## cr18118

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### Recent developments and labor market
- Unemployment rate: 10.1 percent in November 2017, from 11.6 percent one year earlier.  
- Labor force participation: 81 percent in November 2017, up from 76 percent one year earlier.  
- Youth unemployment: fell to 22 percent, from 26 percent.  
- Real GDP growth: estimated expansion of 1.3 percent in 2017.  
- Air tourist arrivals: declined 4 percent in 2017; 50 percent of hotel room capacity in Grand Bahama remained out of commission after Hurricane Matthew (2016).  
- Baha Mar: created about 4,000 jobs by March 2018; first and second phases opened in April and November 2017, respectively; scheduled to fully open in Spring of 2018.  
- National accounts revision: a 27-percent increase in the level of nominal GDP due mainly to improved coverage.

### Inflation and prices
- Headline year-on-year inflation: reached 1.8 percent in December 2017, up from 0.8 percent in December 2016.  
- Consumer price index (annual average): 1.5 percent in 2017 (est.), projected 2.2 percent in 2018 and 2.5 percent in 2019.  
- Consumer price index (end of period): 1.8 percent in 2017 (est.), projected 2.4 percent in 2018 and 2.6 percent in 2019.  
- Increase driven by housing and transportation services—which include components sensitive to fuel prices.

### Fiscal position and public debt
- Central government fiscal deficit: reached 5.8 percent of GDP in FY2017.  
- FY2018 (first 7 months) central government fiscal deficit: declined to 1.6 percent of GDP, 1.2 percentage points of GDP lower than a year earlier, excluding the one-off purchase of promissory notes issued by Resolve.  
- Central government revenue and grants: 18.0 percent of GDP in 2017 (est.), projected 17.6 percent in 2018 and 17.7 percent in 2019.  
- Central government expenditure: 23.8 percent of GDP in 2017 (est.), projected 20.4 percent in 2018 and 20.0 percent in 2019.  
- Overall balance: -5.8 percent of GDP in 2017 (est.), projected -2.7 percent in 2018 and -2.3 percent in 2019.  
- Primary balance: -3.5 percent of GDP in 2017 (est.), projected -0.3 percent in 2018 and 0.2 percent in 2019.  
- Central government debt: 57.2 percent of GDP in 2017 (est.), projected 57.4 percent in 2018 and 56.8 percent in 2019.  
- Central government debt reached 57.2 percent of GDP in FY2017 (ending in June); staff projects debt to peak at 57.4 percent of GDP in FY2018 and decline to around 55 percent of GDP over the medium term under the baseline.  
- Debt profile and vulnerabilities:
  - Foreign currency debt projected at 36 percent of total debt in FY2018 (up from 27 percent in FY2017).  
  - Short-term debt represents 14 percent of total debt.  
  - Weighted average maturity: domestic bonds 8.5 years; external bonds 11 years.  
- Gross financing requirements: projected to decline from 12 percent of GDP in FY2018 to about 5 percent of GDP in the medium term.  
- Policy and fiscal targets recommended:
  - Permanent ceiling of 1 percent of GDP on the fiscal deficit.  
  - Annual budget target of a deficit of ½ percent of GDP to allow automatic stabilizers to operate.  
  - Staff recommended an additional adjustment of 2 ¼ percent of GDP to bring the deficit to ½ percent of GDP by FY2021.

### External sector and reserves
- Current account balance: estimated -16.4 percent of GDP in 2017, from -7.7 percent in 2016.  
- Drivers of current account deterioration: surge in imports of goods and services related to completion of Baha Mar; recovery in oil prices; lower tourism receipts due to Hurricane Matthew.  
- Cyclically-adjusted current account deficit (after deducting FDI-related imports): estimated to be above the level consistent with fundamentals and desirable policy settings; adjusted CA deficit estimated -6.8 percent of GDP in 2017, cyclically-adjusted CA norm -4.6 percent of GDP, CA gap -2.2 percent of GDP.  
- Staff’s REER assessment: models imply REER adjustment of 9.8 percent (CA model) and suggest REER was 12.3 percent stronger than consistent level (REER model); staff’s view: the currency is overvalued by about 0–10 percent.  
- Gross international reserves: US$1,414 million (end-2017), equivalent to 3.6 months of imports of goods and services; boosted by sovereign external bond placement in November 2017.  
- Memorandum reserves projections: US$1,225 million in 2018, US$1,273 million in 2019.  
- Reserve adequacy metrics (selected): reserves = 150 percent of Central Bank liabilities; reserves = 111 percent of Fund risk-weighted metric; revised risk-weighted measure = 156 percent; SIDS Measure = 72 percent.  
- External public debt (end of period): 27.3 percent of GDP in 2017 (est.), projected 26.2 percent in 2018 and 27.6 percent in 2019.

### Financial sector and banking system
- External bond placement: government successfully placed an external bond for US$750 million in November 2017.  
- Banking sector capitalization and liquidity (as of end-2017): average capital adequacy ratio 33.3 percent (regulatory requirement 17 percent); liquid assets represented 29.0 percent of total assets, more than double the statutory minimum.  
- Nonperforming loans (NPLs): declined to 9.2 percent of total loans at end-2017, from 11.4 percent at end-2016; decline followed mainly from a large disposal of NPLs by the Bank of The Bahamas (BOB).  
- BOB sold B$168 million of NPLs at book value to Resolve and strengthened its capital adequacy ratio to 42 percent.  
- Financial Soundness Indicators (selected, domestic commercial banks, 2017):
  - Capital/risk-weighted assets: 33.3 (minimum requirement is 17 percent).  
  - Excess liquid assets (percent of statutory minimum): 161.7.  
  - Liquid assets/deposits: 44.5.  
  - NPLs/total loans: 9.2.  
  - Provisions/NPLs: 74.7.  
  - Return on assets (end of September 2017): 2.3.  
  - Return on equity (end of September 2017): 8.6.  
- Credit to private sector (excluding NPLs): broadly flat; banks cautious due to weak activity, household debt overhang, absence of a credit bureau, large intermediation spreads, and limited competition.  
- Pressures on correspondent banking relationships (CBR): have not resulted in major disruptions so far.  
- Policy priorities for the sector:
  - Encourage banks to step up efforts to restructure NPLs.  
  - Strengthen AML/CFT and tax transparency compliance.  
  - Planned amendments to central bank law to improve governance, clarify objectives, and tighten limits to central bank lending to the government.

### Outlook and growth projections
- Real GDP growth projections: 2½ percent in 2018 and 2¼ percent in 2019; medium-term growth projected at 1½ percent.  
- Drivers of near-term growth: stronger U.S. economy; phased opening of Baha Mar; pickup in foreign direct investment (FDI).  
- Baha Mar is projected to contribute 2¼ percentage points to real GDP growth, cumulatively, over 2017–2019.  
- Bank credit to the private sector: under the baseline, bank credit would grow at annual rates of around 2.5–3.0 percent by 2021–2023.  
- Risks to medium-term growth: significant structural impediments; downside risks include weaker-than-projected U.S. growth or tourism activity, tightening global financial conditions, natural disasters, intensification of pressures on CBR, and domestic failure to implement fiscal consolidation or structural reforms.  
- Upside risks: lower oil prices, higher-than-projected U.S. growth and FDI flows, or a bigger-than-expected boost from Baha Mar.

### Executive Board assessment and policy recommendations
- Overall assessment: The Bahamian economy has turned the corner but significant challenges remain. Near-term prospects are improving, but medium-term growth requires structural reforms; fiscal deficits remain above debt-stabilizing levels; external position weaker than suggested by fundamentals.  
- Fiscal policy recommendations (selected):
  - Fiscal consolidation with focus on reducing current expenditure to maintain market confidence and reverse upward public debt trends.  
  - Identify measures to bring the deficit down to desirable levels while avoiding undue compression of capital spending.  
  - Trim the wage bill; turn SOEs self-sufficient; reform the unsustainable civil servants’ pension system.  
  - Address imbalances at the National Insurance Board (NIB) to reduce fiscal contingent liabilities.  
  - Create a natural disasters savings fund with a target size between 2–4 percent of GDP by setting aside ½ percentage point of GDP annually during non-disaster years.  
  - Insure public assets and encourage broader use of private insurance through financial literacy training and targeted subsidies.  
  - Planned fiscal responsibility legislation should include a permanent ceiling of 1 percent of GDP on the fiscal deficit and a cap on the growth rate of current expenditure equal to the estimated long-run growth of nominal GDP; annual budgets should target a deficit of ½ percent of GDP.  
  - Complete ongoing public financial management reforms to support a medium-term fiscal framework.  
- Revenue policy: continue strengthening fiscal revenues to make the tax system more progressive; protect infrastructure and social spending; offset a reduction in import duties under eventual WTO accession; avoid introducing a zero-rate VAT for some items.  
- Structural reforms (selected):
  - Advance energy sector reforms to improve electricity grid reliability and reduce costs.  
  - Streamline administrative processes to improve ease of doing business.  
  - Expand vocational and apprenticeship programs to reduce skills mismatches and youth unemployment.  
  - Implement the credit bureau to improve access to credit.  
  - Continue governance reforms and step up efforts to fight crime to enhance the business environment.  
- Monetary and financial policy:
  - Amend central bank law to improve governance, clarify objectives, and tighten limits on central bank lending to government.  
  - Strong compliance with AML/CFT and tax transparency standards; work closely with CFATF and FATF to address strategic deficiencies identified in the 2017 Mutual Evaluation Report (MER).  
  - Reduction in central bank lending to the government is welcomed.

