## 1bhsea2022001 ## Source details **Canonical URL:** [1bhsea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1bhsea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1bhsea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1bhsea2022001.pdf.json) --- ### Recovery from the pandemic — key macro and social indicators - COVID-19 cases reported: more than 33,368 as of April 2022; deaths: over 789. - Vaccination: about forty percent of the population fully vaccinated. - Economic contraction and rebound: - Economy contracted by almost 24 percent in 2020. - Tourism receipts fell by more than 75 percent in 2020. - Air arrivals recovered to half of 2019 levels in 2021. - Output expanded by around 14 percent in 2021. - Labor market: - Unemployment estimated at around 18 percent at end-2021 compared to over 25 percent in 2020. - Latest available unemployment data are from 2019; next labor force survey planned in May 2023. - Prices and inflation: - CPI increased by 4.1 percent year-on-year in December (driven by energy, transportation, and more recently food). - Public finances: - Fiscal deficit: 13.7 percent of GDP in FY2020/21 (July to June). - Public debt rose to over 100 percent of GDP by end-2021. - Revenues doubled year-on-year in the first half of FY2021/22, while spending remained elevated. - External position and reserves: - Current account deficit: 19.7 percent in 2021 (24 percent in 2020). - Gross reserves close to 5 months of imports at end-2021. - IMF general SDR allocation: 174.8 million in August 2021 (as of March 15, 2022, corresponds to US$241 million). - Authorities plan to keep SDRs as reserves given legal limits on central bank lending to the government. - Banking sector: - Average ratio of capital to risk-weighted assets: 26½ percent in the fourth quarter. - Average return on assets: just over 2 percent in the third quarter of 2021. - Private sector credit is still contracting. ### Outlook, risks, and projections - Short- and medium-term projections: - Staff’s baseline projects real GDP growth at 8 percent in 2022. - Real output expected to be about 6 percent below its pre-pandemic level in 2022. - Full recovery to pre-pandemic levels not expected until 2024. - Staff expects average inflation to increase to 6¾ percent in 2022. - Staff projects medium-term potential growth at just 1½ percent. - Major downside risks (Annex II): - (i) Emergence of new COVID-19 variants. - (ii) Additional upward pressures on global food and oil prices (including because of the war in Ukraine). - (iii) Sharp rise in global risk premia that could further strain public and private balance sheets. - (iv) Natural disasters related to climate change. - External financing and reserves outlook: - Ongoing recovery in international tourism projected to narrow external imbalances and keep international reserves at an adequate level despite high imported inflation in the short term. ### Fiscal policy — near-term actions, measures, and medium-term consolidation - FY2021/22 selected items (percent of GDP): - Revenue: 19.0 (FY20/21 outturn), 18.5 (Original budget), 19.3 (Supplementary budget), 19.8 (IMF projection). - Tax: 16.3, 15.9, 16.6, 16.9. - VAT: 7.5, 7.0, 7.6, 7.7. - Expenditure: 32.7, 26.4, 26.4, 26.5. - Overall balance: -13.7, -7.8, -7.1, -6.7. - Primary balance: -9.4, -3.9, -3.1, -2.7. - Fiscal measures enacted: - Supplementary budget kept around one-third of pandemic-related spending, cut the VAT rate from 12 to 10 percent (starting on January 1, 2022), marginally raised public salaries and non-contributory pensions. - Authorities removed some zero-rated VAT items and expanded VAT to rentals paid on vacation properties. - Staff estimate measures, recovery effects, and less demand for COVID-related spending will reduce the primary deficit to below 3 percent of GDP this fiscal year. - Financing needs and contingent actions: - Gross financing needs around 16 percent of GDP in FY2021/22 (excluding short-term Treasury bills, notes, and central bank advances of about 10 percent of GDP). - Repo agreement in February using U.S. Treasuries nominal value close to US$236 million as collateral; authorities will receive US$206.5 million and purchase the Treasuries back within 2 years. - Recommendation: develop contingency plan to allow low priority spending (including by SOEs) to be cut quickly and flexibly if needed. - Recommendation: allow higher international food and energy costs to pass through to domestic prices, accompanied by targeted support to protect the poorest. - Medium-term fiscal outlook: - Under current policies, public debt would remain more than 15 percentage points above pre-pandemic levels by FY2026/27 (assumes modest fiscal adjustment of around 1½ percent of GDP over the medium-term). - Authorities’ 2021 Fiscal Strategy Report (FSR) plans to increase revenues by more than 5 percent of GDP, raise public investment to 3½ percent of GDP, limit current spending to 20 percent of GDP, and target an overall surplus of 1½ percent by FY2025/26. - Authorities envisage reducing central government debt to 50 percent of GDP by FY2030/31 (Fiscal Responsibility Act target); the paper notes the country may need to delay achieving the 50 percent debt ratio by at least two years given high debt. ### Medium-term consolidation — Active scenario and tax reform options - Medium-term surplus scenario: - A medium-term surplus of 1½ percent of GDP is consistent with reducing debt-to-GDP to 50 percent by 2032/33. - Staff proposes around ¾ percent of GDP additional measures per year (more gradual than FSR). - Composition (cumulative contributions): - Increase in the revenue-GDP ratio by 5 percent through credible tax reform. - Permanent cuts to unproductive spending of 1½ percent of GDP. - Higher spending on capital investment, education and health of 2½ percent of GDP. - Protect vulnerable groups through better targeting of social spending. - Staff’s proposed path would reduce cumulative gross financing requirements by about 10 percent of GDP between FY2022/23 and FY2026/27. - Menu of tax reform options and estimated revenue effects: - VAT: gradual increase to the regional average of 15 percent would raise around 2.7 percent of GDP. - Eliminating various indirect tax expenditures (zero-rated or exempted items) could raise an additional 0.8 percent of GDP. - Property taxes: build comprehensive real estate price indices; no single-figure revenue estimate provided. - Personal income taxes: progressive tax on employment income applied to the top 10 percent of earners at a 10 - 15 percent rate, coupled with a flat 5 percent withholding tax on capital income, would raise around 2 percent of GDP (static estimate). - Corporate income taxes: a Bahamian corporate income tax on large businesses could generate around 2 percent of GDP (proposed designs include a 10 percent statutory rate with a B$500,000 threshold or a top-up tax on multinationals). - Excise taxes: could increase revenues by up to 3 percent of GDP but would need complementary measures to support the vulnerable. ### Environmental taxation — estimates, revenue potential, and distributional concerns - Social cost estimates (per gallon): - B$1.70 per gallon for gasoline and diesel used for transportation. - B$1.10 per gallon for diesel used for power generation. - Current tax settings: - Current tax rates of B$1.15 for road use and no taxation for diesel used for power generation are deemed too low. - Revenue implications: - Increased and then indexed taxation of road fuels would raise revenue of an additional 1.5 and 0.2 percent of GDP by 2025, respectively. - Removing the tax exemption on the Bahamas Electricity Corporation (BEC) would raise about 1.4 percent of GDP but could increase residential electricity prices by up to 60 percent. - Distributional and implementation notes: - Thorough review recommended to assess economic and distributional effects of eliminating the BEC excise exemption. - Compensation measures would be needed to protect poorer households and potentially some smaller firms. - A feebate scheme could be integrated into vehicle duties, leveraging favorable rates for electric vehicles. - Methodology note: - Estimates calculated using FAD’s Climate Policy Assessment Tool (CPAT); revenue estimate assumes annual inflation of 2 percent and changes in consumption that depend on GDP growth and elasticity of demand. ### Debt dynamics, DSA findings, and stress scenarios - Public debt and financing needs: - FY2021/22 public debt/GDP is expected to decrease to 94.8 percent from 109.2 percent in FY2020/21. - Gross public sector financing needs decline from 37.8 percent of GDP in FY2020/21 to 24.8 percent of GDP in FY2021/22. - Gross financing needs projected to decline to 19 percent of GDP by FY2026/27. - Baseline public gross nominal debt (percent of GDP, As of April 04, 2022): - 62.5 (2020), 82.8 (2021), 109.2 (2022), 94.8 (2023), 87.8 (2024), 85.9 (2025), 84.3 (2026), 83.2 (2027). - Stress-test highlights: - Temporary growth shock of one standard deviation for two consecutive years would bring the debt ratio to more than 100 percent before it slightly decreases. - Major hurricane scenario (“combined macro-fiscal shock II”) would increase debt to 109 percent over the medium term, with revenue lower by about 3.5 percentage points of GDP and cumulative expenditure about 7 percent of GDP higher. - Real interest rate shock and combined macro-fiscal shock can produce non-decreasing debt-to-GDP trajectories (real interest rate shock uses a maximum historical increase of about 606 basis points). - External debt sensitivity: - Permanent one-half standard deviation increase in the non-interest current account deficit beginning in 2023 would put the public external debt ratio on an increasing trajectory, reaching 52 percent of GDP by 2027. - Permanent one-time 30 percent real effective exchange rate depreciation in 2022 would shift external debt up by around 18 percentage points of GDP. - Combined shock (permanent ¼ standard deviation shocks to real interest rate, growth rate, and current account) raises external debt-to-GDP ratio to 47 percent by 2027. ### Financial sector resilience and reforms - Banking sector soundness: - Stress tests indicate the banking system remains stable under pessimistic scenarios, though heterogeneity exists across banks. - Severe scenario with NPLs increasing by 15 percentage points still leaves the weighted average capital ratio of commercial banks above regulatory limits, though some banks experience modest shortfalls. - Small credit unions (around 3 percent of total banking system assets) show pockets of weakness. - Sovereign-bank linkages: government debt accounts for more than 10 percent of banking sector assets. - Supervisory and resolution recommendations: - Introduce countercyclical capital buffer as part of Basel III reforms in 2022. - Operationalize credit bureau to improve financial inclusion and reduce cost of borrowing. - CBOB should have authority to recommend regulatory policies for non-bank financial institutions that pose systemic risk. - Establish a separate Resolution Unit and enhance Deposit Insurance Corporation governance, organization, and funding targets. - Improve AML/CFT supervisory effectiveness and ensure accuracy of beneficial ownership information. ### Climate change, disaster resilience, and financing strategies - Climate impacts and commitments: - Hurricane Dorian (2019) caused $3.4 billion in damages, around 25 percent of GDP. - During 2011-2020, damages related to natural disasters accounted for 3.2 percent of GDP per year on average. - National commitments: 30 percent reduction of greenhouse gas emissions by 2030 (vs BAU) and minimum 30 percent renewables in energy matrix by 2030. - Disaster risk financing instruments and gaps: - Natural disaster fund was depleted following Hurricane Dorian (2019). - The Bahamas has 3 CCRIF tropical cyclone policies; CCRIF payout for Dorian: about $11 million (0.1 percent of GDP). - IDB contingent loan arrangement available: $100 million (drawn fully after Dorian). - Insurance penetration relative to average climate-related damages: The Bahamas 1.7 percent; Barbados benchmark 32 percent; LAC average around 11 percent. - Recommended three-pillar Disaster Resilience Strategy (DRS): 1. Enhance structural resilience through ex-ante investments. 2. Build financial resilience via fiscal buffers and pre-arranged financial instruments. 3. Strengthen post-disaster and social resilience for speedy response. - Simulation and cost-effectiveness insights: - Investment in resilient capital can boost GDP by about 2 percent and improve fiscal balance by around 1.6 percent over a 30-year horizon. - Illustration assumptions: investing 25 percent of annual average hurricane damage into adaptation converges to a 65 percent reduction in damages; combined approach (adaptation + debt reduction) identified as most cost-effective. - Staff suggestion: reduce public debt by average residual damage per year; with adaptation reducing damages by 65 percent, residual translates to 0.6 percent of GDP per year. - Policy trade-offs: - Sovereign insurance premiums include actuarially fair premium plus markups; observed markups can far exceed 100 percent; World Bank assumption: 50 percent markup. - Contingency funds face an interest-rate differential cost (government borrows at higher rates than fund’s liquid returns). - Combining physical adaptation and fiscal space creation is recommended as pragmatic and cost-effective. ### Natural disaster clauses in sovereign debt (Annex V) — model findings and policy considerations - Function and precedent: - Natural Disaster Clauses allow automatic extension of debt service when a qualifying disaster occurs; ICMA developed “Terms for Extendible Hurricane Bonds” in 2018. - Grenada and Barbados examples: deferral of payments up to 12 months (Grenada) and up to 24 months (Barbados) with parametric triggers (CCRIF). - Model and calibration: - Simulation follows Mallucci (2020) calibrated to The Bahamas (1962–2020); steady-state debt-to-GDP set to 50 percent per fiscal rules. - Key simulation findings: - At current sovereign debt around 100 percent of GDP, hurricane clauses can increase the price of public debt and lower debt service costs. - Hurricane clauses reduce default risk and yields for high and intermediate debt levels; yields increase for low debt levels because investors require compensation for deferral risk. - Behavioral caveat: if the government borrows more in response to lower yields from clauses, overall debt and yields could increase. - Policy implications: - Inclusion of natural disaster clauses in new issuances can provide liquidity relief and reduce sovereign probability of default, especially when public debt is elevated. - Careful sequencing, communication, and parametric triggers (e.g., CCRIF) are recommended to manage market pricing dynamics. - Fiscal discipline aligned with the Fiscal Responsibility Act is necessary to avoid adverse borrowing responses. ### Data, transparency, and RFI commitments (Annex VII) - Rapid Financing Instrument (RFI) facts: - RFI Jun 01, 2020; Date Drawn Jun 03, 2020; Amount Approved (SDR Million) 182.40; Amount Drawn (SDR Million) 182.40. - Forthcoming projected payments to Fund (SDR Million): Principal: 2022 45.60; 2023 91.20; 2024 45.60. Charges/Interest: 2022 1.77; 2023 2.36; 2024 1.46; 2025 0.31; 2026 0.01. - RFI commitments progress: - Publish procurement contracts of crisis mitigation spending, including beneficial ownership information — Status: No progress. - Report quarterly on COVID-19 mitigation spending — Status: Done. - Audit COVID-19 mitigation spending within 9 months — Status: Partially implemented (financial audit FY2019-20 done; performance/value-for-money audit ongoing). - Public Procurement Act, PFM Bill, and Public Debt Management Bill — Status: Done with delay; enacted in 2021Q3. - Data and transparency notes: - Quarterly public sector data published in “Quarterly Public Debt Statistics Bulletin” since November 2021. - First detailed public debt report released in November 2021. - Authorities have yet to compile IIP statistics and general government accounts data; staff technical assistance ongoing. ### Staff appraisal — overarching policy priorities and structural reforms - Overarching priorities: - Safeguard the recovery, preserve debt sustainability, and promote sustained and inclusive growth. - Vaccinate population swiftly and refocus policies on improving the structure of revenues and spending, rebuilding fiscal space, and making the economy more resilient to climate change. - Key structural reform areas: - Energy reforms: upgrade electricity generation/transmission/distribution; improve governance at state-owned electricity company; increase private sector participation with regulation. - Labor and human capital: expand vocational and apprenticeship programs; address education gaps. - Digitalization and administrative streamlining: modernize government registration/filing processes; streamline approvals at Invest Bahamas. - Insolvency regime: introduce rehabilitative component to support firms as going concerns. - Fiscal transparency: complete audits for COVID-related spending; require collection and publication of beneficial ownership information in public procurement contracts. - Monetary and exchange rate guidance: - Exchange rate peg to the U.S. dollar remains anchor; central bank should be willing to allow interest rates to rise as needed to support the peg without loss of reserves. - Consider temporary capital flow management measures if market environment deteriorates markedly. - Further amend 2020 Central Bank Act to lower ceiling on credit to the government and restrict central bank purchases of public corporation securities. *International Monetary Fund — excerpt from 1bhsea2022001.* ### 1. Environmental Taxation ________________________________________________________________________ 13 ### 1. Environmental Taxation ### Recovery from the pandemic - COVID-19 cases reported: more than 33,368 as of April 2022; deaths: over 789. - Vaccination: about forty percent of the population fully vaccinated. - Economic contraction and rebound: - Economy contracted by almost 24 percent in 2020. - Tourism receipts fell by more than 75 percent in 2020. - Air arrivals recovered to half of 2019 levels in 2021. - Output expanded by around 14 percent in 2021. - Labor market: - Unemployment estimated at around 18 percent at end-2021 compared to over 25 percent in 2020. - Note: latest available unemployment data are from 2019; next labor force survey planned in May 2023. - Prices and inflation: - CPI increased by 4.1 percent year-on-year in December (driven by energy, transportation, and more recently food). - Public finances: - Fiscal deficit: 13.7 percent of GDP in FY2020/21 (July to June). - Public debt rose to over 100 percent of GDP by end-2021. - Revenues doubled year-on-year in the first half of FY2021/22, while spending remained elevated. - Current account and external position: - Net travel receipts in 2021 tripled compared to 2020. - Current account deficit: 19.7 percent in 2021 (24 percent in 2020). - External position in 2021 assessed as broadly in line with medium-term fundamentals and desirable policies (Annex I), but assessment highly uncertain due to the pandemic. - International reserves: - Gross reserves close to 5 months of imports at end-2021. - Reserves about 700 percent of estimated external debt maturing in 2022. - IMF general SDR allocation: 174.8 million in August 2021 (as of March 15, 2022, corresponds to US$241 million). - Authorities plan to keep SDRs as reserves given legal limits on central bank lending to the government. - Capital flow management measures phased out in 2021 included: - (i) more latitude to commercial banks to supply foreign exchange to the public before approaching the central bank; - (ii) suspending access to foreign exchange for residents’ offshore capital market and real estate investments (these pandemic-related changes were phased out). - Suspension of exchange control approvals for commercial banks’ dividends eliminated. - Banking sector: - Average ratio of capital to risk-weighted assets: 26½ percent in the fourth quarter. - Average return on assets: just over 2 percent in the third quarter of 2021. - Pandemic-related loan moratoria expired, leading to a small increase in non-performing loans. - Private sector credit is still contracting. - Political context: - September 2021 elections: Free National Movement lost; Progressive Liberal Party formed a new administration. - New government pledged cuts in VAT to kickstart consumption and aims to increase investment in resilience. ### Outlook and risks - Baseline growth and inflation projections: - Staff’s baseline projects real GDP growth at 8 percent in 2022. - Real output expected to be about 6 percent below its pre-pandemic level in 2022. - Full recovery to pre-pandemic levels not expected until 2024. - Staff expects average inflation to increase to 6¾ percent in 2022. - Medium-term potential growth: - Staff projects medium-term potential growth at just 1½ percent. - Major downside risks (Annex II): - (i) Emergence of new COVID-19 variants. - (ii) Additional upward pressures on global food and oil prices (including because of the war in Ukraine). - (iii) Sharp rise in global risk premia that could further strain public and private balance sheets. - (iv) Natural disasters related to climate change. - Upside scenario: - A stronger-than-expected global recovery could support tourism and the domestic recovery. - External financing and reserves: - Despite high imported inflation in the short term, the ongoing recovery in international tourism is projected to narrow external imbalances and keep international reserves at an adequate level. ### Policy discussions — priorities - Overarching policy priorities: - Safeguard the recovery, preserve debt sustainability, and promote sustained and inclusive growth. - Vaccinate the population as swiftly as possible (including overcoming vaccine hesitancy). - Re-focus policies on improving the structure of revenues and spending, rebuilding fiscal space, and making the economy more resilient to climate change. ### Fiscal policy — Near-term and medium-term - FY2021/22 budget (percent of GDP) — selected items: - Revenue: 19.0 (FY20/21 outturn), 18.5 (Original budget), 19.3 (Supplementary budget), 19.8 (IMF projection). - Tax: 16.3, 15.9, 16.6, 16.9 (same sequence). - VAT: 7.5, 7.0, 7.6, 7.7 (same sequence). - VAT rate change: -0.5 (impact). - Elimination of zero rate items: 0.1. - VAT on vacation rental: 0.2. - Non-tax: 2.7, 2.6, 2.6, 2.9. - Expenditure: 32.7, 26.4, 26.4, 26.5. - Current expense: 29.9, 24.9, 24.6, 24.7. - COVID-19-related spending (component of current expense): 2.8, 1.1, 1.1, 0.4. - Capital expenditure: 2.8, 1.5, 1.8, 1.8. - Overall balance: -13.7, -7.8, -7.1, -6.7. - Primary balance: -9.4, -3.9, -3.1, -2.7. - Fiscal measures and effects: - Supplementary budget kept around one-third of pandemic-related spending (mostly social programs), cut the VAT rate from 12 to 10 percent (starting on January 1, 2022), marginally raised public salaries and non-contributory pensions. - To offset fiscal impact, authorities removed some zero-rated VAT items and expanded VAT to rentals paid on vacation properties; steps to strengthen tax administration ongoing. - Staff estimate these measures, recovery effects, and less demand for COVID-related spending will reduce the primary deficit to below 3 percent of GDP this fiscal year. - Financing needs and contingent actions: - Gross financing needs around 16 percent of GDP in FY2021/22 (excluding short-term Treasury bills, notes, and central bank advances of about 10 percent of GDP). - Domestic banks expected to rollover maturing debt (~8 percent of GDP); remainder expected to be mostly from external sources. - Authorities agreed a repurchase agreement in February using U.S. Treasuries nominal value close to US$236 million as collateral; authorities will receive US$206.5 million and purchase the Treasuries back within 2 years. - Since the repo transaction became public, average external bond spreads increased by more than 100 basis points. - Timing of planned Eurobond issuance (with IDB partial guarantee of US$200 to create a blue economy) remains uncertain. - Recommendation: develop a contingency plan to allow low priority spending (including by SOEs) to be cut quickly and flexibly if needed. - Recommendation: allow higher international food and energy costs to pass through to domestic prices, accompanied by targeted support to protect the poorest. - Medium-term fiscal outlook and targets: - Under current policies, public debt would remain more than 15 percentage points above pre-pandemic levels by FY2026/27 (assumes modest fiscal adjustment of around 1½ percent of GDP over the medium-term). - Most COVID and Dorian-related spending assumed phased out by FY2022/23; revenue collections assumed to benefit from recovery and an updated property tax roll. - Consolidated public sector debt, including SOE debt, assessed to be sustainable but vulnerable to shocks (Annex III). - Authorities’ 2021 Fiscal Strategy Report (FSR) plans to increase revenues by more than 5 percent of GDP, raise public investment to 3½ percent of GDP, limit current spending to 20 percent of GDP, and target an overall surplus of 1½ percent by FY2025/26. - Authorities envisage reducing central government debt to 50 percent of GDP by FY2030/31 (Fiscal Responsibility Act target); Fiscal Council to review FSR by May 2022. - The 50 percent central government debt-to-GDP ratio remains an appropriate anchor given susceptibility to large shocks, but given the severity of the COVID-shock and current high debt levels the country may need to delay achieving the 50 percent debt ratio by at least two years. - Medium-term fiscal consolidation under baseline (Percent of GDP): - Baseline primary balance: -2.7 (FY2021/22) and 1.8 (FY2026/27); difference: 4.5. - Cyclically adjusted primary balance: 0.3 (FY2021/22) and 1.8 (FY2026/27); difference: 1.5. - Contributors to change include: VAT decline -0.4; revenue administration reforms 1.0; COVID-19-spending 0.4; Other 0.5. - Other fiscal notes: - In early March the government published stock of arrears, unpaid invoices, and unbudgeted expenditure as of December 31, 2021 totaling B$938 million (7.7 percent of GDP). The baseline macro framework does not include them while details and plans to clear them are clarified. - The Bahamas’s capacity to repay the Fund remains adequate. Obligations to the Fund have been declining and will be below 1 percent of GDP by 2024 as expected at the time the Rapid Financing Instrument was requested. *International Monetary Fund — excerpt from the country report content provided.* ### 18. A medium-term surplus of 1½ percent of GDP is consistent with reducing debt-to-GDP ### 18. A medium-term surplus of 1½ percent of GDP is consistent with reducing debt-to-GDP to 50 percent by 2032/33 ### Medium-term fiscal consolidation: Active scenario - A medium-term surplus of 1½ percent of GDP is consistent with reducing debt-to-GDP to 50 percent by 2032/33. - Staff proposes a somewhat more gradual adjustment than the FSR, with around ¾ percent of GDP additional measures per year. - Composition of the staff’s proposed adjustment (cumulative contributions): - Increase in the revenue-GDP ratio by 5 percent through a credible tax reform. - Permanent cuts to unproductive spending of 1½ percent of GDP. - Higher spending on capital investment, education and health of 2½ percent of GDP. - Protecting the vulnerable through better targeting of social spending is emphasized. - Staff’s proposed path would reduce cumulative gross financing requirements by about 10 percent of GDP between FY2022/23 and FY2026/27. ### Tax reform and revenue measures - Tax reform should be accompanied by strengthened tax administration. - Menu of options and estimated revenue effects: - Value-added taxes: gradual increase of the VAT rate to the regional average of 15 percent would raise around 2.7 percent of GDP. - Eliminating various indirect tax expenditures (zero-rated or exempted items) could raise an additional 0.8 percent of GDP. - Property taxes: build comprehensive real estate price indices to enable a market-value-based property tax and make the system progressive by increasing rates on higher value residences (no single-figure revenue estimate provided). - Personal income taxes: a progressive tax on employment income applied to the top 10 percent of earners at a 10 - 15 percent rate, coupled with a flat 5 percent withholding tax on capital income, would raise around 2 percent of GDP. (Estimate noted as static.) - Corporate income taxes: a Bahamian corporate income tax on large businesses could generate around 2 percent of GDP. Proposed designs include a top-up tax on in-scope multinational enterprises or a general corporate income tax at a 10 percent statutory rate combined with a 5 percent withholding tax and a B$500,000 threshold below which a simple turnover tax is applied. - Excise taxes: could increase revenues by up to 3 percent of GDP but would need complementary measures to support the vulnerable. ### Social protection, pensions, and SOEs - Measures are needed to contain rising outlays to SOEs and on pensions; strengthen SOE governance and operational efficiency. - Civil servants have a non-contributory pension scheme; spending on pension benefits has trended up to an estimated 1¼ percent of GDP in 2020-21. - ILO projection: without ambitious parametric reforms, the country’s social security system will run out of funds by 2029. - Staff recommends changes to private and public pension systems, including raising the retirement age and contribution rates. - Revenue reforms, improving SOE finances, and addressing pension structural problems would create room to increase spending on growth-enhancing areas (capital, health, education). - Improving social assistance requires better information (timely and comprehensive household survey), better targeting, reducing overlaps, creating a single registry of beneficiaries, and strengthening administrative capacity. ### Debt management and fiscal transparency - The Bahamas would benefit from a more robust, multi-year debt management strategy; financing needs decline only gradually even with significant consolidation. - Recommendations for the debt management committee: - Adequate staffing and resources to track and evaluate implementation of the multi-year government financing strategy. - Regular contingency planning to ensure robustness in less favorable market environments. - Avoid short-term cost-reduction strategies that may exacerbate debt distress costs. - Scope to access international financing for climate-related investments and green bonds; include natural disaster clauses in debt contracts. - Fiscal transparency and accountability: key PFM-Amendment and Public Procurement Act enacted in 2021Q3 but implementation gaps remain (procurement report not published, SOEs not publishing regular audited financial statements). - Priority: complete audits for COVID-related spending and publish reports; require collection and publication of beneficial ownership information in public procurement contracts. - Scope to align medium-term budget processes with PFM Act and FRA; IMF technical assistance planned. ### Environmental taxation (Box 1) - Staff estimates of social costs (per gallon): - B$1.70 per gallon for gasoline and diesel used for transportation. - B$1.10 per gallon for diesel used for power generation. - Current tax settings: - Current tax rates of B$1.15 for road use and no taxation for diesel used for power generation are deemed too low. - Revenue implications and distributional considerations: - Increased and then indexed taxation of road fuels would raise revenue of an additional 1.5 and 0.2 percent of GDP by 2025, respectively. - Removing the tax exemption on the Bahamas Electricity Corporation (BEC) would raise about 1.4 percent of GDP but could increase residential electricity prices by up to 60 percent. - A thorough review is recommended to assess economic and distributional effects of eliminating the BEC excise exemption. - Compensation measures would be needed to protect poorer households and potentially some smaller firms. - A feebate scheme could be integrated into vehicle duties, building off favorable rates for electric vehicles. - Notes: Estimates calculated using FAD’s Climate Policy Assessment Tool (CPAT); revenue estimate assumes annual inflation of 2 percent and changes in consumption that depend on GDP growth and elasticity of demand. ### Monetary and exchange rate policies - The exchange rate peg to the U.S. dollar has served as an anchor of macroeconomic stability. - The central bank (CBOB) controls domestic liquidity mainly through cash reserve requirements. - During the pandemic, the CBOB kept the policy rate at 4 percent and introduced temporary CFMs on outflows (now phased out). - Higher imported inflation and expected U.S. policy rate increases create potential pressures on the peg; central bank should be willing to allow interest rates to rise as needed to support the peg without loss of reserves. - In more volatile scenarios, renewed temporary capital flow management measures may be required. - The 2020 Central Bank Act strengthened governance and autonomy but requires further amendments: lower the ceiling on credit to the government and restrict central bank purchases of securities issued by public corporations to prevent quasi-fiscal activities. - The Sand Dollar (CBDC) was introduced in October 2020: - Current share: less than 0.1 percent of currency in circulation. - Recent integration: initial integration with the Automated Clearing House system completed. - Recommendation: continue strengthening internal capacity on cybersecurity and resilience, and maintain careful oversight to safeguard financial integrity. ### Financial sector resilience - Stress tests: banking system remains stable even under pessimistic scenarios, though heterogeneity exists across banks. - A severe scenario with the ratio of NPLs to gross loans increasing by 15 percentage points still leaves the weighted average capital ratio of commercial banks above regulatory limits, although some banks experience modest shortfalls. - Small credit unions (around 3 percent of total banking system assets) exhibit pockets of weakness with large exposures to employees in the tourism sector. - Sovereign-bank linkages: government debt accounts for more than 10 percent of banking sector assets, increasing the risk of adverse feedback loops between sovereign stress and banks. - Policy recommendations for the CBOB: - Require regular loan portfolio reviews and risk assessments by all banks. - Work with banks to facilitate effective work-out of NPLs. - Stress test methodology notes: based on bank-level data for the 7 onshore commercial banks as of December 2021; scenarios assume NPLs increase by 15 percentage points in line with the 95 percent percentile in the modeled distribution; stress tests do not model sovereign linkages. *Source: IMF staff calculations and The Bahamas authorities as presented in the provided content.* ### 30. Some of the 2019 FSAP recommendations have yet to be addressed. A countercyclical ### 1bhsea2022001 - 30. Some of the 2019 FSAP recommendations have yet to be addressed. A countercyclical ### Financial sector reforms and supervisory recommendations - A countercyclical capital buffer will be introduced as part of the Basel III reforms when they are implemented in 2022. - Operationalization of the recently established credit bureau should: - Improve financial inclusion. - Reduce the cost of borrowing. - Support collection of loan-level data to assist market monitoring and future implementation of loan-to-value (LTV) and debt-to-income (DTI)-based lending standards. - The CBOB should have authority to recommend regulatory policies for non-bank financial institutions that pose systemic risk. - The CBOB is encouraged to improve its analytical capacity for assessing solvency and liquidity risks. ### Bank recovery, resolution, and deposit insurance - Progress made in setting up a bank recovery and resolution regime, but scope for further enhancements remains. - The CBOB should: - Update its supervisory framework for bank intervention to ensure early warning indicators are used more effectively. - Establish a separate Resolution Unit. - Further enhancements to the Deposit Insurance Corporation are warranted, including: - Strengthening governance. - Strengthening organizational structure. - Strengthening funding arrangement, with a higher target set for capitalization of the deposit insurance scheme over the next five years. - Interagency coordination on systemic matters should be enhanced; a new inter-agency coordination body (Financial Stability Council) could facilitate regular information exchange and cooperation on financial stability and crisis management issues. ### AML/CFT, beneficial ownership, and virtual assets risks - The Bahamas exited the FATF “grey-list”. - Authorities are working to ensure effective implementation of strengthened AML/CFT regulation and supervision. - Measures already taken include: - Setting up a register of beneficial ownership. - Introducing an automated system to collect suspicious transaction reports. - Applying fines for non-compliance. - Ongoing priorities: - Ensuring accuracy of beneficial ownership information in the register. - Enhancing AML/CFT supervisory effectiveness. - Reforming the economic permanent residency program. - Offshore sector remains a reputational risk despite decline; specific data point: - International banks and trust companies (IBCs) had about US$420m in deposits and US$2.5bn in custody or trust assets for which the ultimate beneficial owners were from or connected to Russia, as of February 2022, representing 0.2 and 2½ percent of total deposits and assets of IBCs. - A large crypto asset trading platform has recently established its headquarters in the Bahamas; authorities should establish and implement a robust supervisory framework to regulate registration, ensure prudential supervision, and AML/CFT compliance. ### International banking sector — authorities’ views and developments - Authorities attribute banking system strength to sound regulation, supervision, and COVID-19 support. - Central bank reported loan deferral program declined from $400 million at the height of the pandemic to $3.4 million as of end-2021. - Central bank views improvements to beneficial ownership register as instrumental to exiting FATF “grey list”. - Authorities aim to position The Bahamas as a leader in digital assets and cryptocurrencies and have enacted the 2020 Bahamas’ Digital Assets and Registered Exchanges Bill (DARE) to provide a designated legal framework. ### Building a more competitive and resilient economy — priorities - Fostering an enabling environment for more sustainable tourism: - Strengthen commitment to climate adaptation policies and put in place a comprehensive disaster resilience strategy (Annex IV). - Invest in renewable energy and make tourism more sustainable. - Advancing energy sector reforms: - Upgrade infrastructure in electricity generation, transmission, and distribution. - Improve governance at the state-owned electricity company. - Increase private sector participation with accompanying regulatory oversight. - Creating opportunities for young workers: - Expand vocational and apprenticeship programs. - Improve skill databases and job placement services. - Authorities working with the ILO and employers to implement a three-pillar strategy on job and skills, social dialogue, and governance. - Advancing digitization and streamlining administrative processes: - Modernize government registration/filing processes and establish intra-agency information exchange systems. - Streamline review and approval processes at Invest Bahamas and regulatory requirements for starting a business. - Establishing the Department of Transformation and Digitization (DTD) in November 2019 was an important first step. - Reforming the corporate insolvency regime: - Current system allows liquidation but lacks a rehabilitative component to allow firms to continue as going concerns while restructuring. - Addressing this omission is urgent given potential tightening of global financial conditions and increased borrower distress. - Closing data gaps and publishing statistics according to international standards: - Employment, GDP, and inflation data are published with long lags. - IMF technical staff working with the new Statistical Office on closing Balance of Payments data gaps. ### Authorities’ views on climate, digitization, and social policy - Authorities request more international grant support (not loans) for climate change adaptation. - Authorities consider the envisaged 30 percent share of renewable energy by 2030 to be difficult and costly to achieve. - Revamped Invest Bahamas seen as key to streamlining administrative processes. - Authorities seek technical assistance to address education gaps worsened by the pandemic. ### Staff appraisal — macroeconomic outlook and policy recommendations - Recovery and inflation: - Tourist arrivals have rebounded strongly, although a full recovery to pre-pandemic levels is not expected before 2024. - Inflationary pressures are building and are projected to ease only gradually. - It will be important to allow higher international food and energy costs to pass through to domestic prices alongside targeted support to protect the vulnerable. - Risks: - Significant risks include the evolving pandemic and vulnerability to natural disasters. - Medium-term growth and public finances: - Pandemic deepened medium-term growth challenges and public finances have deteriorated. - Education gaps have increased due to varied quality and access to remote learning. - Private investment and employment will take time to recover; lasting effects on travel preferences and shifts in technology noted. - Public debt is close to 100 percent of GDP and fiscal financing costs are elevated. - Debt sustainability and fiscal consolidation: - Under staff’s baseline projections, consolidated public sector debt, including SOE debt, is assessed to be sustainable but vulnerable to shocks. - Government goal to achieve a 1½ percent of GDP fiscal surplus over the medium term is well-calibrated but needs credible and growth-friendly measures. - Planned surplus would support rebuilding fiscal buffers and put public debt-GDP on a decisive downward path. - Revenue administration enhancements should accompany meaningful tax reform; options include: - Gradually raising VAT rates to the regional average of 15 percent. - Increasing the property tax rate on higher value residences. - Introducing corporate and personal income taxes on large businesses and high earners. - Public spending reprioritization: - Measures needed to contain rising outlays to SOEs and on pensions. - Conduct rigorous cost-benefit analyses for capital project selection. - Improve social assistance by obtaining better information on potential recipients (including a timely and comprehensive household survey). - Timely publication of audited financial statements for public sector entities (including beneficial ownership information of companies awarded public procurement contracts) would enhance fiscal transparency and accountability. - Debt management: - The Bahamas would benefit from a more robust multi-year debt management strategy. - New debt management committee should systematically track performance and undertake contingency planning to ensure strategy robustness in less favorable market environments. - Exchange rate and monetary policy: - The exchange rate peg to the U.S. dollar has served as an anchor of macroeconomic stability. - Recommendation: central bank allows interest rates to rise, as needed by market conditions, to support the currency peg and preserve international reserves. - If market environment deteriorates markedly, consideration may be given to a temporary tightening of capital flow management measures. - Further amendments to the 2020 Central Bank Act— including lowering the ceiling on credit to the government and restricting purchases of securities issued by public corporations—would help safeguard central bank autonomy. - Sand Dollar CBDC: - The Sand Dollar currently makes up less than 0.1 percent of currency in circulation and there are limited avenues to use it. - Central bank should accelerate education campaigns and continue strengthening internal capacity—including on cybersecurity—and oversight of the CBDC project to safeguard financial integrity. - Financial system resilience: - Financial system is well-capitalized, but enhancements to bank recovery and resolution regime and AML/CFT framework are needed. - Central bank should update supervisory framework for bank intervention, enhance interagency coordination (potentially through a new inter-agency coordination body), and ensure effective collection of beneficial ownership information and AML/CFT compliance, particularly for the growing virtual assets sector. - Structural reforms: - Well-targeted structural reforms to improve productivity, foster inclusion, and enhance resilience include: - Energy reforms: upgrade infrastructure and improve governance of state-owned electricity company. - Expand vocational and apprenticeship programs (in collaboration with the ILO) to build skills and reduce youth unemployment. - Encourage digitalization, streamline administrative processes, close data gaps, and publish statistics in line with international standards. - Develop a comprehensive disaster resilience strategy and mitigation measures to make tourism more sustainable. *Source: IMF staff excerpt from 1bhsea2022001.* ### 1. Max-min based on 4 domestic onshore banks. ### 1bhsea2022001 - 1. Max-min based on 4 domestic onshore banks. ### Banking sector indicators and balance-sheet snapshots - Non Performing Loans (NPLs): chart shows breakdown by days past due categories "Over 90 days" and "30 - 90 days"; axis labeled "Non Performing Loans (NPLs) (Percent of total loans)". - Total provisions to non-performing loans reported on RHS of chart. - Banking Sector Liquid Assets (B$ millions), selected series (Jan-19 to Sep-21): components shown include "Balances with central bank", "Treasury bills", "Government registered stocks", "Others"; axis range from 0 to 4,000 B$ millions. - Banks' Balance Sheets (Left axis, B$ billions; right axis, percent): items include "Securities & other", "Net loans", "Cash & interbank", "Equity", "Deposits"; CAR and "Minimum regulatory requirement" shown on RHS. Time points: 2019Q1 through 2021Q3. ### Competitiveness indicators (Figure 6) - Wages have outpaced labor productivity gains (visual statement). - Youth unemployment remained high (visual statement). - Electricity costs are relatively elevated (visual statement). - Terms of trade are unfavorable (visual statement). - Recent gains in tourism market shares were interrupted by COVID-19 and Hurricane Dorian (visual statement). - Sources cited: The Bahamian authorities, WDI, DoT and BOP database (IMF), and IMF staff calculations. Notes: 1/ Calculated as the ratio of export unit value index to import unit value index. 2/ Excludes Anguilla and Montserrat. 3/ Includes Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and The Bahamas. ### Selected social and economic indicators, 2018–27 (Table 1) — key levels and projections - GDP (US$ millions), 2021: 11,209 - GDP per capita (US$), 2021: 28,239 - Population (thousands), 2021: 397 - Poverty rate (percent), 2017: 14.8 - Unemployment rate (percent), Dec 2019: 10.7 - Infant mortality rate (per 1,000 live births), 2020: 10.5 - Life expectancy at birth (years), 2020: 74.1 - Human development index (rank), 2020: 58 - Adult literacy rate, 15 & up (percent), 2007: 96 Selected macro projections (annual or end-period as reported): - Real GDP (annual percent change): 2018: 1.4; 2019: 1.8; 2020: -23.8; 2021: 13.7; 2022: 8.0; 2023: 4.1; 2024: 3.0; 2025: 1.9; 2026: 1.6; 2027: 1.5 - Nominal GDP (annual percent change): 2018: 3.3; 2019: 3.2; 2020: -26.5; 2021: 15.6; 2022: 13.4; 2023: 8.1; 2024: 5.7; 2025: 4.5; 2026: 3.9; 2027: 3.8 - Consumer price index (annual average): 2018: 2.1; 2019: 2.3; 2020: 2.5; 2021: 0.0; 2022: 2.9; 2023: 6.7; 2024: 4.8; 2025: 3.3; 2026: 2.9; 2027: 2.6; 2028: 2.4 (table runs through 2027) - Unemployment rate (percent): 2018: 11.1; 2019: 10.4; 2020: 10.1; 2021: 25.6; 2022: 18.1; 2023: 13.9; 2024: 12.7; 2025: 12.3; 2026: 11.9; 2027: 11.6; 2028: 11.4 - Gross national saving rate (percent of GDP): 2018 avg: 18.9; 2018: 16.2; 2019: 23.1; 2020: 2.8; 2021: 10.1; 2022: 10.6; 2023: 15.4; 2024: 18.8; 2025: 19.8; 2026: 20.3; 2027: 20.3 - Investment rate (percent of GDP, constant price): 2018 avg: 27.9; 2018: 25.6; 2019: 25.9; 2020: 26.8; 2021: 29.8; 2022: 28.6; 2023: 27.9; 2024: 27.6; 2025: 27.5; 2026: 27.2; 2027: 26.5 Financial sector (selected): - Credit to the nonfinancial public sector (percent of GDP): 2018: 10.7; 2019: 6.6; 2020: 1.5; 2021: -7.8; 2022: 15.6; 2023: 10.1; 2024: 8.5; 2025: 7.7; 2026: 6.9; 2027: 6.2; 2028: 5.5 - Credit to the private sector (annual percent change): 2018: 4.8; 2019: -1.6; 2020: 0.1; 2021: -2.1; 2022: -1.5; 2023: 0.4; 2024: 1.5; 2025: 2.3; 2026: 3.2; 2027: 1.6; 2028: 1.5 Central government (percent of GDP, selected): - Overall balance: 2018: -2.0; 2019: -3.3; 2020: -1.7; 2021: -7.2; 2022: -13.7; 2023: -6.7; 2024: -3.0; 2025: -3.0; 2026: -2.6; 2027: -2.3; 2028: -2.1 - Primary balance: 2018: -0.3; 2019: -0.8; 2020: 0.8; 2021: -4.1; 2022: -9.4; 2023: -2.7; 2024: 0.7; 2025: 1.0; 2026: 1.4; 2027: 1.6; 2028: 1.8 - Central government debt (percent of GDP): 2018: 29.2; 2019: 61.9; 2020: 59.7; 2021: 75.0; 2022: 103.3; 2023: 90.6; 2024: 84.2; 2025: 82.8; 2026: 81.7; 2027: 81.1; 2028: 80.4 External sector (selected): - Current account balance (percent of GDP): 2018: -5.8; 2019: -9.4; 2020: -24.0; 2021: -19.7; 2022: -18.0; 2023: -12.5; 2024: -8.8; 2025: -7.7; 2026: -6.8; 2027: -6.2 - Gross international reserves (End of period; millions of U.S. dollars): 2019: 108; 2020: 21,196? (table shows "10821,1961,758..." — preserve layout from source: "10821,1961,7582,3822,4342,0652,0212,0112,0251,9561,964") - Reserves in months of next year's G&S imports (mem. item): 2019: 5.2; 2020: 3.0; 2021: 6.3; 2022: 6.4; 2023: 4.9; 2024: 3.9; 2025: 3.7; 2026: 3.5; 2027: 3.5; 2028: 3.2; 2029: 3.1 Notes: Table footnotes: 1/ The data refer to fiscal years ending on June 30. 2/ Net International Reserves. Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; UNDP Human Development Report; and Fund staff projections. ### Central government operations (Tables 2a and 2b) — levels and percent of GDP Key nominal figures (In millions of Bahamian dollars), selected FY columns: - Revenue series (Est. rows): 2019/20: 2,087; 2020/21: 1,871; 2021/22: 2,403; 2022/23: 2,657; 2023/24: 2,830; 2024/25: 3,006; 2025/26: 3,142; 2026/27: 3,268 - Taxes: 2019/20: 1,858; 2020/21: 1,603; 2021/22: 2,056; 2022/23: 2,277; 2023/24: 2,429; 2024/25: 2,586; 2025/26: 2,707; 2026/27: 2,818 - VAT (of which): 2019/20: 880; 2020/21: 742; 2021/22: 940; 2022/23: 995; 2023/24: 1,050; 2024/25: 1,123; 2025/26: 1,178; 2026/27: 1,232 - Expenditure (total): 2019/20: 2,899; 2020/21: 3,221; 2021/22: 3,211; 2022/23: 3,060; 2023/24: 3,251; 2024/25: 3,387; 2025/26: 3,501; 2026/27: 3,601 - Interest Payments: 2019/20: 345; 2020/21: 422; 2021/22: 482; 2022/23: 503; 2023/24: 562; 2024/25: 590; 2025/26: 610; 2026/27: 623 - Overall Balance (millions B$): 2019/20: -812; 2020/21: -1,350; 2021/22: -808; 2022/23: -404; 2023/24: -421; 2024/25: -382; 2025/26: -358; 2026/27: -333 - Central government debt (millions B$): 2019/20: 8,484; 2020/21: 10,167; 2021/22: 10,988; 2022/23: 11,240; 2023/24: 11,707; 2024/25: 12,135; 2025/26: 12,540; 2026/27: 12,919 Key percent-of-GDP ratios (Table 2b), selected: - Revenue (% of GDP): 2019/20: 18.4; 2020/21: 19.0; 2021/22: 19.8; 2022/23: 19.9; 2023/24: 20.0; 2024/25: 20.2; 2025/26: 20.3; 2026/27: 20.3 - Expenditure (% of GDP): 2019/20: 25.6; 2020/21: 32.7; 2021/22: 26.5; 2022/23: 22.9; 2023/24: 23.0; 2024/25: 22.8; 2025/26: 22.6; 2026/27: 22.4 - Overall Balance (% of GDP): 2019/20: -7.2; 2020/21: -13.7; 2021/22: -6.7; 2022/23: -3.0; 2023/24: -3.0; 2024/25: -2.6; 2025/26: -2.3; 2026/27: -2.1 - Central government debt (% of GDP): 2019/20: 75.0; 2020/21: 103.3; 2021/22: 90.6; 2022/23: 84.2; 2023/24: 82.8; 2024/25: 81.7; 2025/26: 81.1; 2026/27: 80.4 Notes: 1/ Fiscal year ends June 30. 2/ Excludes payment arrears and promissory notes for the resolution of Bank of The Bahamas. Sources: Ministry of Finance; and Fund staff projections. ### Balance of Payments, 2019–27 (Table 3) — levels and percent of GDP Selected levels (millions of U.S. dollars): - Current account balance (US$ millions): 2019: -359; 2020: -2,330; 2021: -2,210; 2022: -2,290; 2023: -1,716; 2024: -1,284; 2025: -1,162; 2026: -1,077; 2027: -1,012 - Travel (credit): 2019: 4,125; 2020: 967; 2021: 2,187; 2022: 3,407; 2023: 4,269; 2024: 4,922; 2025: 5,221; 2026: 5,490; 2027: 5,752 - Travel (net): 2019: 3,790; 2020: 857; 2021: 1,977; 2022: 3,082; 2023: 3,909; 2024: 4,535; 2025: 4,809; 2026: 5,055; 2027: 5,292 - Goods exports (US$ millions): 2019: 694; 2020: 378; 2021: 467; 2022: 598; 2023: 687; 2024: 742; 2025: 793; 2026: 843; 2027: 892 - Goods imports (US$ millions): 2019: 3,020; 2020: 1,963; 2021: 2,811; 2022: 3,917; 2023: 4,113; 2024: 4,263; 2025: 4,381; 2026: 4,506; 2027: 4,659 Selected percent-of-GDP series: - Current account balance (percent of GDP): 2019: -2.7; 2020: -24.0; 2021: -19.7; 2022: -18.0; 2023: -12.5; 2024: -8.8; 2025: -7.7; 2026: -6.8; 2027: -6.2 - Exports (percent of GDP): 2019: 5.3; 2020: 3.9; 2021: 4.2; 2022: 4.7; 2023: 5.0; 2024: 5.1; 2025: 5.2; 2026: 5.3; 2027: 5.5 - Imports (percent of GDP): 2019: 22.9; 2020: 20.2; 2021: 25.1; 2022: 30.8; 2023: 29.9; 2024: 29.3; 2025: 28.9; 2026: 28.6; 2027: 28.5 Memorandum items: - Net international reserves (End of period; millions of U.S. dollars): 2019: 1,758; 2020: 2,382; 2021: 2,434; 2022: 2,065; 2023: 2,021; 2024: 2,011; 2025: 2,025; 2026: 1,956; 2027: 1,964 - Net international reserves (In months of next year's G&S imports): 2019: 6.3; 2020: 6.4; 2021: 4.9; 2022: 3.9; 2023: 3.7; 2024: 3.5; 2025: 3.5; 2026: 3.2; 2027: 3.1 Notes: With the exception of the overall CA for 2021 (based on March 2022 CBOB Quarterly Economic Review), historical data are based on the November 2021 Quarterly Statistical Digest. Sources: Central Bank of The Bahamas; Department of Statistics; and IMF staff projections. ### Summary accounts of the Central Bank and the financial system (Table 4) Central Bank (selected end-of-period levels, millions of B$): - Net international reserves: 2019: N.A.; 2020: 2,382; 2021: 2,434; 2022: 2,065; 2023: 2,021; 2024: 2,011; 2025: 2,025; 2026: 1,956; 2027: 1,964 - Reserve money: 2019: 1,731; 2020: 2,118; 2021: 2,200; 2022: 2,310; 2023: 2,416; 2024: 2,519; 2025: 2,624; 2026: 2,731; 2027: 2,841 - Currency held by the private sector: 2019: 489; 2020: 547; 2021: 557; 2022: 588; 2023: 621; 2024: 656; 2025: 693; 2026: 732; 2027: 773 Financial system (selected): - Net foreign assets (millions of B$): 2019: 1,790; 2020: 2,141; 2021: 2,338; 2022: 1,820; 2023: 1,809; 2024: 1,839; 2025: 1,860; 2026: 1,803; 2027: 1,807 - Net domestic assets (millions of B$): 2019: 6,103; 2020: 5,722; 2021: 5,875; 2022: 6,788; 2023: 7,170; 2024: 7,490; 2025: 7,819; 2026: 8,227; 2027: 8,576 - Credit to nonfinancial public sector, net (millions of B$): 2019: 2,775; 2020: 2,558; 2021: 2,958; 2022: 3,256; 2023: 3,534; 2024: 3,806; 2025: 4,068; 2026: 4,319; 2027: 4,557 - Credit to private sector (millions of B$): 2019: 5,892; 2020: 5,766; 2021: 5,681; 2022: 5,705; 2023: 5,791; 2024: 5,924; 2025: 6,112; 2026: 6,208; 2027: 6,301 - Liabilities to the private sector (broad money, millions of B$): 2019: 7,893; 2020: 7,863; 2021: 8,213; 2022: 8,608; 2023: 8,979; 2024: 9,330; 2025: 9,679; 2026: 10,030; 2027: 10,384 Growth and change indicators preserved as presented in source tables (change percent columns retained in full in source). ### Financial Soundness Indicators for the Banking System, 2012–20 (Table 5) — selected series Capital adequacy: - Regulatory capital to risk-weighted assets: 2012: 29.1; 2013: 31.1; 2014: 32.8; 2015: 33.3; 2016: 28.6; 2017: 32.5; 2018: 32.3; 2019: 28.1; 2020: 28.4 - Regulatory Tier I capital to risk-weighted assets: (data points shown partially as) 27.0, 31.0, 31.4, 27.0, 26.7 Asset quality: - Nonperforming loans to total gross loans: 2012: 13.6; 2013: 15.3; 2014: 15.3; 2015: 14.2; 2016: 11.4; 2017: 9.2; 2018: 9.1; 2019: 8.0; 2020: 8.5 - Specific provisions to nonperforming loans: 2012: 33.0; 2013: 29.5; 2014: 41.1; 2015: 47.5; 2016: 56.0; 2017: 52.0; 2018: 68.6; 2019: 76.4; 2020: 83.4 Profitability: - Return on assets: 2012: 1.5; 2013: 1.4; 2014: -1.2; 2015: 1.9; 2016: 2.0; 2017: 1.8; 2018: 2.3; 2019: 2.4; 2020: -0.1 - Return on equity: 2012: 5.9; 2013: 5.4; 2014: -4.6; 2015: 7.0; 2016: 7.9; 2017: 6.8; 2018: 8.8; 2019: 10.6; 2020: -0.3 Liquidity: - Liquid asset to total assets: 2012: 20.2; 2013: 21.8; 2014: 22.6; 2015: 24.1; 2016: 25.9; 2017: 29.0; 2018: 26.6; 2019: 29.6; 2020: 32.4 - Liquid asset to short-term liabilities: 2012: 31.2; 2013: 34.0; 2014: 34.4; 2015: 37.0; 2016: 37.8; 2017: 42.7; 2018: 38.3; 2019: 40.9; 2020: 45.7 Memo items: - Total private sector credit to GDP: 2012: 61.8; 2013: 62.4; 2014: 57.1; 2015: 53.0; 2016: 51.5; 2017: 48.4; 2018: 45.9; 2019: 44.8; 2020: 58.2 - Spread between domestic lending and deposit rates: 2012: 8.9; 2013: 9.4; 2014: 10.4; 2015: 10.4; 2016: 11.3; 2017: 10.8; 2018: 10.5; 2019: 9.9; 2020: 9.9 Notes: 1/ In percent of total credit. 2/ Includes the two largest credit unions. 3/ 2018 & 2019 data do not include Credit Union data for Asset Quality. 4/ Short-term liabilities are defined as resident deposits. Sources: Central Bank of The Bahamas and IMF staff calculations. ### Annex I — External Sector Assessment (Update as of April 15, 2022) Overall assessment: - "Based on preliminary data and EBA-lite model results, the external position of The Bahamas in 2021 was broadly in line with levels implied by fundamentals and desirable policies, although subject to a wide margin of error given the prolonged uncertainty due to the pandemic and its effect on tourism." - Pandemic shock: CA deficit reached 24 percent of GDP in 2020; CA improved to 19.7 percent of GDP in 2021 as tourism recovered. - International reserves remained adequate in 2021, also due to the IMF’s SDR allocation of $249 million in August. Potential policy responses (text as given): - Given The Bahamas’ strong commitment to the exchange rate peg, fiscal consolidation to ensure debt sustainability alongside structural reforms to improve competitiveness are the primary policy tools to preserve external buffers. - Focus should be on commitments to implement pro-growth and inclusive fiscal reforms that raise productivity and put the public debt ratio on a decisive downward path. - Reinvigorating structural reforms will assist in the rebound of key sectors and encourage additional FDI. - After pandemic and hurricane-related government external borrowing provided temporary relief in the last two years, the authorities should focus on improving competitiveness and the investment climate. Priorities should be the renewable energy sector and agriculture where local products could substitute imports in the medium term. - Should economic conditions deteriorate significantly, capital flow management measures – similar to the ones used during the first year of the pandemic – could be considered. Current account assessment and model results: - Background: Five-year pre-pandemic CA deficit averaged 10.1 percent of GDP; trade deficit averaged around 19.2 percent of GDP between 2015-19; services net inflows (mainly tourism) averaged about 23 percent of GDP. 2020 CA: -24 percent of GDP; 2021 CA: -19.7 percent of GDP. Key risks: uncertain pandemic path and increasing import price pressures (including due to the war in Ukraine). - EBA-lite CA model (2021): cyclically adjusted CA deficit is 12.3 percent of GDP, after an IMF staff adjustment of 10.1 percent of GDP to account for the impact of the pandemic on the CA. The CA norm is estimated at -0.3 percent of GDP, implying a CA gap of -12.0 percent of GDP. Policy gaps contribute 0.5 percentage points to the model-estimated CA gap; remainder reflects unidentified country-specific factors and/or regression residuals. - REER model: suggests a CA gap broadly in line with fundamentals and desired policies, at -0.7 percent. The Bahamas: Model Estimates for 2021 (in percent of GDP) — model labels and outcomes referenced in text; REER background note begins: "The REER has been relatively stable, at an average of 100.3 with a standard deviation of only" (sentence truncated in source). *Italic: IMF staff projections and data as presented in the source document.* ### 1.2 in the 10 years before the pandemic (2010-2019). In 2021, the REER declined to a historical low of 94.7, ### 1bhsea2022001 - 1.2 in the 10 years before the pandemic (2010-2019). In 2021, the REER declined to a historical low of 94.7, ### Real Effective Exchange Rate (REER) — assessment and drivers - In 2021, the REER declined to a historical low of 94.7, with a year average of 96.9. - Based on the REER model, the REER gap at end-2021 is estimated at 2.8 percent, indicating a slight overvaluation. - The REER gap for 2020 was previously assessed at 7.5 percent. - The large decrease in overvaluation was driven by a decrease in the REER in line with lower inflation in The Bahamas compared to its main trading partners. - Remaining overvaluation is associated with: - relatively high wages compared to productivity; - high costs of trade. ### Capital and Financial Accounts: flows, outlook, and policy implications - Historical and recent flows: - FDI has been a stable source of financing averaging of 3.5 percent of GDP since 2015. - Portfolio flows were highly volatile between 10.4 and -1.9 percent of GDP over the same period. - Government external borrowing from IFIs, Eurobond issuances, and an increase in domestic banks’ short-term liabilities contributed to a large increase in the financial account for 2020 and 2021. - Policy measures and outcomes: - Measures to control the outflow of capital introduced in 2020 were lifted in 2021 without significant repercussions. - Outlook and risks: - Numerous large and mid-scale tourism related FDI projects are scheduled over the next 5 years and are projected to keep FDI around the mid-term average. - High uncertainty remains about the scarring effects of COVID-19, increasing uncertainty around FDI projections. - A renewed spike in international risk aversion, potentially linked to a tightening in global financial conditions, could hinder investment appetite and the ability to obtain financing from nonresidents. - Policy recommendation: - Reinvigorating structural reforms to improve competitiveness and the investment climate would help increase and sustain FDI flows. ### FX intervention and reserves level — facts and assessment - Reserves evolution: - External reserves were increased to an all-time high of approximately $2.7 billion at the end of September 2021. - The increase was due to front-loading of the government’s external borrowing activity in 2020 and the IMF SDR allocation of $249 million. - By the end of 2021, reserves remained at elevated levels, near $2.4 billion, and higher than the previous year. - Central bank actions: - The central bank undertook some FX sales during the past year to ensure the smooth functioning of foreign currency markets. - Adequacy assessment: - The end-2021 level of foreign reserves results in reserves being around 218 percent of the Fund’s adequacy metric, above the suggested range of (100-150 percent). - Despite global uncertainties and in the absence of escalating upward price pressures of imports, reserve metrics are projected to remain adequate over the medium-term. ### Risk Assessment Matrix — selected external and domestic risks and policy responses - External risks and policy responses (selected): - Outbreaks of lethal and highly contagious Covid-19 variants: High Likelihood / High Impact. - Policy response: Institute robust screening and quarantine processes, strengthen health system, establish effective channels of communication, well-targeted social assistance programs. - De-anchoring of inflation expectations in the U.S. and/or advanced European economies prompting abrupt tightening: Medium Likelihood / High Impact. - Policy response: Implement prudent fiscal policies and structural reforms; CBOB should be willing to allow interest rates to rise to support the currency peg; in an imminent crisis scenario, impose temporary capital flow management measures. - Rising and volatile food and energy prices: High Likelihood / Medium Impact. - Policy response: Allow higher international food and energy costs to pass through to domestic prices alongside targeted support to protect the poorest; CBOB should be willing to allow interest rates to rise; in an imminent crisis scenario, impose temporary capital flow management measures; reform utility SOEs; improve agriculture quality. - Geopolitical tensions and de-globalization: High Likelihood / Medium Impact. - Domestic risks and policy responses (selected): - Natural disasters related to climate change: Medium Likelihood / High Impact. - Policy response: Enhance ex-ante preparedness and risk reduction strategies, invest in resilient infrastructure, rebuild financial resilience. - Revenue reforms fall short and inability to cover large short-term liquidity needs with external financing: Medium Likelihood / High Impact. - Policy response: Review expenditure (including by SOEs) to reprioritize spending flexibly and timely; systematically evaluate performance of multi-year financing strategy and undertake contingency planning. - Information infrastructure failure / cyber-attacks: Medium Likelihood / High Impact. - Policy response: Strengthen cybersecurity in Fintech and digitalization projects. ### Public Debt Sustainability Analysis — key figures, vulnerabilities, and stress scenarios - Overall assessment: - The Bahamas public debt is assessed as sustainable, but vulnerable to shocks, including from a more prolonged pandemic and sharp rises in global risk premia. - Staff’s baseline projection and most risk scenarios indicate a downward trajectory of the debt-to-GDP ratio, but by 2027 the debt ratio would still be above 80 percent, more than 15 percentage points higher than pre-pandemic, and significantly above the MAC DSA threshold of 70 percent of GDP. - Gross financing needs (GFN) will remain significantly above the MAC DSA threshold of 15 percent of GDP and decline only gradually over the medium-term. - Coverage and methodology: - The DSA covers both the central government and other public entities; debt crossholdings were consolidated. - All non-financial public entities which report debt are covered; seven largest SOEs and remainder projected separately mainly based on historical trend due to limited information availability. - Debt stock and financing needs (exact figures): - FY2021/22 public debt/GDP is expected to decrease to 94.8 percent from 109.2 percent in FY2020/21. - Gross public sector financing needs decline from a historical high of 37.8 percent of GDP in FY2020/21 to 24.8 percent of GDP in FY2021/22. - Among the GFN, treasury bills and notes and central bank advances for central government’s short-term liquidity purposes last fiscal year account for about 10 percent of GDP. - The repo arrangement accounts for about 12 percent of GDP among remaining financing needs for this fiscal year. - Over the medium term, public debt is expected to decline to 82.2 percent, assuming continued recovery, phasing-out of COVID-related support measures and a modest increase in revenue collection efficiency. - GFNs are projected to decline to 19 percent of GDP by FY2026/27. - Debt profile: - The central government relied significantly on foreign currency external borrowing last fiscal year; foreign currency debt share is close to 48 percent by end of FY2021/22. - Government intention to increase reliance on domestic financing and longer-term debt implies foreign-currency and short-term debt shares are expected to decline gradually. - Debt vulnerability and realism: - Risks remain high given the high debt level and gross financing needs; market perception weak as spreads are high and sovereign rating was further downgraded into non-investment territory by two rating agencies in the second half of 2021. - External financing risks are high because of the deterioration of the current account deficit. - Stress test results and scenarios (selected): - A temporary growth shock of one standard deviation for two consecutive years would bring the debt ratio to more than 100 percent before it would slightly decrease. - A contingent liabilities shock scenario that combines the same growth shock with a one-time increase in the primary expenditure-to-GDP ratio by 10 percent of banking sector assets would raise debt further. - Under a real interest rate shock and combined macro-fiscal shock, the debt-to-GDP ratio would not display a decreasing trend. - The real interest rate shock assumes an interest rate increase equal to the difference between the average projected real interest rate over the projection horizon and the maximum real historical level (about 606 basis points). - The macro-fiscal scenario assumes shocks to real GDP, inflation, government revenue, expenditure, interest and exchange rates. - A major hurricane scenario (“combined macro-fiscal shock II”) would increase debt to 109 percent over the medium term. - This scenario assumes a devastating impact on infrastructure resulting in a sharp contraction in FY2022/23 and zero growth in FY2023/24. - Government response would likely include wide-ranging tax exemptions; on average, revenue would be lower by about 3.5 percentage points of GDP. - The scenario assumes a long-lasting expenditure impact due to infrastructure recovery and social protection (cumulative expenditure would be about 7 percent of GDP higher). - Inflation would eventually be higher than the baseline by 1 percentage point due to strong demand for construction workers. _International Monetary Fund — https://www.imf.org/-/media/files/publications/cr/2022/english/1bhsea2022001.pdf_ ### 7. External debt. ### 7. External debt. ### Sensitivity and bound-test findings - Bound test results indicate sensitivity of the external public debt profile to shocks to the non-interest current account and real effective exchange rate. - A permanent one-half standard deviation increase in the non-interest current account deficit beginning in 2023 would put the public external debt ratio on an increasing trajectory, reaching 52 percent of GDP by 2027. - A permanent one-time 30 percent real effective exchange rate depreciation in 2022 would shift the external debt level up by around 18 percentage points of GDP. - In a combined shock scenario, where permanent ¼ standard deviation shocks are applied to the real interest rate, growth rate, and current account balance, the external debt-to-GDP ratio rises to 47 percent by 2027. ### DSA baseline projections and debt dynamics (public and external) - Baseline public gross nominal debt and related indicators (As of April 04, 2022): - Nominal gross public debt: 62.5 (2020), 82.8 (2021), 109.2 (2022), 94.8 (2023), 87.8 (2024), 85.9 (2025), 84.3 (2026), 83.2 (2027) (In percent of GDP, as presented in figure panel). - Public gross financing needs: 15.3 (2020), 12.3 (2021), 7.8 (2022), 4.8 (2023), 2.6 (2024), 2.7 (2025), 1.9 (2026), 1.7 (2027) (In percent of GDP). - Real GDP growth (in percent): 1.5 (2020), -12.1 (2021), -10.9 (2022), 16.5 (2023), 6.0 (2024), 2.5 (2025), 2.4 (2026), 1.7 (2027), 1.5 (projection tail in figure). - