 0.6  
  - 2014: 0.8  
  - 2015: 0.6  
  - 2016: 1.8  
  - 2017: 0.9  
  - 2018: 0.6  
  - 2019: 0.6  
  - 2020: 0.7  
  - 2021: 0.7  
  - 2022: 0.6

- Residual, including change in gross foreign assets (selected years, in percent of GDP):  
  - 2012: -6.0  
  - 2013: -10.8  
  - 2014: -13.6  
  - 2015: -11.9  
  - 2016: -9.4  
  - 2017: -15.0  
  - 2018: -9.2  
  - 2019: -6.5  
  - 2020: -5.5  
  - 2021: -4.6  
  - 2022: -4.4

### External debt ratios and financing needs
- External debt-to-exports ratio (selected years, in percent):  
  - 2012: 39.8  
  - 2015: 64.0  
  - 2016: 71.6  
  - 2017: 70.2  
  - 2018: 68.4  
  - 2022: 58.4

- Gross external financing needs (in billions of US dollars, selected years):  
  - 2012: 1.5  
  - 2016: 1.2  
  - 2017: 1.7  
  - 2018: 1.4  
  - 2022: 0.8

- Gross external financing needs (in percent of GDP, selected entries):  
  - 2012: 17.3  
  - 2016: 13.8  
  - 2017: 13.4

### Sensitivity and bound tests (stress scenarios)
- Bounds test results indicate the public external debt profile is moderately sensitive to shocks to the non-interest current account and to a real depreciation shock.
- Scenario outcomes reported (external debt in percent of GDP, relative to baseline = 25 percent at projection horizon):  
  - Permanent increase in non-interest current account deficit by 1.8 percent of GDP relative to the baseline beginning in 2018 would put the public external debt ratio on an increasing trajectory reaching 34 percent of GDP by 2020.
  - A permanent one-time 30 percent real depreciation in 2018 would shift the external debt level up by 12½ percent of GDP relative to the baseline over the projection period (box shows "36" under 30% depreciation scenario while baseline 25).
- Individual shocks in bound tests are permanent one-half standard deviation shocks; combined shocks and one-time real depreciation of 30 percent are also analyzed.
- Growth shock, real interest rate shock, and combined shock outcomes are reported in scenario figures (baseline and scenario paths shown for 2012–2022).

### Risk assessment and vulnerability indicators
- Gross financing needs benchmark: cell coloring rules imply assessment versus 15 percent benchmark; results show some scenarios exceed the 15 percent benchmark under stress tests.
- Debt burden benchmark: 70 percent of GDP; indicators compare against lower and upper risk-assessment benchmarks (detailed heat-map and percentile dynamics presented).
- Public debt held by non-residents, foreign-currency debt share, bond spreads, annual change in short-term public debt, and external financing requirement are monitored against benchmarks, with visual heat-map signaling vulnerabilities.

### Key macroeconomic assumptions underlying baseline (selected averages and projections)
- Real GDP growth (selected years and projections, in percent): historical average 3.1; 2012: 0.0; 2015: -1.7; 2016: -0.3; projection 2017 onward: 2.1, 1.8, 2.5, 2.2, 1.6, 1.5, 1.5 (table entries).
- GDP deflator in US dollars (change in percent): historical average 3.3; 2016: -1.3; projections show modest positive rates (e.g., 2017: 1.2; 2018: 2.0).
- Nominal external interest rate (in percent): historical average 6.6; 2016: 5.5; projections 2017 onward: 5.6, 0.5, 5.3, 4.9, 4.6, 4.5, 4.2, 4.0 (table entries).
- Growth of exports and imports in US dollar terms (percent) shown across historical and projected years.

### Policy implications and resilience recommendations (from Annex V)
- The Bahamas is disproportionately exposed to natural disasters in frequency and economic cost:  
  - Annual damage averaged about 2.0 percent of GDP for The Bahamas compared to an average of 1¼ percent of GDP for the Caribbean region.  
  - The probability of a storm disaster in any given year for The Bahamas is 30 percent relative to 20 percent for the Caribbean region.
- Policies to bolster preparedness and ex-ante risk reduction recommended include:  
  - Bolstering investment in risk reduction.  
  - Increasing reliance on market-based insurance.  
  - Rebuilding fiscal and external buffers, including through a dedicated savings arrangement.