### Box 2 — Calibrating a Fiscal Rule for The Bahamas (highlights)
- Medium-term anchor proposed: central government debt ratio of 50 percent of GDP.  
- Operational targets proposed:
  - Deficit ceiling of 1 percent of GDP.  
  - Cap on current expenditure growth of 3 percent (consistent with expected potential nominal GDP growth under staff’s baseline).  
- Transition period: three years covering FY2018–FY2020.  
- Target timing: a deficit target of 1 percent of GDP from FY2021 onwards would ensure convergence to the debt anchor by FY2028.  
- Savings fund and adjusted target: to create space for accumulation of savings for natural disasters, the target should be reduced to ½ percent of GDP.  
- Exceptional circumstances clause: provide additional flexibility when confronted with more significant negative shocks.  
- Implementation implications:
  - Cap on current spending growth of 3 percent assuming constant revenue share.  
  - Strengthen tax revenues; VAT introduction and revenue administration reforms helped lift tax revenues from 11.6 percent of GDP in FY2014 to 16 percent of GDP in FY2017.  
  - Staff recommended against broad zero-rate VAT exemptions and advised better-targeted tools to help low-income households.  
- Authorities’ views: agreed on need to reduce current expenditure, strengthen tax revenues, reform pensions, rely more on PPPs for infrastructure, and include calibration in draft fiscal responsibility legislation.

### Monetary policy, central bank law, and financial oversight
- Monetary stance: remains appropriate; no need to modify cash reserve requirements at this juncture.  
- Central bank plans: further reduce exposure to the government by selling government advances to commercial banks to mop up excess liquidity.  
- Draft amendments to the central bank law: provisions to improve governance; clarify objectives; tighten limits to central bank lending to the government; public consultation expected in the coming weeks.  
- NPL monitoring: central bank mandated quarterly reporting on status of top 20 NPLs; authorities expect visible results by end-2018.  
- AML/CFT and tax transparency actions:
  - Creating a new AML/CFT Analytics Unit.  
  - Preparing guidance notes on “Financial Crimes Risk Management” and “Proliferation and Proliferation Financing”.  
  - Developing an AML penalties framework and related guidelines.  
  - Expectation that domestic banks will reduce to zero the level of unverified and active accounts by end-March.  
  - Legislation to implement BEPS minimum standards expected to be tabled in Parliament by end-April 2018.

### Disaster risk financing and savings fund proposal
- Motivation:
  - Over the last 30 years, The Bahamas recorded annual average damages from natural disasters at close to 1.5 percent of GDP (Caribbean regional average 1.2 percent of GDP).  
  - Four out of eight hurricanes since 1990 resulted in estimated total damages of at least 5 percent of GDP, implying a probability of close to 15 percent in any given year.  
- Proposal:
  - Natural disasters savings fund target size: between 2–4 percent of GDP.  
  - Annual inflows: ½ percent of GDP during normal years.  
- Methodology and results:
  - VAR model over 1985–2016 and a Monte Carlo experiment focusing on events with probability of occurrence of 15 percent or less.  
  - A savings fund of size between 2 and 4 percent of GDP would be depleted only with 11 percent probability or less.  
- Complementary measures:
  - Contingent funds in the budget; requested contingent loan from the IDB for US$100 million; membership with CCRIF; insurance of public sector assets; catastrophe bonds for most severe events.  
  - Invest in resilient infrastructure and maintain up-to-date building codes, land use, and zoning guidelines.

### External Sector Assessment (Annex I) — key points
- Overall assessment: 2017 external sector position assessed as weaker than suggested by fundamentals and desirable policy settings.  
- Context and recent developments:
  - Goods imports nearly six times exports; services (mainly tourism receipts) average about 20 percent of GDP.  
  - Current account deficit has ranged between 8 and 18 percent of GDP during the past decade.  
  - 2017: current account deficit widened to an estimated 16.4 percent of GDP; capital and financial inflows surged to almost 14 percent of GDP in 2017; foreign reserves accumulation in 2017 amounted to almost 5 percent of GDP.  
- Model-based assessments:
  - EBA-lite panel regressions point to REER overvaluation in 2017 with estimates between 9.8 and 12.3 percent.  
- Reserve adequacy:
  - International reserves: US$1,414 million (3.6 months of next-year’s imports); excluding FDI-related imports: 4.3 months.  
  - Reserves = 150 percent of Central Bank liabilities; reserves = 111 percent of Fund risk-weighted metric; revised risk-weighted measure = 156 percent; SIDS framework = 72 percent.  
- Vulnerabilities and policy implications:
  - Vulnerabilities: exposure to natural disasters, eroded competitiveness, structural bottlenecks, fiscal contingent liabilities.  
  - Policy recommendations: pursue structural reforms, fiscal consolidation, maintain peg commitment, enhance disaster preparedness, strengthen AML/CFT and tax transparency, monitor and communicate on CBRs.

### Debt stock, stress tests, and external debt
- Central government debt reached 57.2 percent of GDP in FY2017.  
- Under baseline, staff projects central government debt to peak at 57.4 percent of GDP in FY2018 and decline to around 55 percent of GDP by FY2023.  
- Macro–fiscal stress tests (selected outcomes):
  - Real interest rate shock: debt would reach about 59 percent of GDP at end of projection period (baseline: 55 percent).  
  - Combined macro–fiscal shock: debt would rise to 66 percent of GDP; gross financing requirements would increase to 12 percent of GDP in FY2023.  
  - Scenario A (no further consolidation): debt rises to 60 percent of GDP by FY2023.  
  - Scenario B (severe adverse): debt rises to 77 percent of GDP over the medium term; gross financing requirements rise to 15 percent of GDP.  
  - Natural disaster shock (temporary growth reduction and primary balance deterioration): debt increases to 64 percent of GDP by FY2023.  
- Public entities’ debt: combined debt of state-owned enterprises reached 14 percent of GDP in 2017; of this, 6.2 percent of GDP is explicitly guaranteed by the central government.  
- External public debt:
  - Stock increased by 6.2 percentage points of GDP in 2017 to an estimated 27.3 percent of GDP (driven by US$750 million external sovereign bond placement).  
  - Baseline external debt path (percent of GDP): 2017: 27.3; 2018: 26.2; 2019: 27.6; 2020: 27.1; 2021: 26.7; 2022: 26.5; 2023: 26.0.  
  - Sensitivity: a permanent 0.5 percent of GDP increase in non-interest current account deficit beginning in 2018 would raise external public debt to 36.1 percent of GDP by 2023; a permanent one-time 30 percent real depreciation would raise external debt by 12.3 percent of GDP relative to baseline.

### Structural, governance, and statistical reforms
- Governance reforms tabled:
  - Constitutional amendment to create an independent Office of the Director of Public Prosecutions (passed by Parliament in 2017).  
  - Bills to create the Office of the Ombudsman and to set up a new code of conduct, an Integrity Commission, and deepen financial disclosure responsibilities.  
- Data and statistics:
  - Staff welcomed national accounts improvements and commitment to adopt IPSAS on an accrual basis by 2022.  
  - Further recommended actions: produce quarterly GDP statistics; publish and adhere to a data release calendar; improve labor market data; develop an estimate of the International Investment Position.

### Key social and economic indicators (selected)
- GDP (US$ millions), 2016: 11,262.  
- GDP per capita (US$), 2016: 30,581.  
- Population (thousands), 2016: 368.  
- Life expectancy at birth (years), 2015: 75.4.  
- Adult literacy rate, 15 & up (percent), 2007: 95.6.  
- Poverty rate (percent), 2013: 12.8.  
- Unemployment rate (percent), November 2017: 10.1.  
- Infant mortality rate (per 1,000 live births), 2015: 9.9.  
- Human development index (rank), 2016: 58.

*Source: IMF staff report for the 2018 Article IV Consultation (The Bahamas).*

### 10.1 percent in November 2017, from 11.6 percent one year earlier.  Inflation remains low

### 10.1 percent in November 2017, from 11.6 percent one year earlier.  Inflation remains low

### Recent developments and labor market
- Unemployment rate: 10.1 percent in November 2017, from 11.6 percent one year earlier.  
- Labor force participation: 81 percent in November 2017, up from 76 percent one year earlier.  
- Youth unemployment: fell to 22 percent, from 26 percent.  
- Real GDP growth: estimated expansion of 1.3 percent in 2017.  
- Air tourist arrivals: declined 4 percent in 2017; 50 percent of hotel room capacity in Grand Bahama remained out of commission after Hurricane Matthew (2016).  
- Baha Mar: created about 4,000 jobs by March 2018; first and second phases opened in April and November 2017, respectively; scheduled to fully open in Spring of 2018.  
- National accounts revision: a 27-percent increase in the level of nominal GDP due mainly to improved coverage.

### Inflation and prices
- Headline year-on-year inflation: reached 1.8 percent in December 2017, up from 0.8 percent in December 2016.  
- Consumer price index (annual average): 1.5 percent in 2017 (est.), projected 2.2 percent in 2018 and 2.5 percent in 2019.  
- Consumer price index (end of period): 1.8 percent in 2017 (est.), projected 2.4 percent in 2018 and 2.6 percent in 2019.

### Fiscal position and public debt
- Central government fiscal deficit: reached 5.8 percent of GDP in FY2017.  
- FY2018 (first 7 months) central government fiscal deficit: declined to 1.6 percent of GDP, 1.2 percentage points of GDP lower than a year earlier, excluding the one-off purchase of promissory notes issued by Resolve.  
- Central government revenue and grants: 18.0 percent of GDP in 2017 (est.), projected 17.6 percent in 2018 and 17.7 percent in 2019.  
- Central government expenditure: 23.8 percent of GDP in 2017 (est.), projected 20.4 percent in 2018 and 20.0 percent in 2019.  
- Overall balance: -5.8 percent of GDP in 2017 (est.), projected -2.7 percent in 2018 and -2.3 percent in 2019.  
- Primary balance: -3.5 percent of GDP in 2017 (est.), projected -0.3 percent in 2018 and 0.2 percent in 2019.  
- Central government debt: 57.2 percent of GDP in 2017 (est.), projected 57.4 percent in 2018 and 56.8 percent in 2019.  
- Fiscal targets recommended: permanent ceiling of 1 percent of GDP on the fiscal deficit; annual budget target of a deficit of ½ percent of GDP to allow automatic stabilizers to operate.

### External sector and reserves
- Current account balance: estimated -16.4 percent of GDP in 2017, from -7.7 percent in 2016.  
- Drivers of current account deterioration: surge in imports of goods and services related to completion of Baha Mar; recovery in oil prices; lower tourism receipts due to Hurricane Matthew.  
- Cyclically-adjusted current account deficit (after deducting FDI-related imports): estimated to be above the level consistent with fundamentals and desirable policy settings.  
- Gross international reserves: US$1,414 million (end-2017), equivalent to 3.6 months of imports of goods and services; boosted by sovereign external bond placement in November 2017.  
- Memorandum reserves projections: US$1,225 million in 2018, US$1,273 million in 2019.  
- External public debt (end of period): 27.3 percent of GDP in 2017 (est.), projected 26.2 percent in 2018 and 27.6 percent in 2019.

### Financial sector and banking system
- External bond placement: government successfully placed an external bond for US$750 million in November 2017.  
- Banking sector capitalization and liquidity (as of end-2017): average capital adequacy ratio 33.3 percent (regulatory requirement 17 percent); liquid assets represented 29.0 percent of total assets, more than double the statutory minimum.  
- Nonperforming loans (NPLs): declined to 9.2 percent of total loans at end-2017, from 11.4 percent at end-2016.  
- Credit to private sector (excluding NPLs): broadly flat; banks remain cautious in making new loans.  
- Pressures on correspondent banking relationships (CBR): have not resulted in major disruptions so far.  
- Policy priorities for the sector: encourage banks to step up efforts to restructure NPLs; strengthen AML/CFT and tax transparency compliance; planned amendments to central bank law to improve governance, clarify objectives, and tighten limits to central bank lending to the government.

### Outlook and growth projections
- Real GDP growth projections: 2½ percent in 2018 and 2¼ percent in 2019; medium-term growth projected at 1½ percent.  
- Drivers of near-term growth: stronger U.S. economy; phased opening of Baha Mar; pickup in foreign direct investment (FDI).  
- Risks to medium-term growth: significant structural impediments that require bold policy action to unlock higher growth.

### Executive Board assessment and policy recommendations
- Overall assessment: The Bahamian economy has turned the corner but significant challenges remain. Near-term prospects are improving, but medium-term growth requires structural reforms; fiscal deficits remain above debt-stabilizing levels; external position weaker than suggested by fundamentals.  
- Fiscal policy recommendations:
  - Fiscal consolidation with focus on reducing current expenditure to maintain market confidence and reverse upward public debt trends.  
  - Identify measures to bring the deficit down to desirable levels while avoiding undue compression of capital spending.  
  - Focus on trimming the wage bill; turning SOE’s self-sufficient; reforming the unsustainable civil servants’ pension system.  
  - Address imbalances at the National Insurance Board (NIB) to reduce fiscal contingent liabilities.  
  - Create a natural disasters savings fund with a target size between 2–4 percent of GDP by setting aside ½ percentage point of GDP annually during non-disaster years.  
  - Insure public assets and encourage broader use of private insurance through financial literacy training and targeted subsidies.  
  - Planned fiscal responsibility legislation should include a permanent ceiling of 1 percent of GDP on the fiscal deficit and a cap on the growth rate of current expenditure equal to the estimated long-run growth of nominal GDP; annual budgets should target a deficit of ½ percent of GDP.  
  - Complete ongoing public financial management reforms to support a medium-term fiscal framework.
- Revenue policy: continue strengthening fiscal revenues with the intention to make the tax system more progressive; protect infrastructure and social spending; offset a reduction in import duties under eventual WTO accession; avoid introducing a zero-rate VAT for some items.  
- Structural reforms:
  - Advance energy sector reforms to improve electricity grid reliability and reduce costs.  
  - Streamline administrative processes to improve ease of doing business.  
  - Expand vocational and apprenticeship programs to reduce skills mismatches and youth unemployment.  
  - Implement the credit bureau to improve access to credit.  
  - Continue governance reforms and step up efforts to fight crime to enhance the business environment.  
- Monetary and financial policy:
  - Planned amendments to the central bank law to improve governance, clarify objectives, and tighten limits on central bank lending to government.  
  - Strong compliance with AML/CFT and tax transparency standards; work closely with CFATF and FATF to address strategic deficiencies identified in the 2017 Mutual Evaluation Report (MER).  
  - Reduction in central bank lending to the government is welcomed.

### Key social and economic indicators (selected)
- GDP (US$ millions), 2016: 11,262  
- GDP per capita (US$), 2016: 30,581  
- Population (thousands), 2016: 368  
- Life expectancy at birth (years), 2015: 75.4  
- Adult literacy rate, 15 & up (percent), 2007: 95.6  
- Poverty rate (percent), 2013: 12.8  
- Unemployment rate (percent), November 2017: 10.1  
- Infant mortality rate (per 1,000 live births), 2015: 9.9  
- Human development index (rank), 2016: 58

*Source: IMF staff report for the 2018 Article IV Consultation (The Bahamas).*

### 4.      Inflation remains low despite higher oil

### 4.      Inflation remains low despite higher oil

### Inflation and prices
- Headline year-on-year inflation reached 1.8 percent in December 2017, up from 0.8 percent in December 2016.
- The increase was driven by an increase in housing and transportation services—which include components sensitive to fuel prices.

### Fiscal position and public debt
- In FY2017 (ending in June), the central government fiscal deficit reached 5.8 percent of GDP, up from 2.8 percent of GDP a year earlier, due to post-hurricane cleanup and reconstruction and lax spending control in the run-up to the general elections.
- Central government debt reached 57 percent of GDP in FY2017.
- Last August, the new administration announced across-the-board spending cuts, the nonrenewal of some temporary workers’ contracts, and a hiring freeze.
- Data for the first 7 months of FY2018 show a decline in the deficit to 1.6 percent of GDP, 1.2 percentage points of GDP lower than a year earlier, excluding the one-off purchase of promissory notes issued by Resolve.
- The Bank of The Bahamas promissory note redemption: the central government is redeeming the first set of promissory notes for B$100 million from the Bank of The Bahamas at face value in this fiscal year. Staff estimated the fair value of the notes at 20 percent, with the difference recorded as a capital transfer for the central government, adding 0.7 percent of GDP to spending.
- The Bahamas avoided a new sovereign rating downgrade and successfully placed an external bond.

### Financial sector soundness and credit
- Commercial banks remain liquid and well capitalized; financial system assets are concentrated in the offshore sector, with strict firewalls between the domestic and offshore banking sectors.
- Seven commercial banks, four of which are subsidiaries of foreign banks, dominate the domestic financial sector.
- As of December 2017:
  - Average capital adequacy ratio stood at 33.3 percent (regulatory requirement is 17 percent).
  - Liquid assets represented 29 percent of total assets, and more than double the statutory minimum.
  - Stock of nonperforming loans (NPLs) declined to 9.2 percent of total loans, from 11.4 percent at end-2016.
- The decline in NPLs followed mainly from a large disposal of NPLs by the Bank of The Bahamas (BOB); the disposal allowed BOB to strengthen its capital adequacy ratio to 42 percent.
- The bank sold B$168 million of NPLs at book value to Resolve.
- Despite ample balance sheet space, banks are cautious in making new loans due to:
  - Persistent weakness in economic activity.
  - A debt overhang problem straining households’ debt-servicing capacity.
  - A central bank survey showing an excessively high debt-service-to-income ratio as the most common reason for rejecting loan applications.
  - Absence of a credit bureau and book-keeping tradition complicating borrower screening.
  - Large intermediation spreads and limited competition.
- Credit to the private sector, excluding NPLs, has been broadly flat.
- Pressures on correspondent banking relationships (CBR) have not resulted in major disruptions so far.

### Financial Soundness Indicators (selected, domestic commercial banks)
- Capital/risk-weighted assets (2017): 33.3 (minimum requirement is 17 percent).
- Excess liquid assets (in percent of statutory minimum requirement, 2017): 161.7.
- Liquid assets/deposits (2017): 44.5.
- NPLs/total loans (2017): 9.2.
- Provisions/NPLs (2017): 74.7.
- Return on assets (end of September 2017): 2.3.
- Return on equity (end of September 2017): 8.6.

### External sector
- The current account deficit is estimated to have widened to 16.4 percent of GDP in 2017, from 7.7 percent of GDP in 2016.
- The increase is due to a surge in imports of goods and services related to the completion of Baha Mar, the recovery in oil prices, and lower tourism receipts due to the impact of Hurricane Matthew on hotel infrastructure.
- The 2017 cyclically-adjusted current account deficit, after deducting FDI-related imports, is estimated to be 2.2 percentage points of GDP above the level consistent with fundamentals and desirable policy settings.
- As of end-2017, the Bahamian dollar depreciated 4.3 percent in real effective terms relative to the 2017 average as the U.S. dollar weakened vis-a-vis other major currencies.
- Staff’s view: the currency is overvalued by about 0–10 percent.
- Foreign reserves strengthened to US$1.4 billion by end-2017, equivalent to 3.6 months of imports of goods and services, boosted by the sovereign external bond placement in November.
- The current level of reserves is adequate under traditional benchmarks.

### Governance reforms
- Authorities tabled legislation to strengthen governance and the rule of law, including:
  - A constitutional amendment, passed by Parliament in 2017, to create an independent Office of the Director of Public Prosecutions.
  - A bill to create the Office of the Ombudsman.
  - A bill to set up a new code of conduct for public officials, establish an Integrity Commission to investigate alleged cases of corruption, and deepen the financial disclosure responsibilities of public officials.
- The Integrity Commission Bill and the Ombudsman Bill were tabled in 2017 and are expected to be debated this year.

### Outlook and risks
- Real GDP growth projections:
  - Pick up to 2¼ – 2½ percent in 2018-2019.
  - Stabilize at 1½ percent over the medium term.
- Baseline assumptions: stronger global growth (particularly in the United States), the full opening of Baha Mar, and a pickup in foreign direct investment.
- Baha Mar is projected to contribute 2¼ percentage points to real GDP growth, cumulatively, over 2017–2019.
- Medium-term growth at 1½ percent reflects significant structural impediments.
- The current account deficit is projected to narrow over the medium term due to larger tourism receipts and lower imports from the completion of Baha Mar and fiscal consolidation.
- Bank credit to the private sector is expected to improve gradually; under the baseline, bank credit would grow at annual rates of around 2.5–3.0 percent by 2021–2023.
- Risks skewed to the downside:
  - Weaker-than-projected U.S. growth or tourism activity.
  - Tightening of global financial conditions reducing foreign investment inflows.
  - Natural disasters and intensification of pressures on CBR.
  - Domestic failure to implement fiscal consolidation or structural reforms.
- Upside risks: lower oil prices, higher-than-projected U.S. growth and FDI flows, or a bigger-than-expected boost from Baha Mar.

### Authorities’ views
- Authorities broadly agreed with staff’s projections and risk assessment.
- Authorities underscored commitment to tackle fiscal imbalances and structural impediments and agreed with the external position assessment.

### Key policy issues — Fiscal policy
- Sharp increases in public debt call for decisive fiscal consolidation to rebuild fiscal buffers and maintain market confidence.
- Under staff’s baseline:
  - Expenditure restraint would reduce the fiscal deficit from 5.8 percent of GDP in FY2017 to 2.7 percent of GDP in FY2018, and to about 1½ percent of GDP in the medium term.
  - Central government debt would peak at 57.4 percent of GDP in FY2018 and gradually decline to stabilize at around 55 percent of GDP by FY2023.
  - The debt sustainability heat map points to low to moderate risks under this baseline, but sizable contingent liabilities and exposure to natural disasters pose significant downside risks.
- Authorities’ fiscal consolidation targets announced in the FY2018 budget envisage:
  - Fiscal deficit reduction to 2.7 percent of GDP in FY2018.
  - 1.8 percent of GDP in FY2019.
  - 0.8 percent of GDP in FY2020.
- Staff recommended an additional adjustment of 2 ¼ percent of GDP to bring the deficit to ½ percent of GDP by FY2021 (the medium-term target under the proposed fiscal rule).
- Staff urged identifying measures with a strong focus on reducing current spending and avoiding undue compression of capital spending.
- Staff emphasized the following areas for adjustment:
  - Trimming the wage bill through gradual rationalization of public sector jobs and wage restraint.
  - Turning SOEs self-sufficient by ensuring service prices recover costs, restructuring corporations, and establishing effective financial oversight.
  - Reforming the civil servants’ pension system by moving to a contributory regime in the near term and to a defined-contribution scheme in the medium term.
  - Addressing imbalances at the National Insurance Board (NIB) by adopting recommendations in the last actuarial report to reduce fiscal contingent liabilities.
- The combined debt of state-owned enterprises reached 14 percent of GDP in 2017, which includes the promissory notes issued by Resolve.

### Disaster risk financing and savings fund proposal
- Staff recommended a multilayer disaster risk-financing strategy including a proposed natural disasters savings fund:
  - Target size: between 2–4 percent of GDP.
  - Annual inflows: ½ percent of GDP during normal years.
- Motivation:
  - Over the last 30 years, The Bahamas recorded annual average damages from natural disasters at close to 1.5 percent of GDP (higher than the Caribbean regional average of 1.2 percent of GDP).
  - Four out of eight hurricanes since 1990 resulted in estimated total damages of at least 5 percent of GDP, implying a probability of close to 15 percent in any given year.
- Methodology:
  - Staff estimated a VAR model over 1985–2016 and used a Monte Carlo experiment focusing on events with a probability of occurrence of 15 percent or less.
- Results:
  - A savings fund of size between 2 and 4 percent of GDP would be depleted only with 11 percent probability or less.
  - The fund would require annual inflows for ½ percent of GDP during normal years.
- Complementary measures:
  - Contingent funds in the budget, the proposed savings fund, and the requested contingent loan from the IDB for US$100 million to confront more frequent, less severe shocks.
  - Risk transfer through CCRIF and insurance of public sector assets for more severe events.
  - Catastrophe bonds for the most severe disasters.
- Staff recommended setting up the savings fund over the medium term and insuring public assets while encouraging private insurance uptake through financial literacy training and targeted subsidies.
- Investing in resilient infrastructure and maintaining up-to-date building codes, land use, and zoning guidelines are critical.

### Fiscal responsibility framework and rule
- Draft fiscal responsibility legislation is being prepared with Fund technical assistance and is expected to be tabled in Parliament in May together with the FY2019 budget.
- Recommended fiscal rule features:
  - A ceiling on the fiscal deficit no larger than 1 percent of GDP with annual deficit targets set at ½ percent of GDP to allow space for automatic stabilizers (binding from FY2021).
  - The rule should cap the growth rate of current expenditure at the estimated long-run growth of nominal GDP.
  - Include exceptional circumstances clauses to be triggered only when confronted with significant negative shocks.
  - Mandate an assessment of near and medium-term fiscal risks and mitigating policies in the budget process and include enhanced reporting requirements.
- Completing ongoing public financial management reforms is critical for the effectiveness of a medium-term fiscal framework.

*Source: cr18118 - 4.      Inflation remains low despite higher oil*

### Box 2. Calibrating a Fiscal Rule for The Bahamas

### Box 2. Calibrating a Fiscal Rule for The Bahamas

### Fiscal framework: anchor and operational targets
- Medium-term anchor proposed: central government debt ratio of 50 percent of GDP.
- Rationale for 50 percent anchor:
  - It is the lower bound among three approaches that yielded a range between 50–71 percent of GDP:
    - Median debt level among emerging markets with investment grade sovereign rating across the three major rating agencies.
    - Initial debt level such that negative shocks would increase debt to above 70 percent of GDP—the DSA critical debt level for emerging markets—only with a small probability.
    - Highest level of debt that could be sustained under a prolonged economic slowdown without requiring a primary surplus above 2 percent of GDP.
  - Favoring the lower end due to: sizable contingent liabilities of the central government; the need for a prudent debt level under an exchange rate peg; and to put the debt-to-GDP ratio on a downward trajectory from the current level of 58 percent of GDP.

- Operational targets proposed:
  - Deficit ceiling of 1 percent of GDP.
  - Cap on current expenditure growth of 3 percent (consistent with expected potential nominal GDP growth under staff’s baseline).

### Calibration, transition, and special provisions
- Transition period: three years covering FY2018–FY2020.
- Target timing:
  - A deficit target of 1 percent of GDP from FY2021 onwards would ensure convergence to the debt anchor by FY2028.
- Technical basis:
  - The target fiscal deficit is backed out from a debt dynamics equation relating initial debt stock, target fiscal deficit, expected long-term nominal GDP growth, an assumed convergence horizon, and the debt target.
- Savings fund and adjusted target:
  - To create space for accumulation of savings in staff’s proposed fund for natural disasters, the target should be reduced to ½ percent of GDP.
  - To limit procyclicality, setting the permanent ceiling at 1 percent of GDP would allow accommodating real GDP growth shocks of up to 1 standard deviation without breaching the deficit ceiling.
- Exceptional circumstances clause:
  - Would provide the option of additional flexibility when confronted with more significant negative shocks.

### Implementation implications for expenditure and revenues
- Cap on growth of current spending:
  - Consistent with the proposed deficit ceiling—assuming revenues remain constant as a share of GDP—the cap equals expected potential nominal GDP growth; under staff’s baseline this implies setting a cap of 3 percent.
- Revenue strengthening:
  - Strengthening tax revenues is critical to protect social and infrastructure spending.
  - VAT introduction in 2015 and revenue administration reforms helped lift tax revenues from 11.6 percent of GDP in FY2014 to 16 percent of GDP in FY2017.
  - Staff advised continuing to strengthen tax revenues to make the tax system more progressive; protect infrastructure and social spending; and offset a reduction in import duties under an eventual WTO accession.
  - Staff recommended considering better-targeted tools than a zero-rate VAT on some food items to help low-income households.

### Authorities’ views and complementary measures
- Authorities agreed on need to reduce current expenditure and strengthen tax revenues; taking steps to gradually trim the wage bill; asking SOEs to prepare plans to become self-sufficient; acknowledged need to reform the pension system.
- Capital spending:
  - Authorities indicated the reduction in capital spending is temporary while priorities are being identified and intend to rely more on PPPs for infrastructure investment.
- Fiscal legislation:
  - Authorities agreed with staff’s proposed fiscal rule targets and plan to include the calibration in draft fiscal responsibility legislation to be sent to Parliament in late May.
- Savings fund and disaster preparedness:
  - Authorities welcomed the recommendation on the savings fund and highlighted actions including seeking a contingent credit line from the IDB for US$100 million; membership with CCRIF; planned investments in sea walls and coastal protection; and updating the building code.

### Key policy recommendations and priorities linked to the fiscal rule
- Put public debt-to-GDP ratio on a downward trajectory by:
  - Sustaining the proposed anchor and operational targets.
  - Strengthening tax revenues rather than broad zero-rate VAT exemptions.
- Allow limited flexibility for shocks via:
  - A transition period (FY2018–FY2020), an exceptional circumstances clause, and a procyclicality buffer (setting permanent ceiling at 1 percent of GDP while temporarily targeting ½ percent to fund savings).
- Ensure expenditure control by:
  - Capping current expenditure growth at expected potential nominal GDP growth (3 percent under staff’s baseline), assuming constant revenue share.
- Complement fiscal consolidation with structural reforms to support growth and resilience (summarized elsewhere in the report), which would facilitate achieving and sustaining the fiscal targets.

*Source: Box 2. Calibrating a Fiscal Rule for The Bahamas.*

### 30.      The authorities agreed that the monetary stance remains appropriate and with the

### cr18118 - 30.      The authorities agreed that the monetary stance remains appropriate and with the

### Monetary policy and central bank law
- The monetary stance remains appropriate.
- The central bank agreed there was no need to modify cash reserve requirements at this juncture.
- The central bank plans to further reduce its exposure to the government in the near term by selling government advances to commercial banks, which will help mop up some of the excess liquidity in the system.
- The draft amendments to the central bank law are ready and the public consultation process is expected to begin in the coming weeks.
- Planned amendments include provisions to improve central bank governance; clarify its objectives; and tighten limits to central bank lending to the government, which should lead to a more robust legislation.
- The reduction in central bank lending to the government is welcome and would bring the central bank closer to international best practices and strengthen the peg’s credibility.

### Nonperforming loans (NPLs) and financial sector soundness
- The authorities are confident that increased monitoring of NPLs will lead to a faster resolution of these loans.
- The central bank has mandated banks to report on a quarterly basis the status of the top 20 NPLs.
- Authorities expect visible results by end-2018 from this approach encouraging faster NPL resolution.
- Reforms to the property tax system and automation of transfer taxes offer opportunities to develop property value databases.
- The Bank of The Bahamas now has a sound balance sheet, which should improve its institutional brand and future prospects.
- The Bank of The Bahamas has strengthened its capital position, but it still requires a sustainable business model, free from political interference, to keep fiscal contingent liabilities contained.

### AML/CFT, tax transparency, and BEPS
- Addressing deficiencies in the AML/CFT framework is a top priority.
- Actions taken or planned:
  - Creating a new AML/CFT Analytics Unit.
  - Increasing outreach and capacity building activities.
  - Preparing guidance notes on “Financial Crimes Risk Management” and “Proliferation and Proliferation Financing”.
  - Developing an AML penalties framework and related guidelines.
- Authorities expect all domestic banks will reduce to zero the level of unverified and active accounts by end-March.
- In coordination with other financial sector regulators, the central bank plans to issue an annual report on AML/CFT risks.
- Authorities reiterated their commitment to tackle BEPS:
  - Legislation is currently being drafted to give effect to the implementation of the BEPS minimum standards and to address gaps identified by the EU Code of Conduct Group (COCG).
  - Authorities expect to table this legislation in    Parliament by end-April 2018, which includes provisions to mandate financial reporting to large multinational corporations operating in The Bahamas.
- Strong compliance with AML/CFT and tax transparency standards is critical to mitigate withdrawal of CBR and safeguard financial-sector integrity.
- It is critical to work closely with the CFATF and the FATF to swiftly address strategic deficiencies identified in the 2017 Mutual Evaluation Report (MER).
- Steps to commit to implement the OECD’s international standards on tax transparency are welcome.

### Data, statistics, and reporting
- Authorities should step up efforts to improve the quality and ensure timely dissemination of statistics.
- Staff welcomed recent improvements to the national accounts statistics and the commitment to adopt the International Public Sector Accounting Standards (IPSAS) on an accrual basis by 2022.
- Further actions recommended:
  - Move forward with the production of quarterly GDP statistics.
  - Publish and adhere to a data release calendar.
  - Improve labor market data, including by conducting unemployment surveys more frequently.
  - Develop an estimate of the International Investment Position.

### Fiscal outlook and policy recommendations
- Near-term economic prospects are improving, with real GDP growth projected to reach 2½ percent in 2018, on the back of the phased opening of Baha Mar, a stronger U.S. economy, and a pickup in FDI.
- Public debt ratios have declined on the back of a sizable upward revision to nominal GDP, but fiscal deficits remain above debt-stabilizing levels.
- External reserve buffers have improved; however, the external position is weaker than the level suggested by fundamentals and desirable policy settings.
- Fiscal consolidation, focused on reducing current expenditure, is critical to maintain market confidence and reverse the upward trend in the public debt-to-GDP ratio.
- The FY2018 target is within reach, but measures still need to be identified to bring the deficit down to desirable levels while avoiding undue compression of capital spending.
- Priority fiscal measures recommended:
  - Trim the wage bill.
  - Turn SOE’s self-sufficient.
  - Reform the unsustainable civil servants’ pension system.
  - Address imbalances at the National Insurance Board (NIB) to reduce fiscal contingent liabilities.
- The planned fiscal responsibility legislation should include:
  - A permanent ceiling of 1 percent of GDP on the fiscal deficit.
  - A cap on the growth rate of current expenditure equal to the estimated long-run growth of nominal GDP.
  - Annual budgets should target a deficit of ½ percent of GDP to allow space for automatic stabilizers.
- Strong adherence to these targets over the medium term would keep debt on a firmly downward trajectory and allow accumulating savings into a natural disasters fund.
- Completing ongoing reforms to the public financial management system is critical for the effectiveness of a medium-term fiscal framework.
- Authorities should continue strengthening fiscal revenues to make the tax system more progressive; protect infrastructure and social spending; and offset a reduction in import duties under an eventual WTO accession.
- Introducing a zero-rate VAT for some items should be avoided as there can be better-targeted tools to assist low-income households.

### Disaster risk management and resilience
- Increased reliance on preparedness and risk reduction policies should enhance fiscal and economic resilience.
- Recommendation to create a natural disasters savings fund with a target size between 2–4 percent of GDP, by setting aside ½ percentage point of GDP annually during non-disaster years.
- Additional measures:
  - Insure public assets and encourage broader use of private insurance, including through financial literacy training and targeted subsidies.
  - Invest in resilient infrastructure and maintain up-to-date building codes, land use, and zoning guidelines.

### Structural reforms to lift medium-term growth
- Lifting growth in the medium term requires resolute implementation of structural reforms.
- Priorities include:
  - Advancing energy sector reforms to improve the reliability of the electricity grid and reduce costs.
  - Streamlining administrative processes to improve the ease of doing business.
  - Expanding vocational and apprenticeship programs to help reduce skills mismatches and youth unemployment.
  - Steadfast implementation of the credit bureau to improve access to credit.

*International Monetary Fund — STAFF APPRAISAL excerpt*

### 43.      It is proposed that the next Article IV consultation take place on the standard 12-

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

### Real sector: growth, inflation, labor markets
- Real GDP (US$ millions), 2016: 11,262.
- Real GDP growth: contraction in the period around 2014–2015, a bounce back in 2016 and estimated strengthening in 2017.
- Inflation: declined due to the dissipation of VAT impact and low oil prices; inflation remains low despite an uptick due to higher oil prices.
- Tourism activity: remained flat following the passage of Hurricane Matthew in 2016.
- Construction: pickup in construction activity reflected in higher investment and construction indicators.
- Labor markets:
  - Unemployment rate (percent), November 2017: 10.1.
  - Labor force participation: rising even as unemployment falls.
- Tourism and arrivals:
  - Tourist arrivals and air/sea arrivals series show recovery trends through 2017 (charts cited).

### Fiscal developments
- Central government fiscal year ends June 30.
- Revenue composition and trends:
  - Introduction of the VAT and revenue administration reforms boosted tax revenue.
  - VAT (Value added tax) receipts increased materially after introduction (VAT lines shown in fiscal charts and tables).
- Fiscal aggregates (selected, from staff tables):
  - Revenue (In percent of GDP) series: FY11/12–FY16/17 show increases with Revenue reaching 17.6 percent (FY16/17 column in fiscal table series).
  - Expenditure (In percent of GDP) series: peaked with Expenditure at 23.8 percent (FY14/15) and remained elevated thereafter (FY16/17 around 20.4 percent).
  - Overall balance (percent of GDP): series includes -4.4, -3.9, -2.8, -5.8, -2.7, -2.3 (historical to FY16/17 and projections thereafter).
  - Primary balance (In millions of B$ and percent of GDP): primary balance shifted from deficits toward small surpluses in projections (series includes -265, -195, -35, -403, -362 then 157, 768, 887 in projections).
- Central government debt:
  - Central government debt (In percent of GDP) series includes 48.0, 51.1, 53.0, 57.2, 57.4, 56.8, 56.3, 55.8, 55.5, 55.4 (calendar/fiscal series reported in public debt tables and operations tables).
  - Commentary: Central government debt rose faster than peers' debt; debt profile skewed toward domestic holders and currency, and longer-term maturities; overall public debt remains below the regional average in some comparisons.

### Financial system structure and risks
- Offshore sector:
  - Offshore sector assets estimated at US$309 billion in 2017.
  - Offshore sector comprises a diverse and large number of players (Mutual Funds, Nominee Trusts, Banks & Trusts, Banks, Trusts, Insurance companies).
- Domestic financial sector:
  - Domestic financial sector assets estimated at US$18 billion in 2017.
  - Domestic sector composition (end-2017 asset values reported): Domestic-owned banks $3.2; Foreign-owned banks $9.0; Credit Unions $0.42; Insurance companies $2.1; Private Pension Funds $1.0 (values as shown).
- Nonperforming loans (NPLs):
  - NPL composition (end-2017): Total Mortgages 61%; Consumer credit 27%; Business credit 12%.
  - NPLs concentrated in mortgages; two domestic banks out of 7 have NPLs above 10 percent.
  - NPLs declined as a result of bulk NPL disposals, bringing NPLs to the regional average.

### Monetary and financial developments
- Banking system: capital buffers remain high; return on assets and capital to risk-weighted assets ratios charted.
- Interest rates and liquidity:
  - Treasury bill (90 days), weighted average deposit rate, and weighted average lending rate tracked; interest rate spreads have remained high.
  - Excess liquid assets and statutory liquid assets seen in B$ millions series; liquidity described as ample.
- Credit growth:
  - Credit growth remains weak overall; sectoral credit growth series show variation across consumer credit, business credit, residential mortgages, and commercial mortgages.
- Central Bank summary (selected items, end-period levels):
  - Gross international reserves (millions of US$): 788, 812, 904, 1,414, 1,225, 1,273, 1,333 (series across years).
  - Reserve money (B$): 981, 980, 1,292, 1,450, 1,534, 1,606, 1,676 (series across years).
  - Net domestic assets (B$): 193, 168, 388, 363, 093, 333, 44 (series as reported).
- Financial system aggregates (selected, end-period B$):
  - Liabilities to the private sector (broad money): 6,390; 6,374; 6,930; 7,037; 7,446; 7,797; 8,137 (series).
  - Credit to private sector: 6,367; 6,300; 6,171; 5,983; 6,043; 6,133; 6,256 (series).

### External sector and reserves
- Current account and capital flows:
  - Current account balance (In millions of US$): -2,193; -1,610; -868; -1,909; -1,674; -1,136; -968; -885; -752; -700 (series from 2014 to projections).
  - Current account (percent of GDP) series: -20.2; -14.3; -7.7; -16.4; -13.6; -8.8; -7.2; -6.3; -5.2; -4.7.
  - Capital and financial account (In millions of US$): 2,239; 1,635; 960; 2,420; 1,485; 1,184; 1,027; 911; 953; 653 (series).
- Trade and services:
  - Trade (goods) balance and components: Domestic exports and imports series show imports substantially larger than exports; Travel (credit) and Travel (net) series show travel credits as the dominant services inflow.
  - Travel (credit) series (In millions of US$): 2,317; 2,537; 2,622; 2,504; 2,739; 2,956; 3,154; 3,316; 3,478; 3,645 (series).
- Reserves and external debt:
  - Gross international reserves (end-period; millions of US$) series: 788, 812, 904, 1,414, 1,225, 1,273, 1,333, 1,358, 1,558, 1,512 (series).
  - Reserves adequacy: foreign reserves strengthened to above standard adequacy metrics following private capital inflows and an external sovereign bond placement.
  - External public debt: sharp increase reported following the sovereign placement; External public debt series charted (percent of GDP).

### Business environment and cost competitiveness
- Doing Business indicators (Distance to Frontier; 100 is highest):
  - Ease of Doing Business Indicator series for selected years: 2010–2018 plotted; descriptive finding: the business environment has lost ground to competitors across a broad range of areas.
  - Administrative processes: the administrative process is long (construction permits, registering property metrics charted).
  - Accessing credit: accessing credit is difficult; Credit Bureau Coverage (percent of adults) low relative to comparators.
  - Labor market: labor market flexibility can improve, but a skills gap appears to be a more important obstacle.
- Cost competitiveness indicators:
  - Real wage in accommodation and food industry has outpaced labor productivity (index series, 2004=100).
  - Residential electricity rates (US cents per kWh) comparisons: values shown for The Bahamas, Jamaica, Aruba, Belize, US, Mexico.
  - Trade costs: border compliance, document compliance, and cost to export indicators show relatively high costs.
  - Credit information asymmetries increase risk premiums.
  - These factors underlie decreasing shares of goods and tourism exports in world markets.

### Key social and macroeconomic indicators and projections (selected)
- Social indicators (selected):
  - Poverty rate (percent), 2013: 12.8.
  - GDP per capita (US$), 2016: 30,581.
  - Population (thousands), 2016: 368.
  - Infant mortality rate (per 1,000 live births), 2015: 9.9.
  - Life expectancy at birth (years), 2015: 75.
  - Human development index (rank), 2016: 58.
  - Adult literacy rate, 15 & up (percent), 2007: 96.
- Selected projections (annual percentage changes / percent of GDP where indicated; series reported in Table 1 and staff projections):
  - Real GDP growth projections (2018–2023): series includes 1.3, 2.5, 2.2, 1.6, 1.5, 1.5 (annual percent changes shown in table).
  - Consumer price index (annual average) projection path includes values: 2.2, 2.5, 2.4, 2.3, 2.2, 2.1 (series as presented).
  - Saving rate (percent of GDP) series and projections include: 13.1, 12.3, 18.8, 11.5, 12.9, 16.1, 16.4, 17.0, 18.1, 18.5.
  - Investment rate (percent of GDP) series and projections include: 33.3, 26.6, 26.5, 27.9, 26.5, 24.9, 23.6, 23.3, 23.3, 23.2.
  - Central government external debt (percent of GDP) series includes: 14.5, 14.6, 15.5, 22.5, 20.6, 20.1, 19.7, 19.3, 19.0, 18.6.
  - Gross international reserves (End of period; millions of U.S. dollars) projection series appears above in External sector.

*Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; Insurance Commission of The Bahamas; UNDP Human Development Report; World Bank Doing Business Database; IMF World Economic Outlook; and IMF staff calculations.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment
- Staff assesses the 2017 external sector position as weaker than the level suggested by fundamentals and desirable policy settings.
- Reserve accumulation soared in 2017 due to an external sovereign bond placement in November, bringing foreign reserves to levels above most traditional adequacy metrics.
- Despite stronger reserve buffers, vulnerabilities remain, including exposure to natural disasters, eroded competitiveness, and significant structural bottlenecks.
- In the context of a strong commitment to the exchange rate peg, structural reforms alongside fiscal consolidation are critical to strengthen external buffers.

### A. Context and Recent Developments
- The Bahamas carries sizable current account deficits owing to its relatively narrow economic base and heavy reliance on imports for infrastructure and development.
- Goods imports have steadily increased to nearly six times that of exports, resulting in trade deficits above 15 percent of GDP in recent years.
- Composition of imports:
  - Machinery and equipment and manufactured goods comprise about one third of imports.
  - Oil and food imports amount to another 30 percent of imports.
- Services: net inflows, mainly tourism receipts, have averaged about 20 percent of GDP.
- Current account deficit history and financing:
  - The current account deficit has ranged between 8 and 18 percent of GDP during the past decade.
  - Financing concentrated in FDI and other private capital inflows.
- 2017 specific developments:
  - Current account deficit widened to an estimated 16.4 percent of GDP in 2017, from 7.7 percent of GDP in 2016.
  - Drivers: increased construction activity (completion of Baha Mar), weak tourism performance, and rising oil prices.
  - Hurricane Matthew (October 2016) left 50 percent of hotel room capacity in Grand Bahama out of commission; air tourist arrivals declined 4 percent for 2017.
  - Capital and financial inflows surged to almost 14 percent of GDP in 2017 explained by Baha Mar and a government placement of a long-term bond for US$750 million.
  - Foreign reserves accumulation in 2017 amounted to almost 5 percent of GDP.

### B. External Stability Assessments (Model-based)
- Two panel regressions (EBA-lite) for the current account and the real effective exchange rate estimate “norm” values consistent with fundamentals and desirable policy settings.
- Models point to an overvalued currency in 2017, with REER overvaluation estimates ranging between 9.8 and 12.3 percent.

### C. The Current Account (CA) Model
- The CA model is limited in analyzing tourism-dependent countries; it does not effectively capture potentially strong future tourism inflows that justify infrastructure-driven CA deficits.
- Adjustment made: FDI-related goods and services imports are excluded, leading to an adjusted CA deficit of 6.8 percent of GDP in 2017.
- Key estimates after Bahamas-specific adjustments:
  - Cyclically-adjusted CA balance: -6.8 percent of GDP.
  - Cyclically-adjusted CA norm: -4.6 percent of GDP.
  - Resulting CA gap: -2.2 percent of GDP (after accounting for desirable macroeconomic policy settings).
  - Model implies a REER adjustment of 9.8 percent is needed to align the CA balance with fundamentals.
- Note on adjustments: The adjustment assumes that 80 percent of capital goods imports and 100 percent of construction services imports are related to FDI.

### D. The Real Effective Exchange Rate Index (I-REER) Model
- The REER model suggests a 2017 gap of about 12 percent (model finds average REER for 2017 was 12.3 percent stronger than consistent level).
- Developments:
  - Bahamian dollar depreciated 2 percent in real effective terms on average in 2017.
  - As of end-2017, it had depreciated an additional 4.3 percent relative to the 2017 average, partially correcting the 12 percent REER gap.
  - The current level of the REER is broadly at the long-term average.

### E. Cost and Structural Competitiveness
- Indicators point to erosion in cost and structural competitiveness:
  - The Bahamas’ REER remains above the average among key tourism competitors (Jamaica and the Dominican Republic) with more flexible exchange rate arrangements.
  - Tourism-weighted REER declined 0.7 percent in 2017.
  - Real wages have been rising faster than labor productivity in recent years.
  - Electricity costs are relatively high.
  - World Bank “Doing Business Indicators” show the Bahamas has steadily lost ground from 2013 relative to the frontier (some recovery in 2017). Weak areas include administrative processes, infrastructure, access to credit, ease of trading across borders, and protecting minority investors.
- Mitigating factor: large share of US tourists in total arrivals reduces some risk to tourism competitiveness.

### F. Reserve Adequacy
- International reserves and adequacy metrics at end-2017:
  - International reserves: US$1,414 million (3.6 months of next-year’s imports).
  - If FDI-related goods and services imports are excluded: reserves = 4.3 months of next year’s imports.
  - Reserves = 150 percent of Central Bank liabilities and well above 100 percent of external short-term debt at end-2017.
  - Reserves = 111 percent of the level suggested by the Fund’s risk-weighted metric.
  - Accounting for capital flow measures (CFM), the revised risk-weighted measure assesses reserve coverage at 156 percent (above the recommended 100–150 percent range).
  - According to Mwase (2012) SIDS framework, reserves remain below adequate at 72 percent of recommended levels (the framework does not consider private reinsurance flows; private reinsurance reached almost US$300 million following Hurricane Matthew).
- Reserve adequacy metrics (selected figures from table):
  - 3 months (next year's goods and service Imports): 2017 = 122, 2018 = 110, 2019–2023 Average = 116.
  - 3 months (next year's non-FDI related goods imports): 2017 = 139, 2018 = 122, 2019–2023 Average = 123.
  - 20 percent of broad money (M2): 2017 = 97, 2018 = 81, 2019–2023 Average = 84.
  - 100 percent of Central Bank's demand liabilities: 2017 = 150, 2018 = 124, 2019–2023 Average = 129.
  - Short Term Debt: 2017 = 28, 2018 = 16, 2019–2023 Average = 24.
  - Risk-weighted measure: 2017 = 111, 2018 = 93, 2019–2023 Average = 97.
  - Revised risk-weighted measure: 2017 = 156, 2018 = 130, 2019–2023 Average = 136.
  - SIDS Measure: 2017 = 72, 2018 = 59, 2019–2023 Average = 58.
- Note on capital flows and CFMs: All outward capital transfers require Exchange Control approval; outflows on resident-owned capital are restricted. In principle, inward investment in shares and other securities by nonresident is unrestricted, but Central Bank approval is required for sale and issuance of capital and money market instruments by nonresidents in the local market.

### G. Key Vulnerabilities and Policy Implications
- Vulnerabilities: exposure to natural disasters, eroded competitiveness, structural bottlenecks, and fiscal contingent liabilities.
- Policy recommendations (implied across assessment):
  - Pursue structural reforms to increase competitiveness and attract FDI-financed investments.
  - Fiscal consolidation to strengthen fiscal and external buffers.
  - Maintain commitment to the exchange rate peg while strengthening external buffers through reforms and consolidation.
  - Enhance ex-ante preparedness and risk reduction strategies for natural disasters (prudent public balance sheet, savings fund, and disaster risk insurance strategies).
  - Strengthen compliance with AML/CFT and tax transparency; monitor and communicate on Correspondent Banking Relationships (CBRs).

### H. Risk Assessment (RAM) — selected entries
- Tighter global financial conditions:
  - Relative likelihood: High.
  - Impact: High.
  - Policy response: Structural reforms to increase competitiveness and fiscal consolidation to strengthen fiscal and external buffers.
- Further pressure on traditional bank business models (including pressures on CBR):
  - Relative likelihood: Medium.
  - Impact: Medium.
  - Policy response: Strengthen AML/CFT and tax transparency implementation; monitor CBRs; communicate efforts by banks and authorities.
- Weaker-than-expected global growth (including significant US slowdown):
  - Relative likelihood: Medium to High.
  - Impact: High.
  - Policy response: Structural reforms and fiscal consolidation.
- Higher- or lower-than-projected boost to tourism activity from Baha Mar:
  - Relative likelihood: Medium.
  - Impact: High.
  - Policy response: Structural reforms to increase competitiveness and attract FDI; fiscal consolidation.
- Natural disasters:
  - Relative likelihood: High.
  - Impact: High.
  - Policy response: Enhance preparedness, maintain prudent public balance sheet, establish savings fund, and adequate disaster risk insurance.
- Delays in fiscal consolidation or structural reforms:
  - Relative likelihood: Medium.
  - Impact: High.
  - Policy response: Enhance communication; announce and implement corrective measures swiftly.

### I. Annex III — Alternative Scenarios for FDI and Tourism Activity
- Background:
  - Over 6 million people visit the country annually—mostly from the United States.
  - Tourism receipts account for more than 20 percent of GDP.
  - The Central Bank reports about 2.7 billion dollars (about 24 percent of GDP) in FDI projects in the pipeline, excluding completion of Baha Mar.
  - A recent application filed for a tourist resort in Grand Bahama with estimated investments of US$2.5 billion over the next 10 years.
  - Plans for a US$5.5 billion oil storage facility in Grand Bahama Island.
- Scenarios considered:
  - FDI scenarios:
    - Negative: cumulative FDI flows about 50 percent lower than baseline.
    - Positive: cumulative FDI flows about 50 percent higher than baseline (materialization of pipeline projects and proposed resort and oil-storage facility).
  - Tourism scenarios:
    - Negative: air tourist arrivals 5 percent lower than baseline during 2018–2023.
    - Positive: air tourist arrivals 5 percent above baseline during 2018–2023.
- Modeling approach:
  - Small simultaneous equations model with five blocks: Output Gap, Phillips curve, Okun’s law, Tourism block, FDI block.
  - Variables: Y (output gap), π (inflation), u (unemployment rate), T (air tourist arrivals), FDI (FDI in percent of GDP).
  - Parameters and shock variances estimated by Bayesian techniques using annual data over 1961–2016.
- Results (selected projections):
  - Positive FDI shock:
    - Output gap closes in 2019.
    - Real GDP growth: around 2¼ – 2½ percent.
    - Faster decline in unemployment; potential growth increases via higher capital accumulation.
  - Negative FDI shock: symmetric adverse effects.
  - Positive tourism shock:
    - Initial growth lifted to 3 – 3½ percent and to about 2 – 2½ percent in medium term.
  - Negative tourism shock (air arrivals 5 percent below baseline):
    - Real GDP growth falls to close to 1 percent (from a baseline of 2½ percent in 2018) and remains below 1½ percent throughout projection period.
    - Unemployment would rise to around 9 percent initially and decline more slowly than in baseline.

### J. Debt Sustainability (Annex IV highlights)
- Central government debt-to-GDP:
  - A substantial upward revision in the national accounts reduced the stock to 57 percent of GDP in FY2017.
  - Under staff’s baseline scenario, debt would decline to around 55 percent of GDP in the medium term due to expenditure restraint.
- Risk assessment:
  - Debt sustainability heat map points to low to moderate risks to debt sustainability.
  - Combination of adverse shocks would put the debt ratio on an upward trajectory.
  - Sizable fiscal contingent liabilities, vulnerability to natural disasters, and subdued medium-term growth underscore the importance of fiscal consolidation complemented by structural reforms to lift potential growth.

*Source: Annex I. External Sector Assessment, cr18118.*

### 1. Debt stock and gross financing requirements. Central government debt reached

### 1. Debt stock and gross financing requirements. Central government debt reached

### Debt level and trajectory
- Central government debt reached 57.2 percent of GDP in FY2017 (ending in June), more than doubling over the past decade, owing to tepid economic growth and weaker-than-budgeted fiscal consolidation.
- Under the baseline scenario, staff projects debt to peak at 57.4 percent of GDP in FY2018, and decline to around 55 percent of GDP over the medium term due to projected expenditure restraint.
- Gross financing requirements are projected to decline from 12 percent of GDP in FY2018 to about 5 percent of GDP in the medium term, reflecting fiscal consolidation efforts and lower amortization needs.
- The increase in debt prompted downgrades by two rating agencies in 2016; prospects for debt stabilization under the new administration avoided new downgrades in 2017.

### Debt profile and vulnerabilities
- Foreign currency debt is projected at 36 percent of total debt in FY2018 (up from 27 percent in FY2017).
- Short-term debt, denominated entirely in domestic currency, represents 14 percent of total debt.
- The weighted average maturity for the government’s domestic and external bonds is 8.5 and 11 years, respectively.
- Ample liquidity in the domestic banking system and a captive investor base mitigates rollover concerns.
- Debt level and gross financing needs are below vulnerability thresholds for emerging market comparators, but a combination of adverse shocks could put the debt on an upward trajectory.
- External financing requirements are at the upper early warning threshold for emerging markets due to a sizable current account deficit.
- Overall heat map: moderate risks to debt sustainability.

### Realism of baseline assumptions
- Staff projects real growth to average 1.8 percent over the medium term.
- Inflation is expected to remain low (2.4 percent).
- The primary balance is projected to gradually improve to 0.6 percent by the end of the forecast period.
- Past growth forecast errors are largely explained by a substantial revision to the national accounts in 2017, the bankruptcy of Baha Mar in 2015, and natural disasters.
- Past projections for the primary balance appear relatively optimistic; inflation has turned out better than expected.
- Staff assesses the projected primary balance path as feasible: the projected primary deficit reduction between 2018 and 2023 is much lower than the reduction observed between 2013 and 2016.
- Note: GDP numbers have been translated from calendar to fiscal year basis for consistency with fiscal numbers.

### Macro–fiscal stress test: scenarios and outcomes
- Four individual shocks simulated: a real GDP growth shock, a primary balance shock, real interest rate shock, and real exchange rate shock.
  - Definitions of the four shocks: 1) a half-standard deviation reduction in real GDP growth, 2) a one-standard deviation increase in the primary deficit, 3) 485 basis points increase in projected interest rates from the average for the past 6 years, and 4) a 10-percent real exchange rate shock.
- Outcomes of individual shocks:
  - Real interest rate shock: debt would reach about 59 percent of GDP at the end of the projection period (baseline: 55 percent of GDP).
  - Other individual shocks: debt rises to 57–58 percent of GDP.
  - Real exchange rate shock is the least significant because the bulk of debt is denominated in local currency.
- Gross financing requirements sensitivity:
  - Most sensitive to the real interest rate shock: gross financing requirements would double to 10 percent of GDP in FY2023.
- Combined macro–fiscal shock:
  - Debt would rise to 66 percent of GDP.
  - Gross financing requirements would increase to 12 percent of GDP in FY2023.

### Additional adverse scenarios and impacts
- Failure to consolidate and persistent economic weakness:
  - Scenario A: constant primary balance at the projected level for FY2018 (-0.4 percent of GDP); other variables remain at baseline levels (except real effective interest rate). Outcome: debt rises to 60 percent of GDP by FY2023.
  - Scenario B (severe adverse): primary balance and real GDP growth set equal to their historical averages for the past decade (-0.5 percent real GDP growth and -1.9 percent of GDP primary balance) from FY2018 onwards; real effective interest rate assumed to increase by 172 basis points. Outcome: debt rises to 77 percent of GDP over the medium term; gross financing requirements rise to 15 percent of GDP.
- Natural disasters:
  - Shock modeled as temporary reduction in real GDP growth of 0.5 percent for FY2019 and FY2020.
  - Primary balance worsens by 3.6 percent and 2.6 percent of GDP over the same period due to lower tax revenue and larger fiscal spending for cleanup and reconstruction.
  - Outcome: debt increases to 64 percent of GDP by FY2023.
  - Staff notes that a proposed savings fund would help smooth the fiscal impact of such a natural disaster shock.
- Fiscal contingent liabilities:
  - Analysis focuses on the central government; consolidated public-sector data are not available.
  - Debt of public entities amounted to 13.6 percent of GDP in FY2017, of which 6.2 percent of GDP is explicitly guaranteed by the central government.
  - Staff assumed a contingent liability shock of 3 percent of GDP in FY2019.
  - Outcome: central government debt would be about 60 percent of GDP in FY2023; gross financing needs would rise to 10 percent of GDP.

*International Monetary Fund — THE BAHAMAS (excerpt: 1. Debt stock and gross financing requirements).*

### 6. External Debt.

### 6. External Debt.

### Overview and recent developments
- The stock of public external debt increased by 6.2 percentage points of GDP in 2017, reaching an estimated 27.3 percent of GDP by end-year.
- The increase is primarily accounted for by the US$750 million external sovereign bond placement in November.
- Public external debt is defined here as central government and public corporate debt (the stock of private-sector external debt is not available).

### Baseline projections (2018–2023)
- Under the baseline scenario, external debt is projected to rise to 27.6 percent of GDP in 2019, reflecting the planned issuance of a rate reduction bond by the state-owned electricity company, then fall to 26 percent of GDP at the end of the forecast horizon.
- Baseline external debt path (selected years, in percent of GDP):
  - 2017: 27.3
  - 2018: 26.2
  - 2019: 27.6
  - 2020: 27.1
  - 2021: 26.7
  - 2022: 26.5
  - 2023: 26.0
- Change in external debt (selected years, in percent of GDP):
  - 2017: 6.2
  - 2018: -1.1
  - 2019: 1.5
  - 2020: -0.5
  - 2021: -0.4
  - 2022: -0.2
  - 2023: -0.4
- Identified external debt-creating flows (cumulative components, in percent of GDP): 9.1 (2012), 10.8 (2013), 18.6 (2014), 13.2 (2015), 7.2 (2016), 15.7 (2017), 10.7 (2018), 4.5 (2019), 4.3 (2020), 3.3 (2021), 2.6 (2022), 2.0 (2023).

### Sensitivity and stress-test results
- Bound test: The external public debt profile is moderately sensitive to shocks to the non-interest current account and real exchange rate.
- Non-interest current account shock:
  - A permanent increase in the non-interest current account deficit by 0.5 percent of GDP relative to the baseline beginning in 2018 would put the public external debt ratio on an increasing trajectory reaching 36.1 percent of GDP by 2023.
- Real effective exchange rate shock:
  - A permanent one-time 30 percent depreciation in real effective terms in 2018 would shift the external debt level up by 12.3 percent of GDP relative to the baseline over the projection period (resulting box figures show 38 percent of GDP under a 30% depreciation shock versus baseline 26 percent).
- Combined and other shocks (illustrative scenario outcomes shown):
  - CA shock (non-interest current account): scenario reaches 36 percent (box figure labeled 36).
  - Combined shock: scenario reaches 31 percent (box figure labeled 31).
  - Combined shock 3/ (permanent one-half standard deviation shocks to real interest rate, growth rate, and current account): scenario labeled 31 (combined).
  - Growth shock (figures): Baseline: 27; Scenario: 26; Historical: 10 (box displays various growth shock values).
- Gross external financing need (in billions of US dollars and percent of GDP):
  - Historical values: 2012: 1.6; 2013: 1.5; 2014: 2.2; 2015: 1.6; 2016: 0.9; 2017: 2.4; 2018: 1.8; 2019: 1.6; 2020: 1.1; 2021: 1.0; 2022: 1.0; 2023: 0.8.
  - In percent of GDP (selected): 2017: 20.9 (ten‑year number shown elsewhere), other year percentages also provided in the tables/figures.

### Automatic dynamics and drivers (selected contributions)
- Current account deficit, excluding interest payments (in percent of GDP, selected years):
  - 2012: -13.6
  - 2013: -13.4
  - 2014: -19.3
  - 2015: -13.3
  - 2016: -6.7
  - 2017: -15.3
  - 2018: -10.9
  - 2019: -4.0
  - 2020: -12.2
  - 2021: -7.4
  - 2022: -5.7
  - 2023: -5.0
- Exports and imports (in percent of GDP, selected years):
  - Exports: 2012: 34.3; 2017: 29.3; 2018: 29.5; 2023: 32.8.
  - Imports: 2012: 47.1; 2017: 37.7; 2018: 34.5; 2023: 34.5.
- Net non-debt creating capital inflows (in percent of GDP): historical series includes -4.6 (2012), -3.4 (2013), -1.4 (2014), -0.4 (2015), -0.5 (2016), -0.5 (2017), -2.2 (2018), -3.7 (2019), -2.4 (2020), -2.5 (2021), -2.2 (2022), -2.2 (2023).

### Debt-stabilizing indicator
- Debt-stabilizing non-interest current account (long-run constant balance that stabilizes the debt ratio) is reported as -2.3 (in percent of GDP) for the end of the projection period.

### Additional quantitative context (selected macro assumptions and indicators)
- Real GDP growth (baseline projections, in percent): 2018: 1.9; 2019: 2.3; 2020: 1.9; 2021: 1.5; 2022: 1.5; 2023: 1.5.
- Inflation (GDP deflator, in percent): 2018: 2.6; 2019: 2.9; 2020: 2.6; 2021: 2.5; 2022: 2.1; 2023: 1.7.
- Nominal external interest rate (in percent, historical and projections): sample values include 7.2 (2012), 6.0 (2013), 6.3 (2014), 5.4 (2015), 5.3 (2016), 5.4 (2017), 6.1 (2018), 0.6 (2019 in table — retained as printed), 5.3 (2020), 5.5 (2021), 5.2 (2022), 4.9 (2023), 4.6, 2.8 (various table entries shown).
- External debt-to-exports ratio (in percent): 2012: 39.8; 2017: 93.3; 2018: 88.6; 2019: 91.9; 2020: 89.0; 2021: 85.9; 2022: 83.0; 2023: 79.5.
- External debt (baseline, in percent of GDP): 2012: 13.7; 2013: 15.1; 2014: 19.4; 2015: 19.4; 2016: 21.1; 2017: 27.3; 2018: 26.2; 2019: 27.6; 2020: 27.1; 2021: 26.7; 2022: 26.5; 2023: 26.1.

*Source: IMF staff calculations and Country desk data as presented in the chapter "6. External Debt."*

### Annex V. Progress on 2013 FSAP Recommendations

### Annex V. 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 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. — Completed.
- Develop support for consumer complaint handling. Consider establishing ombudsman. — Complain filing process has been strengthened and an independent arbitration process was introduced in 2017.
- Amend legislation to specifically require intermediaries to establish a premium payment trust account separate from the intermediary’s account. — The Insurance Act mandates a separate trust account.
- Introduce staggered terms for Insurance Commission of The Bahamas (ICB) Board and publish reasons for removal of Board members or the Superintendent. — Drafting amendments to the Insurance Act.
- 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. — Draft bill under consultation. IFA is expected to be approved in 2018.
- 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.
- 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. — In progress.

### 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.

*Source: Central Bank of The Bahamas and Insurance Commission of The Bahamas.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18118.pdf_