## 1bhsea2019001 - 2018. Unemployment remains high, at 10.7 percent in November 2018, as employment creation ## Source details **Canonical URL:** [1bhsea2019001 - 2018. Unemployment remains high, at 10.7 percent in November 2018, as employment creation](https://www.imf.org/-/media/files/publications/cr/2019/1bhsea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1bhsea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1bhsea2019001.pdf.json) --- ### Recent developments - Real GDP expanded by 1.6 percent in 2018, up from 0.1 percent in 2017. - Air tourist arrivals increased by 16 percent during 2018; tourism revenue per room is up by 30 percent. - Consumer price index (CPI) increased by 2.2 percent on average in 2018, driven mainly by the VAT rate increase from 7.5 to 12 percent in July 2018; core inflation remained contained. - Labor force participation rose by 8.7 percentage points since 2014 to 83.1 percent of the working-age population in November 2018. - Employment increased some 4.7 percent per year since 2014, but unemployment stood at 10.7 percent in November 2018, up from 10 percent a year earlier. - Youth unemployment (aged 15–24): 24.1 percent for women and 22.4 percent for men. - Budget deficit narrowed to 3.4 percent of GDP in FY2017/18, down from 5.5 percent a year earlier. - Central government debt increased to 63.3 percent of GDP in FY2017/18 from 54.4 percent in FY2016/17, partly reflecting recognition of payment arrears. - Current account deficit widened to 16.4 percent of GDP in 2018, reflecting higher oil prices and imports associated with the conclusion of a large FDI project. - Banking system well capitalized; credit to the private sector continued to contract in 2018, though at a more moderate rate. - Average non-performing loans (NPLs) declined from a peak of 15.4 percent in 2013 to 9.1 percent in 2018. - Systemic liquidity remains high but moderated in 2018 as commercial banks increased lending to the government. ### Outlook and projections - Growth and inflation - Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1½ percent in the medium term. - The increase in inflation is projected to have been temporary. - Labor market and external accounts - Unemployment is projected to decline only gradually. - External accounts expected to strengthen over the medium-term, supported by high tourism receipts, fiscal consolidation and lower oil prices; current account deficit projected to converge to 5 percent of GDP. - Selected macro projections (annual percentage change or percent of GDP as provided) - Real GDP: 2018: 1.6; 2019: 1.8; 2020: 1.7 - Nominal GDP: 2018: 2.3; 2019: 2.4; 2020: 3.6 - CPI (annual average): 2018: 2.2; 2019: 1.6; 2020: 2.4 - CPI (end of period): 2018: 2.0; 2019: 2.4; 2020: 2.4 - Unemployment rate (percent): 2018: 10.7; 2019: 9.0; 2020: 9.0 - Saving rate (percent of GDP): 2018: 7.5; 2019: 10.9; 2020: 12.5 - Investment rate (percent of GDP): 2018: 23.9; 2019: 23.0; 2020: 22.9 - Credit to the private sector (annual change): 2018: -1.5; 2019: 1.0; 2020: 1.5 - Exports of goods and services (annual change): 2018: 11.8; 2019: 8.2; 2020: 6.4 - Travel receipts (gross): 2018: 12.0; 2019: 8.5; 2020: 5.5 - Imports of goods and services (annual change): 2018: 11.5; 2019: 2.0; 2020: 2.2 - Central government overall balance (percent of GDP): 2018: -3.4; 2019: -2.3; 2020: -1.5 - Central government debt (percent of GDP): 2018: 63.3; 2019: 63.1; 2020: 61.9 - Current account balance (percent of GDP): 2018: -16.4; 2019: -12.2; 2020: -10.3 - Gross international reserves (end of period; millions of U.S. dollars): 2018: 1,196; 2019: 1,250; 2020: 1,275 - Reserves in months of next year's G&S imports: 2018: 2.5; 2019: 2.6; 2020: 2.6 - External public debt (end of period): 2018: 25.5; 2019: 27.9; 2020: 27.6 - External debt-service ratio (percent of exports of G&S): 2018: 9.1; 2019: 19.5; 2020: 8.9 - GDP (in millions of Bahamian dollars): 2018: 12,425; 2019: 12,724; 2020: 13,178 ### Risks - External risks - Risks to global growth, particularly in key trading partners, have increased; slowing external demand or tightening of financial conditions in key advanced economies could adversely affect growth prospects. - Downside risks include slowing global growth, tightening financial conditions, and high vulnerability to hurricanes and climate change. - Domestic risks - Reform momentum could stall delaying fiscal consolidation and implementation of competitiveness-enhancing reforms. - Vulnerability to hurricanes and climate change remains high. - International sector and financial spillovers - Reputational risks in the offshore sector could intensify despite recent strengthening of regulatory and transparency standards, possibly challenging existing business models. - Potential spillovers into the domestic financial system from the unification of banking license regimes. ### External sector assessment and outlook - Current account and REER - The current account deficit widened to 16.4 percent of GDP in 2018. - The 2018 cyclically-adjusted current account deficit—correcting for FDI-related imports—is estimated to be 5.2 percentage points of GDP above the level consistent with fundamentals and desirable policy settings. - The I-REER model points to an overvaluation of around 8 percent. - For 2018, staff assess the REER as overvalued by 10 to 20 percent. - Reserves and composition risks - Reserves declined in 2018 by US$222 million. - Tourism composition risk: the U.S., Canada, and the U.K. together account for 90 percent of tourists. - Projection highlights - Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1½ percent in the medium term. - The current account deficit is projected to converge to 5 percent of GDP once one-off factors dissipate. - Foreign exchange reserves are projected to stabilize at 2.9 months of imports. - Key drivers of the 2018 deficit - Higher oil prices. - The opening of the Baha Mar resort (raising imports during construction and then boosting receipts). - Higher interest and dividend payments abroad by the private sector. - Reserves pressures also reflected refinancing by a public sector entity of foreign currency with local currency debt. ### Fiscal policy, governance, and public financial management - Fiscal Responsibility Law (FRL) — numeric rules and transition - FRL establishes three fiscal rules: - A ceiling on the overall budget deficit set at ½ percent of GDP. - A ceiling on the annual growth rate of current expenditures set at long-term nominal GDP growth (once the budget deficit target is met). - A ceiling on government debt set at no more than 50 percent of GDP (which the authorities expect to meet by FY2024/25). - Transition provisions: - During the transition phase, the overall budget deficit shall not exceed 1.8 percent of GDP in FY2018/19 and 1 percent of GDP in FY2019/20. - The FRL provides for a compliance margin of ½ percent of GDP in any given fiscal year, including the transition period. - Fiscal reporting and arrears - The law establishes a fiscal council; staff recommended operationalizing the council by mid-2019. - The government recognized payment arrears totaling 2.9 percent of GDP resulting primarily from unfunded budgetary commitments. - The FY2018/19 budget includes a five-year arrears clearance strategy, including appropriations of 1.4 percent of GDP for the current fiscal year. - FY2018/19 budget performance and staff advice - The FY2018/19 budget aimed for a budget deficit target of 1.8 percent of GDP. - Staff projects that the deficit target will be missed by 0.5 percentage point of GDP given weaker-than-expected revenues in the first half of the fiscal year. - Staff recommended limiting new hiring to essential staff, rein in low-priority current spending, and reprioritize capital expenditure to cover the projected shortfall. - Fiscal balance composition (staff estimates) - VAT increase (+ 2.0) - Arrears payment (-1.4) - Other factors, net (+0.8) - New initiatives (-0.4) - FY 17/18 deficit (-3.4) → FY 18/19 deficit (-2.3) - Medium-term recommendations - Staff recommended decisive measures to keep debt on a downward path while balancing spending composition to achieve inclusive growth and invest in natural disaster preparedness. - Strengthen tax administration capacity in line with CARTAC advice to reduce tax gaps. - Contain expenditure growth by further rationalizing the wage bill, advancing pension reform, and accelerating state-owned enterprises (SOEs) reforms. - Introduce periodic quantification and review of tax expenditures and other incentives. ### Disaster resilience and climate adaptation - Geographic vulnerability - About 80 percent of the land area lies less than 3 feet above sea level. - Three-pillar disaster resilience strategy - Financial, structural, and post-disaster preparedness components. - Financial resilience measures and initiatives - Natural disaster fund seed funding from proceeds of extinguished dormant accounts estimated at US$41 million. - Contingent credit line: agreement with the Inter-American Development Bank (IDB) for a US$100 million credit facility with parametric triggers. - Disaster insurance: rejoining CCRIF with tailored coverage; cited US$35 million IDB loan project supports natural infrastructure and coastal flood control measures. - Governance recommendations for the natural disaster fund - Provide governance and safeguards in the fund’s law, including a management and supervising board chaired by the Minister of Finance, asset management rules, procedures to release funds, and annual financial and strategic reporting to parliament. - Future allocations to increase the fund’s resources should take place through the budgetary process. ### Banking system health, FSAP findings, and financial sector policy - Asset quality and NPLs - The 2019 FSAP found continued improvement in banking system health but highlighted risks associated with domestic asset quality. - Little visibility for regulators into the dynamics of the domestic residential real estate market, which accounts for ¾ of NPLs. - Recommendations: - Establish a real estate price index and collect loan-level data. - Swift implementation of the credit bureau and an asset registry. - Bank of the Bahamas (BOB) and state-controlled institutions - BOB has been bailed out twice; capital injections received in 2014 and 2017 totaled about 2.2 percent of GDP. - Recommendations: complete legislative reform to enhance recovery and resolution powers, implement governance reforms, and undertake a strategic review of BOB. - Correspondent banking relationships (CBR) - CBR pressures stabilized after earlier withdrawals; reliance on affiliated international banks and third parties limited impact. - CBOB 2017 survey: one-third of surveyed financial institutions not using parents or affiliates still reported a relationship with one or two large U.S. correspondent banks. - Recommendation: systematically monitor CBR pressures, including concentration risks in payment corridors. - AML/CFT and offshore sector - The Bahamas was identified by the FATF as a country with strategic AML/CFT deficiencies and is taking steps to address them. - The Bahamas has a large international financial sector, amounting to about 21 times GDP as of 2018. - Recommendations: focus on implementation of AML/CFT measures, enhance entity transparency, and implement the new legal and fiscal frameworks for the international sector licensing regime. - Monetary policy and liquidity - Policy rate has been at 4 percent since October 2016. - Large structural liquidity surplus exists; CBOB holdings of government debt reduced from 6.1 percent of GDP in 2016 to 4.2 percent as of end-2018; staff encouraged further reduction. - Recommendations: deepen domestic debt and interbank markets; adopt amendments to CBOB law to strengthen governance and independence; establish and implement a debt management strategy consistent with the FRL. - Exchange rate peg and reserves management - Exchange rate peg is supported by exchange controls; controls have been gradually relaxed. - Recommendation: continue building up reserves to underpin the credibility of the peg and integrate all public sector financing requirements in the public debt management strategy. ### Central Bank Digital Currency (Project Sand Dollar) - Objectives and design - Pilot a digital version of the Bahamas Dollar to boost financial inclusion, especially in smaller islands. - Pilot will be conducted in Exuma (home to about 2 percent of the population). - Pilot will start in late 2019 / early 2020 for a trial period of six-months. - The Sand dollar will be general purpose, accepted as legal tender, exchanging one for one with existing notes, coins and balances. - Design incorporates AML/CFT best practices and KYC rules; users will not be anonymous. - Will build on blockchain infrastructure; balances will not accrue interest; a ceiling on amounts held in e-wallets will be set. - Emphasis on interoperability with private service providers, data privacy and sovereignty, and cyber security. - Risks and recommendations - E-currency can pose risks to financial stability, cybersecurity, and AML/CFT. - Invest in human capital and technological capabilities; consider deploying proven technologies (e.g., mobile phone applications) and enabling greater access to ATMs. ### Competitiveness and structural reforms - Core impediments - Onerous administrative processes, high costs of trading across borders, poor access to credit, and lack of reliable and affordable electricity; aggravated by strength of the currency in real effective terms. - Urgent actions ahead of WTO accession in 2020 - Advance energy sector reforms: restructure BPL; upgrade transmission and distribution; install a 220-megawatt power plant and a regassification terminal; switch from heavy oil to natural-gas based generation; encourage energy efficiency and renewable energy through FDI and appropriate regulation. - Lower costs of transacting with government: utilize the US$ 30 million IDB loan for the Government Digital Transformation to Strengthen Competitiveness Program (DTP); enact the Integrity Commission Bill. - Ease labor-market bottlenecks: expand vocational and apprenticeship programs; improve quality of education; develop online skills databases and job placement services. ### Data, statistics, and capacity - Priorities and recommendations - Produce quarterly national accounts. - Compile balance-of-payments statistics according to the BPM6 manual and produce International Investment Position estimates. - Conduct a household survey and improve labor market data. - Publish and adhere to an advance calendar of data releases and make data available to the public in a user-friendly form. - Noted progress - Subscription to the enhanced General Data Dissemination System. - Adoption of International Public Sector Accounting Standards in fiscal accounts. - Increased reporting on fiscal data. ### Executive Board Assessment and authorities’ views (summary) - Directors welcomed strengthening economic activity and prospects for continued growth underpinned by prudent policies and comprehensive structural reforms. - Noted concerns: still high unemployment, rising public debt, and risks from external imbalances. - Underscored need to rebuild policy buffers, safeguard financial stability, and enhance resilience to natural disasters. - Welcomed enactment of the FRL and emphasized that effective implementation would bolster policy credibility and ensure durable gains from fiscal consolidation. - Authorities broadly concurred with staff’s views but anticipate more robust economic performance driven by continued high tourism growth and new FDI projects; reiterated commitment to achieving the FRL targets and legislating PFM reforms. ### Public debt, stress tests, and scenario analysis - Baseline public debt and projections (selected figures) - Baseline nominal gross public debt projection series (percent of GDP, fiscal year): 39.4 (2017), 54.4 (2018), 63.3 (2019), 61.3 (2020), 61.9 (2021), 60.0 (2022), 58.5 (2023), 57.0 (2024), 55.7 (projection end). - Public gross financing needs (percent of GDP): 2.3 (2017), 4.3 (2018), 5.9 (2019), 5.7 (2020), 5.4 (2021), 4.2 (2022), 3.8 (2023), 4.7 (2024), 5.3 (cumulative). - Macro–fiscal stress test outcomes - Under individual shocks, debt-to-GDP increases marginally by between 0.8 (real exchange rate shock) to 2.7 (real GDP growth shock) percentage points from the baseline of 55.7 percent at the end of projection period. - A combined macro–fiscal shock would raise debt to 64.5 percent of GDP, and gross financing requirements to 7.1 percent of GDP in FY2023/24. - Natural disaster scenario - Hurricane-based scenario: temporary reduction of real GDP growth by 0.5 percent in FY2019/20 and FY2020/21; lower tax revenue by 2.2 percentage point of GDP for each of the years FY2019/20 and FY2020/21; higher spending by 1.5 and 0.75 percentage points of GDP for FY2019/20 and FY2020/21 respectively. - Buffers and responses: Natural disaster relief fund (B$41 million); contingent credit line with IDB (US$100 million); CCRIF payout (US$35 million). - Outcome: Government debt would still increase to 63.0 percent of GDP by FY2023/24, 7.4 percentage point higher than in the baseline. - External DSA bound tests - A permanent one-half standard deviation increase in the non-interest current account deficit beginning in 2020 would put the public external debt ratio on an increasing trajectory, reaching 35 percent of GDP by 2024. - A permanent one-time 30 percent depreciation in real effective terms in 2020 would shift the external debt level up by around 12.25 percent of GDP relative to the baseline over the projection period. ### Key policy recommendations (selected) - Fiscal Policy - Effectively implement the new Fiscal Responsibility Law (FRL) and adopt measures to deliver on the fiscal targets to ensure debt sustainability. - Review tax expenditures and consider a more comprehensive tax reform. - FX and Monetary Policy - Reduce the central bank’s government debt holdings and strengthen its governance framework to boost the credibility of the exchange rate peg. - Central Bank Digital Currency (CBDC) - Prepare for risks associated with the introduction of the pilot CBDC. - Offshore Sector - Strengthen the AML/CFT and tax transparency frameworks to reduce reputational risks and mitigate possible correspondent banking relationship (CBR) pressures. - Develop a medium-term strategy for the offshore sector to uphold its contributions to the economy. - Financial Sector Policies (FSAP) - Increase resources to enable enhanced banking supervision of credit risks, strengthen the banking resolution framework and improve governance of asset management companies. - Move expeditiously to operationalize the credit bureau. - Structural reforms and competitiveness - Prioritize reforms that tackle high energy costs, improve access to credit, and address skill mismatches in the labor market to boost competitiveness and attract foreign direct investment. - Advance energy sector reforms, utilize the US$30 million IDB DTP to digitalize government interactions, and expand vocational and apprenticeship programs. ### Selected social and economic indicators (highlights) - GDP (US$ millions), 2018: 12,425 - GDP per capita (US$), 2018: 32,997 - Population (thousands), 2018: 377 - Unemployment rate (percent), Nov 2018: 10.7 - Poverty rate (percent), 2013: 12.8 - Life expectancy at birth (years), 2018: 75.7 - Human development index (rank), 2018: 54 - Infant mortality rate (per 1,000 live births), 2016: 9 - Adult literacy rate, 15 & up (percent), 2007: 95.6 *Source: THE BAHAMAS — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (IMF staff report, May 16, 2019).* ### 2018. Unemployment remains high, at 10.7 percent in November 2018, as employment creation ### 1bhsea2019001 - 2018. Unemployment remains high, at 10.7 percent in November 2018, as employment creation ### Recent developments - Real GDP expanded by 1.6 percent in 2018, up from 0.1 percent in 2017. - Air tourist arrivals increased by 16 percent during 2018; tourism revenue per room is up by 30 percent. - Consumer price index (CPI) increased by 2.2 percent on average in 2018, driven mainly by the VAT rate increase from 7.5 to 12 percent in July 2018; core inflation remained contained. - Labor force participation rose by 8.7 percentage points since 2014 to 83.1 percent of the working-age population in November 2018. - Employment increased some 4.7 percent per year since 2014, but unemployment stood at 10.7 percent in November 2018, up from 10 percent a year earlier. - Youth unemployment (aged 15–24): 24.1 percent for women and 22.4 percent for men. - Budget deficit narrowed to 3.4 percent of GDP in FY2017/18, down from 5.5 percent a year earlier. - Central government debt increased to 63.3 percent of GDP in FY2017/18 from 54.4 percent in FY2016/17, partly reflecting recognition of payment arrears. - Current account deficit widened to 16.4 percent of GDP in 2018, reflecting higher oil prices and imports associated with the conclusion of a large FDI project. - Banking system well capitalized; credit to the private sector continued to contract in 2018, though at a more moderate rate. - Average non-performing loans (NPLs) declined from a peak of 15.4 percent in 2013 to 9.1 percent in 2018. - Systemic liquidity remains high but moderated in 2018 as commercial banks increased lending to the government. ### Outlook and projections - Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1½ percent in the medium term. - The increase in inflation is projected to have been temporary. - Unemployment is projected to decline only gradually. - External accounts expected to strengthen over the medium-term, supported by high tourism receipts, fiscal consolidation and lower oil prices; current account deficit projected to converge to 5 percent of GDP. ### Risks - External: Risks to global growth, particularly in key trading partners, have increased; slowing external demand or tightening of financial conditions in key advanced economies could adversely affect growth prospects. - Domestic: Vulnerability to hurricanes and climate change remains high; reform momentum could stall delaying fiscal consolidation and implementation of competitiveness-enhancing reforms. - International sector: Reputational risks in the offshore sector could intensify despite recent strengthening of regulatory and transparency standards, possibly challenging existing business models. - Financial spillovers: Potential spillovers into the domestic financial system from the unification of banking license regimes. ### Executive Board Assessment (summary of Directors' views) - Welcomed strengthening economic activity and prospects for continued growth underpinned by prudent policies and comprehensive structural reforms. - Noted concerns: still high unemployment, rising public debt, and risks from external imbalances. - Underscored need to rebuild policy buffers, safeguard financial stability, and enhance resilience to natural disasters. - Welcomed enactment of the Fiscal Responsibility Law (FRL) and emphasized that effective implementation would bolster policy credibility and ensure durable gains from fiscal consolidation. - Encouraged strengthening public financial management, tightening expenditure control, operationalizing the fiscal council, and reviewing the tax regime to enhance efficiency and progressivity. - Recommended prioritizing reforms that tackle high energy costs, improve access to credit, and address skill mismatches in the labor market to boost competitiveness and attract foreign direct investment. - Noted progress on 2013 FSAP recommendations; overall banking system remains resilient. - Urged efforts to revive credit growth, resolve nonperforming loans, strengthen supervision of credit underwriting, develop a real estate price index, and operationalize the credit bureau. - Supported strengthening the central bank’s recovery and resolution powers, governance and independence; highlighted need to complete legislative reform of the banking resolution framework and improve governance of public asset management companies and state-controlled financial institutions. - Emphasized addressing remaining deficiencies in the AML/CFT framework. - Welcomed new international sector transparency and monitoring framework; advised vigilance on potential spillovers from banking license unification and caution on issuance of a central bank digital currency (CBDC). - Welcomed subscription to the enhanced General Data Dissemination System and encouraged further progress on data availability and quality. ### Key policy recommendations - Fiscal Policy - Effectively implement the new Fiscal Responsibility Law (FRL) and adopt measures to deliver on the fiscal targets to ensure debt sustainability. - Review tax expenditures and consider a more comprehensive tax reform. - FX and Monetary Policy - Reduce the central bank’s government debt holdings and strengthen its governance framework to boost the credibility of the exchange rate peg. - Central Bank Digital Currency (CBDC) - Prepare for risks associated with the introduction of the pilot CBDC. - Offshore Sector - Strengthen the AML/CFT and tax transparency frameworks to reduce reputational risks and mitigate possible correspondent banking relationship (CBR) pressures. - Develop a medium-term strategy for the offshore sector to uphold its contributions to the economy. - Financial Sector Policies (FSAP) - Increase resources to enable enhanced banking supervision of credit risks, strengthen the banking resolution framework and improve governance of asset management companies. - Move expeditiously to operationalize the credit bureau. ### Selected social and economic indicators (highlights) - GDP (US$ millions), 2018: 12,425 - GDP per capita (US$), 2018: 32,997 - Population (thousands), 2018: 377 - Unemployment rate (percent), Nov 2018: 10.7 - Poverty rate (percent), 2013: 12.8 - Life expectancy at birth (years), 2018: 75.7 - Human development index (rank), 2018: 54 - Infant mortality rate (per 1,000 live births), 2016: 9 - Adult literacy rate, 15 & up (percent), 2007: 95.6 ### Selected macro projections (annual percentage change or percent of GDP as provided) - Real GDP: 2018: 1.6; 2019: 1.8; 2020: 1.7 - Nominal GDP: 2018: 2.3; 2019: 2.4; 2020: 3.6 - CPI (annual average): 2018: 2.2; 2019: 1.6; 2020: 2.4 - CPI (end of period): 2018: 2.0; 2019: 2.4; 2020: 2.4 - Unemployment rate (percent): 2018: 10.7; 2019: 9.0; 2020: 9.0 - Saving rate (percent of GDP): 2018: 7.5; 2019: 10.9; 2020: 12.5 - Investment rate (percent of GDP): 2018: 23.9; 2019: 23.0; 2020: 22.9 - Credit to the private sector (annual change): 2018: -1.5; 2019: 1.0; 2020: 1.5 - Exports of goods and services (annual change): 2018: 11.8; 2019: 8.2; 2020: 6.4 - Travel receipts (gross): 2018: 12.0; 2019: 8.5; 2020: 5.5 - Imports of goods and services (annual change): 2018: 11.5; 2019: 2.0; 2020: 2.2 - Central government overall balance (percent of GDP): 2018: -3.4; 2019: -2.3; 2020: -1.5 - Central government debt (percent of GDP): 2018: 63.3; 2019: 63.1; 2020: 61.9 - Current account balance (percent of GDP): 2018: -16.4; 2019: -12.2; 2020: -10.3 - Gross international reserves (end of period; millions of U.S. dollars): 2018: 1,196; 2019: 1,250; 2020: 1,275 - Reserves in months of next year's G&S imports: 2018: 2.5; 2019: 2.6; 2020: 2.6 - External public debt (end of period): 2018: 25.5; 2019: 27.9; 2020: 27.6 - External debt-service ratio (percent of exports of G&S): 2018: 9.1; 2019: 19.5; 2020: 8.9 - GDP (in millions of Bahamian dollars): 2018: 12,425; 2019: 12,724; 2020: 13,178 *Source: THE BAHAMAS — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (IMF staff report, May 16, 2019).* ### 7. The external sector position is weaker than suggested by fundamentals and desirable ### 7. The external sector position is weaker than suggested by fundamentals and desirable policies. ### External sector assessment and outlook - The current account deficit widened to 16.4 percent of GDP in 2018. - The 2018 cyclically-adjusted current account deficit—correcting for FDI-related imports—is estimated to be 5.2 percentage points of GDP above the level consistent with fundamentals and desirable policy settings. - The I-REER model points to an overvaluation of around 8 percent. - Reserves declined in 2018 by US$222 million. - For 2018, staff assess the REER as overvalued by 10 to 20 percent. - Tourism composition risk: the U.S., Canada, and the U.K. together account for 90 percent of tourists. - Projection highlights: - Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1½ percent in the medium term. - The current account deficit is projected to converge to 5 percent of GDP once one-off factors dissipate. - Foreign exchange reserves are projected to stabilize at 2.9 months of imports. ### Key drivers and risks - Drivers of the 2018 deficit: higher oil prices, the opening of the Baha Mar resort (raising imports during construction and then boosting receipts), and higher interest and dividend payments abroad by the private sector. - Reserves pressures also reflected refinancing by a public sector entity of foreign currency with local currency debt. - Downside risks to the outlook: - Slowing global growth—particularly in key trading partners—could dampen tourism arrivals and growth. - Tightening of financial conditions in key advanced economies. - High vulnerability to hurricanes and climate change. - Possible stall in domestic reform momentum that could delay fiscal consolidation and competitiveness-enhancing reforms. - Reputational risks in the international sector could pressure corresponding banking relationships (CBRs) despite recent regulatory improvements. - Sustained credit contraction could slow the recovery. - Domestic constraints: lower purchasing power following tax increases and fiscal consolidation; slow progress in reducing NPLs; domestic bottlenecks and lagging economic diversification. ### Fiscal policy, governance, and public financial management - The Fiscal Responsibility Law (FRL) was enacted in October 2018 and establishes three fiscal rules: - A ceiling on the overall budget deficit set at ½ percent of GDP. - A ceiling on the annual growth rate of current expenditures set at long-term nominal GDP growth (once the budget deficit target is met). - A ceiling on government debt set at no more than 50 percent of GDP (which the authorities expect to meet by FY2024/25). - Transition provisions and limits: - During the transition phase, the overall budget deficit shall not exceed 1.8 percent of GDP in FY2018/19 and 1 percent of GDP in FY2019/20. - The FRL provides for a compliance margin of ½ percent of GDP in any given fiscal year, including the transition period. - Fiscal council and reporting: - The law establishes a fiscal council to assess compliance and advise on budgetary matters; staff recommended operationalizing the council by mid-2019 to meet reporting deadlines specified in the law. - New fiscal reporting requirements include a fiscal strategy report; the authorities issued the first publication in November 2018 and revamped quarterly fiscal data reporting. - Complementary PFM reforms recommended for timely consolidation: - Enact the PFM, Public Procurement, and Public Debt Management Laws. - Invest in implementation capacity at the Ministry of Finance and other public-sector agencies to meet transparency requirements from the Freedom of Information Act and the FRL. - Fiscal statistics and arrears: - The government recognized payment arrears totaling 2.9 percent of GDP resulting primarily from unfunded budgetary commitments. - The FY2018/19 budget includes a five-year arrears clearance strategy, including appropriations of 1.4 percent of GDP for the current fiscal year. - FY2018/19 budget and targets: - The FY2018/19 budget aimed for a budget deficit target of 1.8 percent of GDP. - The increase in the standard VAT rate and other taxes were key to reaching that target. - Fiscal developments in the first half of the fiscal year indicated weaker-than-expected revenue performance; staff projects that the deficit target will be missed by 0.5 percentage point of GDP. - Staff recommended limiting new hiring to essential staff, rein in low-priority current spending, and reprioritize capital expenditure to cover the projected shortfall. - Fiscal balance composition (staff estimates): - VAT increase (+ 2.0) - Arrears payment (-1.4) - Other factors, net (+0.8) - New initiatives (-0.4) - FY 17/18 deficit (-3.4) → FY 18/19 deficit (-2.3) ### Medium-term fiscal consolidation and tax policy - Without additional measures, the fiscal balance is projected to reach the FRL target only in FY2022/23 and the debt ratio will remain above 50 percent of GDP beyond FY2024/25. - Staff recommended decisive measures to keep debt on a downward path while balancing spending composition to achieve inclusive growth and invest in natural disaster preparedness. - Revenue-side and expenditure-side recommendations: - Strengthen tax administration capacity in line with CARTAC advice to reduce tax gaps. - Contain expenditure growth by further rationalizing the wage bill, advancing pension reform, and accelerating state-owned enterprises (SOEs) reforms. - Tax expenditures and reform: - Regional studies estimate tax expenditures amount to, on average, 3½ percent of GDP in the region. - Staff recommended introducing a periodic quantification and review of tax expenditures and other incentives. - The Bahamas does not levy taxes on income, capital gains, or inheritance; VAT and business license fees are main tax tools, with property taxation playing a small role. - The government is unifying the business fee licensing framework to remove preferential tax treatment of offshore entities. - The Bahamas is seeking WTO membership by 2020, a process expected to reduce revenue from trade. - Staff encouraged completing a comprehensive land/property registry and building comprehensive real estate price indices to support market-value-based property taxation and consider increases in tax rate or rate structure. - For the medium term, staff noted income taxation could help achieve greater equity, reduce distortions from a tiered business license fee system, and contain increasing non-residents’ profit repatriation. ### Disaster resilience and climate adaptation - Geographic vulnerability: about 80 percent of the land area lies less than 3 feet above sea level. - A three-pillar disaster resilience strategy is being pursued, including financial, structural, and post-disaster preparedness components. - Financial resilience measures and initiatives: - Natural disaster fund to respond to lower impact, higher frequency events; seed funding from proceeds of extinguished dormant accounts estimated at US$41 million. - Contingent credit line: agreement with the Inter-American Development Bank (IDB) for a US$100 million credit facility with parametric triggers. - Disaster insurance: rejoining parametric coverage from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) with coverage split into three zones and tailored attachment points and payout factors. - Structural resilience measures: - Enforce building codes and improve coastal management. - Bahamas Power and Light (BPL) has improved its infrastructure by replacing underground cables and reinforcing overhead networks. - An ongoing US$35 million IDB loan project supports strengthening natural infrastructure, restoring coastal habitats, and improving coastal flood control measures. - Governance recommendations for the natural disaster fund: - Provide appropriate governance and safeguards in the fund’s law, including appointment and definition of responsibilities of a management and supervising board chaired by the Minister of Finance, asset management rules, procedures to release funds, and annual financial and strategic reporting to parliament. - Future allocations to increase the fund’s resources should take place through the budgetary process. *Source: IMF staff.* ### 21. The health of the banking system continues to improve, but risks associated with ### 21. The health of the banking system continues to improve, but risks associated with ### Banking system health and asset quality - The 2019 FSAP found continued improvement in banking system health but highlighted risks associated with domestic asset quality. - Further progress in supervision of credit underwriting and timely resolution of NPLs in some banks and credit unions remains a key objective to ensure resilience against adverse shocks. - There is little visibility for regulators into the dynamics of the domestic residential real estate market, which accounts for ¾ of NPLs. - Recommendations: - Establish a real estate price index and collect loan-level data to assist market monitoring and future implementation of LTV or DTI-based lending standards. - Swift implementation of the credit bureau and an asset registry to make credit markets more efficient and enhance the quality and pace of transactions in the residential mortgage market. ### Bank of the Bahamas (BOB) and state-controlled financial institutions - The public Bank of the Bahamas (BOB) has been bailed out twice in recent years. - Capital injections received in 2014 and 2017 totaled about 2.2 percent of GDP. - Recommendations: - Complete planned legislative reform to enhance recovery and resolution powers. - Implement a reform plan and strengthen governance of state-controlled financial institutions to prevent recurrence of poor lending practices. - Undertake a strategic review of BOB. ### Correspondent banking relationships (CBR) - CBR pressures stabilized after perceived reputational risks led to the withdrawal of some CBRs. - Reliance on affiliated international banks and third-party institutions to execute international financial transactions limited the impact of CBR pressures. - According to the CBOB 2017 survey, one-third of surveyed financial institutions not using parents or affiliates still reported having a relationship with one or two large U.S. correspondent banks. - Recommendation: - Systematically monitor CBR pressures, including concentration risks in payment corridors and increases in transaction costs. ### AML/CFT, offshore sector, and regulatory reform - The Bahamas was identified by the FATF as a country with strategic AML/CFT deficiencies and is taking steps to address them. - Authorities have made progress on technical compliance by revising laws and regulations, and strengthening supervisory guidelines and codes of conduct. - Recommendations: - Enhance effectiveness of AML/CFT by focusing on implementation, including strengthening risk-based supervision of financial institutions and designated non-financial businesses and professions (including casinos, real estate agents, lawyers, accountants, and trust company service providers). - Implement measures to enhance entity transparency, as agreed with the FATF. - The Bahamas has a large international financial sector, amounting to about 21 times GDP as of 2018, with significant non-financial business operations. - Offshore banking is separated from the domestic financial system through strict exchange controls; historically offshore banks have been unable to offer services to domestic residents. - A new legal and fiscal framework is being developed to address concerns over harmful tax practices. - Recommendation: - Swift implementation of the new frameworks and enhanced monitoring under the new licensing regime (which allows financial institutions to serve both international and domestic clients subject to exchange controls). ### Medium-term strategy for the international sector - The changing international environment (tax transparency, real economic activity, substantial economic presence, territorial taxation, minimum effective income taxes) requires a review of The Bahamas’ competitive advantage for international business corporations. - Recommendation: - Review and charter a forward-looking strategy for the international sector to ensure its continued contribution to the economy. ### Monetary stability and central bank operations - Excess liquidity calls for reducing CBOB holdings of government debt and strengthening monetary policy transmission. - The policy rate has been at 4 percent since October 2016. - The accommodative stance is appropriate because the output and credit gaps are negative and core inflation is contained. - A large structural liquidity surplus exists as banks maintain conservative lending practices and pension funds and insurance companies hold liquid assets. - CBOB’s holdings of government debt have reduced from 6.1 percent of GDP in 2016 to 4.2 percent as of end-2018; staff encouraged a further reduction. - Recommendations: - Deepen domestic debt and interbank markets to reduce excess liquidity and improve monetary transmission. - Adopt planned amendments to the CBOB law to strengthen governance and independence, clarify operational objectives, and limit lending to the government. - Establish and implement a debt management strategy—consistent with the FRL—to reduce reliance on central bank lending and facilitate domestic debt market deepening (e.g., regular and pre-announced auctions). ### Exchange rate peg and reserves management - The exchange rate peg is supported by exchange controls; capital controls have been gradually relaxed (reducing the premium charged on buy and sell rates in the Investment Currency Market). - Exchange controls remain instrumental to managing foreign exchange reserves and balance-of-payments flows, especially given large—but irregular—FDI-related transactions. - Recommendation: - Continue building up reserves to underpin the credibility of the peg. - Ensure the public debt management strategy is broad enough to integrate management of all public sector financing requirements, including SOE financing. ### Central Bank Digital Currency (Project Sand Dollar) - The CBOB plans to pilot a digital version of the Bahamas Dollar to boost financial inclusion, especially in smaller islands. - Project objectives include: making payments more efficient; achieving more inclusive, cost-affordable access to financial services; and strengthening financial infrastructure against money laundering by reducing cash transactions. - Key features and timeline: - The “Sand dollar” will be a digital version of the Bahamian dollar with both wholesale and retail applications. - Pilot will be conducted in Exuma, home to about 2 percent of the population. - Pilot will start in late 2019 / early 2020 for a trial period of six-months. - The Sand dollar will be general purpose, accepted as legal tender, exchanging one for one with existing notes, coins and balances. - Design incorporates AML/CFT best practices and KYC rules; users will not be anonymous. - Will build on blockchain infrastructure with capabilities for swift processing; intended to complement, not replace, existing banking services (balances will not accrue interest; a ceiling on amounts held in e-wallets will be set). - Emphasis on interoperability with private service providers, data privacy and sovereignty, and cyber security. - Risks and recommendations: - E-currency can pose risks to financial stability, cybersecurity, and AML/CFT. - Invest in human capital and technological capabilities to ensure the pilot and any full-scale adoption are compatible with and complementary to existing financial infrastructure. - Consider deploying proven technologies (e.g., mobile phone applications) and enabling greater access to ATMs to achieve wider geographic penetration. ### Financial infrastructure, inclusion, and payments - The 2019 FSAP found reforms that would reduce the cost of financial services and close demographic, geographic, and socioeconomic gaps in financial intermediation. - Recommendations: - Enhance the legal framework to facilitate new entrants into the payments sector and issue detailed supervisory guidelines for payment systems operators. - Introduce formal coordination mechanisms and strengthen governance for public funds targeting SMEs to boost effectiveness and efficiency. ### Competitiveness and structural reforms - Decisive structural reforms are needed to enhance competitiveness; long-standing impediments constrain private investment and growth. - World Bank Doing Business indicators point to onerous administrative processes, high costs of trading across borders, poor access to credit, and lack of reliable and affordable electricity; these are aggravated by strength of the currency in real effective terms. - Urgent actions recommended ahead of planned WTO accession in 2020 include: - Advancing energy sector reforms: restructure Bahamas Power and Light (BPL); upgrade transmission and distribution; install a 220-megawatt power plant and a regassification terminal; switch from heavy oil to natural-gas based generation; strengthen regulatory oversight; encourage energy efficiency and renewable energy through FDI and appropriate regulation. - Lowering costs of transacting with government: utilize the US$ 30 million IDB loan for the Government Digital Transformation to Strengthen Competitiveness Program (DTP) to reduce costs of doing business with government; enact the Integrity Commission Bill to prevent, detect, and investigate public-sector corruption. - Easing labor-market bottlenecks: expand vocational and apprenticeship programs; improve quality of education; develop online skills databases and job placement services. ### Data, statistics, and capacity - Priority should be given to improving availability and quality of data. - Staff welcomed: - Subscription to the enhanced General Data Dissemination System. - Adoption of International Public Sector Accounting Standards in fiscal accounts. - Increased reporting on fiscal data. - Recommendations: - Produce quarterly national accounts. - Compile balance-of-payments statistics according to the BPM6 manual and produce International Investment Position estimates. - Conduct a household survey and improve labor market data. - Publish and adhere to an advance calendar of data releases and make data available to the public in a user-friendly form. ### Authorities' views - Authorities broadly concurred with staff’s views of the outlook and risks but anticipate more robust economic performance driven by continued high tourism growth and new FDI projects. - They noted progress towards a natural disaster resilience strategy and a diminished rate of credit contraction with a gradual expansion in bank lending expected. - Authorities reiterated commitment to achieving the FRL targets and legislating PFM reforms to strengthen governance and accountability; they expect tight expenditure control to achieve the budget target despite a potential revenue shortfall in FY2018/19. - Authorities stressed intent to preserve The Bahamas as a competitive tax jurisdiction fully compliant with AML/CFT standards and international tax transparency requirements and to continue reforms to align the offshore sector with international standards. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1bhsea2019001.pdf.* ### 37. The authorities were in broad agreement with the FSAP recommendations. This ### THE BAHAMAS — STAFF APPRAISAL (paras. 37–49) ### Financial sector supervision, resolution, and AML/CFT - Authorities broadly agreed with the FSAP recommendations, including: - Enhancing supervision of credit underwriting and NPL resolution. - Strengthening recovery and resolution powers for the central bank. - Improving AML/CFT practices; authorities noted recent advances and significant resources committed to support implementation and effectiveness of the AML/CFT framework. - Commitments and actions: - Continued improvements in transparency and enhanced monitoring of the offshore sector, particularly given changes to the bank licensing regime. - Draft Corporate Governance Bill to subject all SOEs, including public banks, to rules limiting political interference. - Need to strengthen governance arrangements for state-controlled financial institutions and enhance governance of public asset management companies. ### Monetary policy, central bank governance, and CBDC - Monetary policy stance: - Authorities assessed the monetary policy stance as appropriate. - The CBOB shared staff’s views, including the need to maintain an accommodative stance during a period of low credit growth and fiscal consolidation, and concerns about weaknesses of monetary transmission. - The authorities intend to submit the amendment to the central bank law, which aims to strengthen the central bank’s governance, operations, and independence, to parliament in 2019. - Central bank digital currency (CBDC): - Authorities emphasized that a CBDC can enhance financial inclusion and help modernize payment systems. - The CBOB indicated the pilot will gather critical information on technological challenges and changes in payment system usage; the project design includes safeguards against possible risks. - Authorities stressed the CBDC is designed to complement, not substitute, private banking services. - Staff welcomed the CBOB’s emphasis on protecting against risks associated with introduction of a CBDC. ### Macro-financial monitoring, data, and statistics - Need for better macro-financial monitoring tools: - Authorities agreed on the need for a real estate price index to increase visibility into the residential housing market and improve NPL valuations. - The credit bureau, once operational, should strengthen the quality and pace of credit activity and improve assessment of lending standards. - Data and statistical infrastructure: - Authorities are addressing shortcomings in data collection and dissemination. - In coordination with development partners, authorities are developing a national strategy for statistics and drafting a new statistics law to modernize and unify the country’s statistical network under the umbrella of an independent institute of statistics. ### Fiscal framework, public financial management (PFM), and fiscal risks - Fiscal Responsibility Law (FRL) and fiscal consolidation: - Enactment of the FRL and steps to consolidate the fiscal position underpin macro-financial stability and guard against risks. - Effective implementation of the FRL will bolster policy credibility and ensure durable gains from fiscal consolidation. - Staff welcomes commitment to keeping the pace of fiscal adjustment in line with the FRL target but sees the need for stronger PFM systems and procedures to address weaknesses in expenditure control and budget preparation. - Ratification of the remaining PFM reforms and operationalization of the fiscal council before end-2019 is key to ensure permanent advances in budgeting, transparency, and accountability. - Long-term fiscal sustainability: - To safeguard long term debt sustainability, decisive measures—including in the areas of public pensions and healthcare—are required and need to be carefully balanced with priorities for more inclusive growth and disaster preparedness. - Fiscal policy role: - Fiscal policy should play a greater medium-term role in achieving public policy objectives, including greater income equality. - Global tax trends and prospective accession to the WTO present an opportunity for a comprehensive review of the tax regime to achieve a more equitable and less distortionary tax system. - A quantitative review of existing tax and other investment incentives can strengthen transparency and inform future policies. ### Banking sector soundness and resilience - Current assessment: - The 2019 FSAP found the banking sector enjoys healthy profits and maintains high capital and liquidity ratios. - Banking sector remains sound, but credit growth is hampered by non-performing loans (NPLs) and lack of information about potential borrowers. - Recommended actions: - Further progress in supervision of credit underwriting and timely resolution of NPLs remain key objectives. - Introduce a local real estate price index and operationalize the credit bureau to improve NPL valuation and lending assessment. - Strengthen central bank recovery and resolution powers to enhance banking sector resilience. - Complete planned legislative reform following recapitalizations of the Bank of The Bahamas. ### International sector, competitiveness, and structural reforms - External position and growth: - Authorities shared staff’s assessment that the external position in 2018 was weaker than suggested by fundamentals. - Buoyant activity in tourism and construction has revived growth, but unemployment remains high, particularly among young people, and is projected to decline only gradually due largely to structural factors. - Significant current account deficits—projected to continue, albeit at a declining rate—over the medium term highlight need for structural reforms. - Structural reform priorities: - Advance structural reforms to boost competitiveness, lower costs, raise productivity, and support a shift to higher and more inclusive growth. - Address impediments including high energy costs, bottlenecks in access to credit, and skills mismatches in the labor market. - WTO accession process will allow analyzing implications for the Bahamian economy and putting in place necessary safeguards to mitigate disruptions, enabling transition towards a more open and competitive economy. - International sector framework: - Swift implementation of the new framework for the international sector will demonstrate commitment to a transparent and well-regulated industry. - Potential spillovers into the domestic financial system from unification of banking license regimes require careful monitoring. - In the medium term, review the competitive advantage The Bahamas offers to international business corporations in light of global trends to help secure the sector’s contribution to the economy. *Source: THE BAHAMAS — IMF Staff Appraisal (paras. 37–49).* ### 50. Staff recommends that the next Article IV consultation take place on the standard ### 50. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector - Real GDP growth returned in 2018 after a period of stagnation; projections show Real GDP growth at: 1.3, 0.7, 0.6, 0.4, 0.1, 1.6, 1.8, 1.7, 1.5, 1.5, 1.5, 1.5 (annual percentage changes in projection table). - Growth drivers in 2018: strong tourism activity, sustained private consumption, and a pickup in construction activity. - Inflation: Consumer price index (annual average) entries include 2.1, 1.2, 1.9, -0.3, 1.6, 2.2, 1.6, 2.4, 2.3, 2.3, 2.2; end-of-period CPI entries include 2.0, 0.2, 2.0, 0.8, 1.8, 2.0, 2.4, 2.4, 2.3, 2.3, 2.2. - Labor market: Unemployment rate (percent), Nov 2018 = 10.7; unemployment series in projections: 11.1, 14.6, 13.4, 12.2, 10.1, 10.7, 9.0, 9.0, 8.9, 8.8, 8.7, 8.6. - Tourism metrics: GDP (US$ millions), 2018 = 12,425; GDP per capita (US$), 2018 = 32,997; Air arrivals and Tourist expenditure show sustained tourism contribution (figures presented in source charts). ### Fiscal developments - VAT implementation materially boosted tax revenue; Value Added Tax (VAT) receipts in nominal terms (B$ millions): 219, 628, 638, 681, 954, 1,005, 1,060, 1,112, 1,161, 1,200 (table 2). - Total Revenue (B$ millions): 1,451, 1,702, 1,930, 2,070, 2,041, 2,438, 2,545, 2,649, 2,743, 2,850, 2,945 (FY series). - Expenditure (B$ millions): 1,927, 2,130, 2,240, 2,731, 2,457, 2,729, 2,739, 2,761, 2,826, 2,922, 3,018. - Overall balance (B$ millions): -477, -428, -310, -661, -416, -291, -194, -112, -83, -72, -73; in percent of GDP: -4.4, -3.8, -2.6, -5.5, -3.4, -2.3, -1.5, -0.8, -0.6, -0.5, -0.5. - Primary balance (in percent of GDP): -2.5, -1.7, -0.3, -3.3, -0.8, 0.4, 1.1, 1.7, 1.9, 1.9, 1.8 (memorandum). - Central government debt (percent of GDP): 48.1, 49.7, 50.4, 54.4, 63.3, 63.1, 61.9, 60.0, 58.5, 57.0, 55.7 (FY series); debt profile skewed toward domestic holders, domestic currency, and long-term maturity (figures shown in debt profile charts). ### Financial sector developments - Non-performing loans (NPLs) have declined; comparative NPLs (2018, percent of total loans) place Bahamas among peers (chart presents country comparisons). - NPLs by bank (percent of total loans) for 2015–2018 reported by bank; progress uneven across banks. - Credit continues to contract: Credit to the private sector annual percentage changes include 4.9, -2.8, -1.1, -2.0, -3.0, -1.5, 1.0, 1.5, 2.0, 2.5, 3.0, 3.0 (table 4). - Banking sector maintains high capital ratios and profitability driven by interest spreads. - Banking sector assets and financial sector value-added show a shrinking domestic financial sector; Offshore financial sector assets declined (Offshore Financial System Assets multiples of GDP for 2013, 2016, 2018 presented in source charts). - One foreign bank closed operations in 2018 (note in figure). ### External sector developments - Current account deficits widened in 2018 driven by higher oil prices and high imports; Current account balance (US$ millions): -1,898, -1,415, -711, -1,570, -2,040, -1,548, -1,359, -1,228, -1,091, -903, -753 (2014–2024 projections). - As a result, foreign reserves fell in 2018 to below the 3-month benchmark; Gross international reserves (end period; US$ millions): 788, 812, 904, 1,417, 1,196, 1,250, 1,275, 1,399, 1,500, 1,546, 1,559; in months of next year's G&S imports: 2.2, 2.2, 2.2, 3.1, 2.5, 2.6, 2.6, 2.8, 2.8, 2.9, 2.9. - External public sector debt declined even as reserves fell; External public debt (percent of GDP) time series shown in figures. ### Business environment (Doing Business indicators) - Business environment weaknesses across a broad range of areas: long administrative processes, difficult access to credit, credit information asymmetries increasing risk premia. - Labor market rigidity relatively low; trade costs relatively high (country comparisons in figures). ### Selected social and economic indicators (key levels) - GDP (US$ millions), 2018 = 12,425. - GDP per capita (US$), 2018 = 32,997. - Population (thousands), 2018 = 377. - Poverty rate (percent), 2013 = 12.8. - Unemployment rate (percent), Nov 2018 = 10.7. - Infant mortality rate (per 1,000 live births), 2016 = 9. - Life expectancy at birth (years), 2018 = 75.7. - Human development index (rank), 2018 = 54. - Adult literacy rate, 15 & up (percent), 2007 = 96. ### Central government operations (highlights and projections) - Revenue and tax composition (B$ millions): Total Revenue and Tax revenue series for FY14–FY24 presented in Table 2; notable VAT recovery in nominal VAT receipts (see VAT series above). - Wages and salaries (B$ millions): 624, 640, 665, 694, 697, 701, 703, 713, 729, 750, 776. - Interest payments (B$ millions): 212, 233, 275, 268, 314, 347, 342, 339, 342, 341, 338. - Net incurrence of liabilities (B$ millions): 477, 428, 310, 661, 416, 291, 194, 112, 83, 72, 73; domestic and foreign composition detailed in table. ### Balance of payments (composition and projections) - Trade and service balances: Trade (goods) balance, domestic exports and imports series presented; Services and Travel (credit) series show travel receipts robust (Travel (credit) US$ millions): 2,317, 2,537, 2,622, 2,507, 2,960, 3,110, 3,261, 3,415, 3,567, 3,721, 3,887. - Capital and financial account components include Foreign direct investment, Other private capital, Long-term public sector financing; Capital and financial account (percent of GDP) timeline provided. - Change in Net International Reserves (increase -) series: -46, -24, -92, -513, 222, -54, -25, -124, -101, -47, -13 (US$ millions) with percent of GDP entries in table. ### Central Bank and financial system summary accounts - Central Bank gross international reserves (US$ millions): 788, 812, 904, 1,417, 1,196, 1,250, 1,275, 1,399 (2014–2021). - Reserve money (B$ millions): 981, 980, 1,292, 1,450, 1,252, 1,282, 1,327, 1,372. - Broad money (liabilities to private sector, B$ millions): 6,390, 6,374, 6,930, 7,037, 6,982, 7,150, 7,405, 7,652. - Credit to nonfinancial public sector and private sector levels and annual changes presented in Table 4. ### Risk Assessment Matrix — key risks and policy responses - Sharp tightening of global financial conditions / higher-than-expected U.S. inflation: Relative likelihood = Low; Impact = M; Policy response: Structural reforms to increase competitiveness and fiscal consolidation to strengthen fiscal and external buffers. - Weaker-than-expected global growth (including significant US slowdown): Relative likelihood = Medium; Impact = H; Policy response: Structural reforms and fiscal consolidation. - Large swings in energy prices: Relative likelihood = Medium; Impact = M; Policy response: Accelerate energy reform to build price buffer and reduce reliance on fossil fuels. - Further pressure on the offshore sector (reputational/tax transparency risks): Relative likelihood = High; Impact = H; Policy response: Strengthen AML/CFT effectiveness and tax transparency; systematically monitor CBRs; effectively communicate reforms. - Natural disasters: Relative likelihood = High; Impact = H; Policy response: Enhance ex-ante preparedness, risk reduction, and resilient infrastructure investment. - Sustained credit contraction: Relative likelihood = Medium; Impact = M; Policy response: Accelerate financial sector reforms to revive credit growth. - Higher-than-expected FDI flows: Relative likelihood = Low; Impact = H; Policy response: Structural reforms to increase competitiveness and improve regulatory environment to attract FDI. - Delays in fiscal consolidation or structural reform implementation: Relative likelihood = Medium; Impact = H; Policy response: Enhance communication strategy and implement corrective measures swiftly. *International Monetary Fund staff summary based on the provided chapter content.* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### A. Context and Recent Developments - The Bahamas typically runs large current account deficits owing to its relatively narrow economic base and heavy dependence on imports and tourism. - Goods imports have steadily increased to nearly eight times that of domestic exports, resulting in trade deficits averaging around 20 percent of GDP over the past decade. - Composition of imports and external flows: - Machinery and equipment and manufactured goods: about one third of imports. - Oil and food imports: another 30 percent of imports. - Net inflows on services (mainly tourism receipts): averaged about 10 percent of GDP. - Net income transfers abroad (profit repatriation and dividends on tourism investments): averaged 2 percent of GDP. - Current account deficit over the past decade: ranged between 8 and 17 percent of GDP, financed mainly by FDI and other private sector inflows. - 2018 developments that widened the current account deficit: - Oil import bill rose by over 30 percent in line with world oil prices. - Imports of other services increased by almost 50 percent, most related to opening of the Baha Mar resort. - Interest and dividend payments abroad increased almost 90 percent to over 4 percent of GDP. - Tourism receipts increased by around 12 percent. - International reserves: - Authorities boosted reserves in 2017 through a US$750 million external sovereign bond issuance, amounting to around 6.2 percent of GDP in that year. - Reserves declined in 2018 by around US$220 million, largely reflecting SOE operations, oil imports increasing by US$125 million from 2017, and a public-sector entity refinancing about US$70 million of foreign currency debt with domestic currency. Commercial banks contributed +159 (USD million) to reserve dynamics. - End-2017 NIR: (1,417) (USD million). End-2018 NIR: (1,196) (USD million). - Medium-term outlook: - Oil and other commodity prices are expected to decline modestly, which should help improve the current account. - Tourism receipts expected to continue strengthening as FDI projects in the pipeline come on stream. - Recovery of the world economy expected to slow in 2019 and beyond, adversely affecting demand for exports of goods and services. - Net income outflows anticipated to continue as investors collect dividends on tourism investments. - Current account deficit projected to gradually converge to around 5 percent of GDP over the medium term. ### B. External Stability Assessments - Overall assessment: staff assesses the 2018 external position as weaker than the level suggested by fundamentals and desired policy settings. - Methodology: EBA-lite (two panel regressions of the current account and the REER) — poor fit for a small tourism-dependent country with irregular large FDI projects; external sustainability approach not used due to lack of official IIP data. - Current Account (CA) Model: - Adjustments: FDI-related goods and services imports excluded (assumes 80 percent of capital goods imports and 100 percent of construction services imports are FDI-related), yielding an adjusted CA deficit of -8.0 percent of GDP in 2018. - Estimates (2018): - Actual CA (adjusted): -8.0 percent of GDP. - Cyclically adjusted CA: -8.0 percent of GDP. - CA norm: -2.8 percent of GDP. - Cyclically adjusted CA norm: -2.9 percent of GDP. - CA gap: -5.2 percent of GDP. - Policy gap: -1.1 percent of GDP (policy gaps, including higher fiscal deficits and tighter capital flow management than desirable, contributed about 1.1 percent of GDP to the CA gap). - Using standard elasticities, the CA model suggests an overvaluation of 19 percent in 2018, but model fit is poor and norm estimates are tighter than in previous years. - Real Effective Exchange Rate (REER) / I-REER Model: - REER model findings for 2018: - REER gap (CA approach elasticity): 19.5 percent. - REER gap (I-REER approach): 7.6 percent. - The model finds the average REER for 2018 was 7.6 percent stronger than the level consistent with fundamentals and desirable policy settings. - Historical movements: - Following an appreciation of the Bahamian dollar of 3¼ percent in 2015 in real effective terms (largely due to U.S. dollar appreciation), the period average REER depreciated by 1½ percent from 2015 to 2018. - The REER in 2018 was roughly at the level it was in 2010. - Model fit is poor; results indicate a moderate overvaluation but are imprecise. - Summary judgement: - On balance, staff assesses the external position to be weaker than the level suggested by fundamentals and desirable policy settings. - Contributing factors to uncertainty: poor model fit in 2018, lack of data on the IIP position, and the presence of exchange control measures in place since 1972 that affect capital flow management while maintaining the peg to the U.S. dollar. ### C. Cost and Structural Competitiveness - Competitiveness indicators: - IMF-compiled “Week at the Beach” index (January 2019): The Bahamas is the second most expensive tourist destination after Bermuda among key destinations in Mexico, Central America, and the Caribbean (Bahamas = 100 benchmark used in the index). - Elevated costs driven by hotel costs and food and water prices. - Structural impediments to private sector expansion: - High energy costs. - Skills mismatches and structural problems in the labor market. - Poor access to credit. - Inefficiencies in government bureaucracy. - Priority reforms recommended: - Advancing energy sector reforms: - Prepare for natural disasters, improve reliability in generation and distribution, and reduce costs. - Bahamas Power and Light (BPL) medium-term plan to switch from heavy oil to natural gas for power generation and upgrade electricity transmission and distribution. - Internal restructuring at BPL; BPL is considering issuing a bond to refinance about US$320 million in legacy debt at a lower rate. - Lowering costs of transacting with the government: - Government Digital Transformation to Strengthen Competitiveness Program (DTP) objectives: - Streamline government procedures and make them available online. - Increase use of information and communications technology in the public sector. - Increase transparency of government activities and strengthen auditing and control mechanisms. - Establish an Integrity Commission to tackle public sector corruption. - Enhancing access to finance: - Absence of a credit bureau for households and weak bookkeeping traditions hamper lending. - CBOB selected an operator for a private credit bureau; it will take time to become fully operational. - A Credit Risk Agency established and expected to become operational in 2020 to oversee licensing of credit bureau establishments. - Easing labor market bottlenecks: - Urgent need to expand vocational and apprenticeship programs to reduce skills mismatches and youth unemployment. - Government five-pronged education reform over five years: - (i) Expansion of pre-school enrollment rates to 100 percent in five years. - (ii) Revision of curricula throughout the education system. - (iii) Ongoing further training of teaching and administrative staff. - (iv) Digitalization and upgrading of technological infrastructure in schools. - (v) Expansion of opportunities and funding for vocational training. ### D. Reserve Adequacy - Standard reserve adequacy metrics give mixed signals for normal times. Benchmarks use 100 as adequate coverage. - Reserve Adequacy Metrics (values as presented): - 3 months (next year's goods and service Imports): 2018 = 84, 2019 = 86, Average 2020-2024 = 94. - 3 months (next year's non-FDI related goods imports): 2018 = 97, 2019 = 99, Average 2020-2024 = 107. - 20 percent of broad money (M2): 2018 = 86, 2019 = 87, Average 2020-2024 = 92. - 100 percent of Central Bank's demand liabilities: 2018 = 114, 2019 = 117, Average 2020-2024 = 122. - Short Term Debt: ... ... ... - Risk-weighted measure: 2018 = 86, 2019 = 84, Average 2020-2024 = 89. - Revised risk-weighted measure: 2018 = 114, 2019 = 110, Average 2020-2024 = 117. - Key reserve facts (end-2018): - International reserves stood at US$1,196 million (2.5 months of next year’s imports), below the traditional benchmark of 3 months of next year’s imports of goods and services. - Excluding FDI-related goods and services imports, reserves equaled 2.9 months of next year’s imports at end-2018. - Reserves stood at 114 percent of Central Bank liabilities but were below 20 percent of broad money (M2). - Reserves were 86 percent of the level suggested by the Fund’s risk-weighted metric. - Accounting for the presence of exchange controls (ECs), the revised risk-weighted measure assesses reserve coverage at 1142 percent, within the recommended 100–150 percent range. - Recommendations and data needs: - In the context of continued commitment to the exchange rate peg, structural reforms alongside continued fiscal consolidation and accumulation of foreign exchange reserves are critical to strengthen external buffers. - Improvements in external sector statistics are crucial: priority should be given to compiling data on the international investment position; improving the quality, coverage, and timeliness of financial account data; and moving to BPM6 as soon as possible. *Source: Annex II. External Sector Assessment (as provided).* ### 57.2 percent in the 2018 Article IV to 54.4 percent. ### 1bhsea2019001 - 57.2 percent in the 2018 Article IV to 54.4 percent. ### Realism of baseline assumptions - Staff projects real growth to average 1.6 percent over the medium term. - Inflation is expected to remain low (2.2 percent). - The primary balance is projected to improve to 1.7 percent by the end of the forecast period, reflecting the authorities’ recent consolidation efforts and the FRL targets. - Past growth forecast errors are largely explained by a substantial revision to the national accounts in 2017, which showed lower growth than previously estimated, as well as large unexpected events such as natural disasters and temporary suspension of large FDI projects. - Past projections for the primary balance appear to have been optimistic, while inflation turned out to be lower than expected. ### Macro–fiscal stress test - Fiscal consolidation over the past two years has increased resilience; staff simulated four shock scenarios: a real GDP growth shock, a primary balance shock, real interest rate shock, and real exchange rate shock. - Under all shocks, the debt-to-GDP ratio increases marginally by between 0.8 (real exchange rate shock) to 2.7 (real GDP growth shock) percentage points from the baseline of 55.7 percent at the end of projection period. - The primary balance shock has relatively strong impact on the debt to revenue ratio in the short term. - Gross financing requirements are sensitive to the real interest rate and would increase by 0.7 percentage point of GDP in FY2023/24 in the case of a shock. - A combined macro–fiscal shock would raise debt to 64.5 percent of GDP, and gross financing requirements to 7.1 percent of GDP in FY 2023/24. ### Natural disaster scenario and disaster preparation - Scenario based on impact of hurricane Matthew: a temporary reduction of real GDP growth by 0.5 percent in FY2019/20 and FY2020/21. - Lower tax revenue by 2.2 percentage point of GDP for each of the years FY2019/20 and FY2020/21. - Higher spending by 1.5 and 0.75 percentage points of GPD for FY2019/20 and FY2020/21, reflecting post-hurricane cleanup and reconstruction efforts. - Disaster preparation measures considered: - Natural disaster relief fund (B$41 million). - Contingent credit line with the Inter-American Development Bank (IDB) (US$100 million). - Payout from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) (US$35 million). - The natural disaster relief fund and CCRIF insurance payout moderate the revenue loss by US$76 million (0.6 percent of GDP) in the first year. - The swift disbursement under the contingent credit line (0.8 percent of GDP) buffers the impact on growth and lowers financing costs, reducing the growth shock by 0.2 and 0.15 percentage points for FY2019/20 and FY2020/21. - Overall, despite the temporary nature of the growth shock and full use of buffers, government debt would still increase to 63.0 percent of GDP by FY2023/24, 7.4 percentage point higher than in the baseline. ### External debt and external DSA findings - The stock of public external debt decreased to 25.5 percent of GDP in 2018. - Under the baseline scenario, external debt is projected to increase to 27.9 percent of GDP in 2019 before declining gradually to 25.9 percent of GDP by 2024. - The projection assumptions include: - Domestic refinancing of external SOE debt will continue (more than half of outstanding external SOE debt matures in 2019 and 2020). - The state-owned electricity company’s plans to reduce the issuance of external bonds. - The central government’s continued shift from external to domestic financing. - Bound test results: - A permanent one-half standard deviation increase in the non-interest current account deficit beginning in 2020 would put the public external debt ratio on an increasing trajectory, reaching 35 percent of GDP by 2024. - A permanent one-time 30 percent depreciation in real effective terms in 2020 would shift the external debt level up by around 12.25 percent of GDP relative to the baseline over the projection period. ### Key public debt and DSA indicators (selected exact figures from projections and tables) - Baseline nominal gross public debt projection series (percent of GDP, fiscal year): 39.4 (2017), 54.4 (2018), 63.3 (2019), 61.3 (2020), 61.9 (2021), 60.0 (2022), 58.5 (2023), 57.0 (2024), 55.7 (projection end). - Public gross financing needs (percent of GDP): 2.3 (2017), 4.3 (2018), 5.9 (2019), 5.7 (2020), 5.4 (2021), 4.2 (2022), 3.8 (2023), 4.7 (2024), 5.3 (cumulative). - Real GDP growth (in percent) projection series: -0.2 (2017), 0.3 (2018), 0.8 (2019), 1.7 (2020), 1.7 (2021), 1.6 (2022), 1.5 (2023), 1.5 (2024), 1.5 (steady). - Inflation (GDP deflator, in percent): 1.7 (2017), 1.4 (2018), 1.2 (2019), 0.6 (2020), 1.2 (2021), 1.8 (2022), 1.8 (2023), 1.8 (2024), 1.9 (last). - Effective interest rate (in percent): 5.3 (2017), 4.5 (2018), 4.8 (2019), 4.5 (2020), 4.3 (2021), 4.2 (2022), 4.3 (2023), 4.2 (2024), 4.1 (end). - Change in gross public sector debt (cumulative projection): 3.0 (2017), 4.0 (2018), 8.9 (2019), -0.2 (2020), -1.2 (2021), -1.9 (2022), -1.5 (2023), -1.5 (2024), -1.4 (final), -7.6 (cumulative). - Identified debt-creating flows and components (percent of GDP, projections): Primary deficit contributions and automatic debt dynamics detailed in schedule (primary deficit contribution series includes 1.7, 3.3, 0.8, -0.4, -1.1, -1.7, -1.9, -1.9, -1.8, -8.8 cumulative). - Public sector consolidated ratios (selected historical series): Total public sector 49.4 (FY2011/12), 57.1, 60.8, 63.3, 64.3, 67.3, 67.2 (FY2017/18). - Composition of central government debt (percent of GDP, FY2017/18): Central government debt 63.3; External 21.5; Domestic 41.8. - Consolidated public sector external debt (percent of GDP): 11.2 (2017), 14.0 (2018), 17.9 (2019), 18.8 (2020), 20.1 (2021), 19.8 (2022), 26.5 (2018 listed elsewhere in table context). ### Stress test outcomes and risk assessment highlights - Individual shocks and outcomes: - Real GDP growth shock: increases debt-to-GDP by up to 2.7 percentage points from baseline. - Real exchange rate shock: increases debt-to-GDP by 0.8 percentage points from baseline. - Real interest rate shock: raises gross financing requirements substantially; example sensitivity: increase by 0.7 percentage point of GDP in FY2023/24. - Combined macro–fiscal shock: raises debt to 64.5 percent of GDP and gross financing requirements to 7.1 percent of GDP in FY2023/24. - Hurricane shock with shock absorbers (with buffers applied) results in gross nominal public debt reaching 63.0 percent of GDP by FY2023/24. - External DSA bound tests show sensitivity: a permanent one-half standard deviation non-interest current account deficit shock reaches 35 percent of GDP external public debt by 2024; a one-time 30 percent real depreciation shifts external debt up by around 12.25 percent of GDP relative to baseline. *Source: IMF staff, "THE BAHAMAS" country report material (extracts provided).* ### Annex IV. Past Policy Advice ### Annex IV. Past Policy Advice ### Fiscal Policy - Recommendation: Undertake additional fiscal adjustment to bring the budget deficit to 0.5 percent of GDP over the medium term. - Current status: An estimated fiscal adjustment of 3 percent of GDP over 2017–18 paves the way for meeting the medium-term deficit target. - Recommendation: Focus on reducing recurrent expenditures rather than compressing much-needed capital spending. - Current status: The expenditure adjustment has impacted capital spending. - Recommendation: Establish a natural disaster fund (amounting to 2-4 percent of GDP) as part of a broader risk management strategy. - Current status: Initial capital for a natural disaster fund has been identified and draft legislation prepared. - Recommendation: Adopt fiscal rules designed to limit the budget deficit and bring down public debt to a sustainable level over the medium term. - Current status: The FRL was enacted in October 2018 and it includes numeric targets and supporting institutions, including a fiscal council. - Recommendation: Improve tax revenue mobilization by eliminating tax concessions and exemptions and developing a progressive tax system. - Current status: The VAT rate has been increased, but significant exemptions remain in place and there is no progress with income taxation. ### Structural Policy - Recommendation: Advance energy sector reforms to improve the reliability of the electricity grid and reduce costs. - Current status: The energy company completed an audit of the electricity grid, and it is upgrading its transmission and distribution networks. - Recommendation: Streamline administrative processes to improve the business climate and establish a credit bureau to enhance financial inclusion. - Current status: An operator for the credit bureau has been selected. - Recommendation: Expand vocational and apprenticeship programs to help reduce skills mismatches and youth unemployment. - Current status: More progress is needed in addressing skills mismatches and reducing youth unemployment. ### Monetary and Financial Policy - Recommendation: Implement provisions to improve central bank governance by clarifying its objectives and restricting lending to the government. - Current status: There has been a reduction in debt held by the CBOB; however, the draft new legal framework has not been approved. - Recommendation: Develop real estate price indices to facilitate the determination of fair value and the resolution of NPLs. - Current status: There has been no progress on a comprehensive real estate index. ### Data - Recommendation: Initiate production of quarterly GDP statistics; publishing and adhering to a data release calendar. - Current status: Experimental quarterly GDP estimates have been compiled. - Recommendation: Improve labor market data, by conducting unemployment surveys more frequently. - Current status: There has been no progress. - Recommendation: Develop estimate of the International Investment Position. - Current status: There has been no progress. *Source: Annex IV. Past Policy Advice (from the provided IMF content).* ### 1. Policymakers across the world are looking to harness opportunities offered by new ### 1. Policymakers across the world are looking to harness opportunities offered by new ### CBDC definitions, types, and operational models - BIS survey: "70 percent of central banks are currently involved—or will soon be involved—in a form of digital currency, with one-third of central banks now seeing the adoption of CBDCs as likely." - BIS distinguishes two CBDC types: - Wholesale CBDC limited to banks and other financial institutions. - General purpose (or retail) CBDC available to the general public. - Two main operational models: - Digital token: operates peer-to-peer with or without a distributed-ledger blockchain system that does not involve the interbank clearing system. - Account-based: individuals and firms directly hold accounts at the central bank—analogous to reserve accounts commercial banks hold with the central bank for interbank payments and regulatory purposes. - Practical distinction: account- and token-based CBDCs are distinguished by identification requirements (payer identification for account-based; genuineness verification for token-based). ### The Bahamas (CBOB) Sand Dollar pilot and objectives - The CBOB is considering a digital form of fiat money primarily to enhance financial inclusion. - Planned action: a blockchain-based CBDC pilot in a remote island of the archipelago. - Objectives of the pilot: - Enhancing financial inclusion. - Reducing transaction costs in areas that are not served, or underserved, by commercial banks. - Implementation note: the CBOB selected an external provider to design and implement the digital fiat currency named "Sand Dollar" in The Bahamas. - Capacity needs: the pilot—and especially full-scale adoption of a general purpose CBDC—will require additional human capital and technological capabilities to ensure compatibility with the existing financial structure and compliance with legal and regulatory requirements. ### Potential benefits and desirable features of CBDCs - Cost and transparency: - CBDCs can reduce the costs of issuing and distributing physical money. - CBDCs can increase transparency throughout the financial system. - Effectiveness depends on performance as: - Medium of exchange. - Secure store of value. - Denominated in an existing unit of account for economic and financial transactions. - Inclusion and efficiency: - CBDCs could enhance financial inclusion among low-income households that tend to rely heavily on cash and small businesses that incur high transaction costs. - Greater efficiency in domestic and cross-border payment systems and low risk in deposit accounts can expand access to financial services and support dynamic and inclusive economic growth. - Features of a well-designed CBDC: - Medium of exchange: accounts-based CBDC makes the central bank the central hub for retail transactions or involves public-private partnerships with commercial banks to handle CBDC accounts. - Store of value: a CBDC account with the central bank could provide a rate of return in line with risk-free assets such as short-term government securities and thereby serve as a tool for the effective conduct of monetary policy. - Unit of account: a stable unit of account is key; a digital form of currency would function like physical fiat money and enable the central bank to maintain the appropriate monetary policy stance for price stability. ### Macro-critical risks, regulatory burdens, and monetary transmission - Financial stability concerns: - Introduction of an interest-carrying CBDC could undermine financial stability by making commercial bank deposits more volatile. - If CBDC substitutes for commercial bank deposits, banks could face increased funding costs, leading to higher lending rates. - Higher CBDC demand may force the central bank to skew the composition of its balance sheet toward more risky assets as it needs to generate higher returns. - CBDCs appear to be subject to fraud and cybersecurity risks that could have significant reverberations to financial stability. - Financial integrity and compliance: - The recorded nature of CBDC can help improve financial integrity and address some AML/CFT vulnerabilities associated with greater reliance on physical cash. - Compliance burdens (e.g., KYC requirements), cyber resilience, and safeguarding personal data will increasingly fall on the central bank. - Monetary transmission and central bank role: - An interest-bearing CBDC has the potential to alter traditional structures of the financial system. - Digitalization alone would not erode the central bank’s control over the macro-financial environment. - An accounts-based CBDC could give a greater role to the central bank in the financial system and may enhance the efficacy of monetary policy by providing more systematic and transparent information on money demand in real time. *Source: 1bhsea2019001 (THE BAHAMAS, INTERNATIONAL MONETARY FUND).* ### 5. By exploring all forms of digital innovation, The Bahamas can progress towards ### 5. By exploring all forms of digital innovation, The Bahamas can progress towards financial inclusion while avoiding risks associated with the CBDC ### Key findings on digital innovation and a CBDC - Financial innovation could help enhance financial inclusion throughout The Bahamas and the widespread use of an account-based CBDC could discourage tax evasion. - Issuing a CBDC is no panacea: - Insufficient infrastructure for reliable electricity and internet connectivity in smaller islands and low-income areas of bigger islands can worsen socioeconomic inequalities because of monetary digitalization. - Financial stability risks associated with the CBDC are significant, and the current rules and regulations may need to evolve to appropriately mitigate these risks. - A more efficient and inclusive financial system could also be achieved through digital innovations in existing payments and financial infrastructures. ### Infrastructure recommendations - Expanding the telecommunication infrastructure: - Greater geographic penetration of financial services—the key objective for the CBOB—can be obtained by improving internet and mobile phone connectivity and implementing low-cost automated teller machines (ATMs). - Although the share of population using the Internet in The Bahamas is much higher than that in the rest of Latin America and the Caribbean, internet access and mobile phone subscriptions are not distributed equally throughout the archipelago scattered over an area of more than 259,000 square kilometers. - Ensuring remote islands have adequate telecommunication infrastructure and weak internet connectivity is key. ### Payments and platform recommendations - Utilizing mobile phone applications: - The widespread availability of mobile phones provides a reliable, well-tested platform to deliver banking and payment services across the archipelago. - Since the geographical reach of telecommunication operators is significantly greater than that of any commercial bank, mobile money transfer and payment applications could offer a low-cost solution to provide access to financial services. - In many countries, mobile phone companies offer m-Wallet (short for mobile wallet) services, which allow subscribers to load cash, pay bills, and transfer money to other m-Wallet accounts or bank accounts. - Smartphones offer users access to a wide spectrum of fintech applications, including peer-to-peer digital wallets. ### Institutional and regulatory recommendations - Improving the institutional infrastructure: - From a broader point of view of financial inclusion, the establishment of a credit bureau and an asset registrar would be more effective in reducing the cost of financial services and closing demographic, geographic and socioeconomic gaps in financial intermediation. - Transparent credit information has significant benefits for financial stability and integrity by providing information on clients’ financial behavior and outstanding assets and liabilities. ### Supporting data and context (selected statistics and observations) - Archipelago area: more than 259,000 square kilometers. - Internet usage in The Bahamas is "much higher" than in the rest of Latin America and the Caribbean (comparative phrasing present in source). - Mobile phone subscriptions and individuals using the Internet are shown in historical series comparing The Bahamas and Latin America & Caribbean (figures and charts referenced in the source). *Source: 1bhsea2019001 - 5. By exploring all forms of digital innovation, The Bahamas can progress towards* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1bhsea2019001.pdf_