*Source: IMF staff calculations and Public Sector Debt Sustainability Analysis (DSA) tables and annexes in chapter "6. External Debt."*

### 2. Natural disasters can have

### 2. Natural disasters can have

### Macroeconomic consequences
- Recurrent destruction of a country’s productive assets constitutes an implicit tax on capital that tends to deter investment, lowers productivity, and income.
- Natural disasters worsen external trade balances and fiscal balances, often leading to a rapid accumulation of debt.
- The erosion of policy buffers entails broader risks to economic stability.
- Policy implication: Investment in risk reduction, increased use of risk transfer mechanisms, and maintaining adequate fiscal and external buffers are critical to reduce and smooth out the economic consequences of natural disasters.

### Investment in Risk Reduction
- Sturdy infrastructure is a first line of defense against natural disasters.
- Public infrastructure programs should prioritize:
  - effective sea walls along urban coastlines,
  - adequate maintenance and reinforcement of public infrastructure,
  - and seek to “build back better” following disaster events.
- Adequate regulatory and property rights frameworks are central pillars of infrastructure risk mitigation.
  - Targeted fiscal incentives, such as subsidies for retrofitting properties, can spur private investment in disaster resilience.
  - Building codes in The Bahamas are generally adequate to ensure that building structures withstand wind damage but the lack of regulatory protections against storm surge constitutes a clear gap.
  - Regulations should be expanded to include height and minimum building set-backs and sea wall requirements, potentially drawing on regulatory guidance in similar vulnerable jurisdictions.
  - Establish systems that mandate regular reviews and updates of land use and zoning rules with limited exemptions to boost resilience.

### Natural disaster damage statistics (Averages, percent GDP)
- Natural Disaster Damage for the Caribbean Region 1/ (in percent GDP)
  - 1990-2016 | 2000-2016 | 2010-2016
  - The Bahamas: 1.8 | 2.0 | 1.2
  - Barbados: 0.0 | 0.0 | 0.0
  - Belize: 2.3 | 3.7 | 0.0
  - Jamaica: 0.5 | 0.8 | 0.2
  - Dominican Republic: 0.4 | 0.1 | 0.0
  - Trinidad and Tobago: 0.0 | 0.0 | 0.0
  - ECCU: 3.7 | 2.5 | 2.3
  - Caribbean average: 1.2 | 1.3 | 0.5
- Note: Average includes both disaster and non-disaster years. Adjusting for under-reporting, Acevedo (2016) found that damages for the Caribbean could be 1½ to 3½ times larger than reported in the EM-DAT database.
- Footnote: 1/ Reports on damages due to storm disasters.

### Risk Transfer
- The Bahamas insurance market:
  - Eight active locally capitalized personal and commercial insurance companies representing a total of $300 million in gross premiums (3½ percent of GDP).
  - The fallout of Hurricane Matthew on the insurance sector: losses totaling 1 percent of gross premiums.
  - About 90-95 percent of claims following Hurricane Matthew had been resolved as of July, 2017.
  - The sector makes extensive use of international reinsurance markets which helps minimize aggregate payout risks.
  - Costs associated with Hurricane Matthew are estimated at 6¾ percent of GDP with about 4 percent of GDP of insurance reflows received by end-2016.
- Coverage gaps and implications:
  - 60 percent of households have no insurance or are underinsured.
  - Insurance on public assets has lapsed in recent years.
  - Empirical research shows countries with more private and public insurance penetration experience far lower output and income losses from disasters.
  - Penetration is weak, especially among the most vulnerable segments; the cost of obtaining insurance is regarded as the main obstacle.
  - Coverage gaps constitute a contingent liability for the public sector in terms of ex-post direct and indirect social support and rehabilitation expenses.
- Policy recommendations to deepen risk transfer:
  - Consider insuring public assets, at least on a selective basis.
  - Develop policies to broaden insurance coverage by reducing the costs of insurance plans on a targeted basis, informed by cost-benefit analyses.
  - Provide means-tested subsidies to low-income households for micro-insurance disaster instruments as one possibility.
  - Consider mandatory property insurance, supplemented by targeted subsidies, to expand the premium base and decrease costs.
- Regional approaches:
  - Administrative economies of scale can be achieved by adopting regional regulatory standards and/or establishing regional administrative bodies.
  - Pooling of regional funds can finance regional insurance schemes.
  - The Bahamas is a member of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) but membership provides only limited protection owing to The Bahamas’ geographic diversity; CCRIF claims are evaluated based on damage to public infrastructure concentrated in New Providence, leaving much of the country effectively underinsured—indicating a need for enhanced market-based insurance complemented with self-insurance.
- Supporting evidence: Prompt insurance compensation reduces downtime for productive assets and indemnifies producers for income losses (see Melecky and Raddatz (2011), von Peter and Saxena (2012), and Munich Re (2013)).

### Self-Insuring via Fiscal and External Buffers
- Fiscal buffers:
  - The Bahamas has relied on the public balance sheet’s capacity to absorb disaster shocks ex post through the accumulation of debt.
  - Public debt has doubled in the past decade, calling for rebuilding fiscal buffers.
  - Budget should include an allocation for natural disaster response as part of annual fiscal planning; this allocation should be saved in an arrangement subject to strict rules governing inflows, outflows, allocation, transparency, and accountability.
  - Fiscal responsibility legislation could mandate depositing revenue surprises into this fund, or using them to reduce debt, to strengthen fiscal buffers faster.
- External buffers:
  - The impact of natural disasters on the balance of payments of small states tends to be proportionately higher as a share of GDP because reconstruction activities have a significant import content.
  - Reserve coverage in The Bahamas is at 2.4 months of next year’s imports, which is below conventional metrics.
  - Reforms to improve the business environment and cost competitiveness, alongside sustained fiscal consolidation, will help strengthen reserve buffers.
  - Measures to reduce dependency on imports—such as initiatives to support the development of domestic agricultural and industrial production through education and improved access to credit—would also help strengthen external buffers.
- Regional coordination note: In the Caribbean, the Caribbean Disaster Emergency Management Agency (CDEMA) coordinates regional disaster responses and establishes codes of good practice, including for building construction.
- Risk sharing rationale: While ex ante all these economies are exposed to the same risk, the realization of the risk does not affect all countries equally, allowing some room for risk sharing.

*International Monetary Fund — CR17314 (excerpt).*

### Annex VI. Progress on 2013 FSAP Recommendations

### Annex VI. Progress on 2013 FSAP Recommendations

### Banking sector
- Recruit additional staff with emphasis on specialists. — Completed.
- Amend legislation so that if Governor is removed, reasons would be publicly disclosed. — Draft amendment in Parliament.
- Implement, as planned, draft guidance on bank responsibilities for managing operational, interest rate, and market risk. — Completed.
- Develop guidelines on the scope and methods of consolidated supervision. — Completed.

### Insurance and Pensions
- Introduce a standard methodology for the valuation of long-term insurer liabilities. — Guideline on minimum standards in place.
- Implement fully the 3-year plan towards risk-based supervision (RBS). Onsite comprehensive examinations should be initiated without delay. — In progress, to be completed in 2017.
- Develop support for consumer complaint handling. Consider establishing ombudsman. — Complaint filing process has been strengthened and an independent arbitration process will be launched in 2017.
- Amend legislation to specifically require intermediaries to establish a premium payment trust account separate from the intermediary’s account. — Pending.
- Introduce staggered terms for Insurance Commission of The Bahamas (ICB) Board and publish reasons for removal of Board members or the Superintendent. — Pending.
- Develop regulations for appropriate group supervision, corporate governance and risk management standards, processes and procedures and conduct onsite reviews in accordance with Insurance Core Principle (ICP) 23. — No regulations; ICB cooperates with other regulators under MOU’s and colleges.
- Promulgate regulation for new pension fund legislation without delay. — Pending.

### Capital Markets
- Replace current Investment Funds Act 2003 (IFA) and its regulations. — In progress.
- Delete the exclusion in the Securities Industry Act 2011 (SIA) which permits selling investment fund shares to clients without a license if that is the only securities business a person undertakes. — Pending; to be addressed as part of IFA overhaul.
- Subject all locally resident related parties to full due diligence check in licensing investment fund. Subject managers/advisers, operators and custodians to ongoing oversight. — In progress; To be completed in 2017.
- Consider appointing a public interest oversight body for the auditing profession and The Bahamas Institute of Chartered Accountants (BICA), possibly giving the role to the Securities Commission of The Bahamas (SCB). — Pending.
- Develop a plan, possibly as part of the NFCMP, to deal with the failure of a licensee. — Pending.

### Safety Net and Crisis Management
- Prepare crisis management plan draft for Ministry of Finance (MoF). — In progress.
- Implement crisis management plan. — In progress.
- Develop a category of ‘systemic banks’ narrowed to those eligible for solvency support or extraordinary intervention, consistent with international practice. — Completed.
- Develop a target ratio for Deposit Insurance Corporation (DIC) equity capital and determine primary and secondary borrowing sources. — In progress.

*Annex VI. Progress on 2013 FSAP Recommendations*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17314.pdf_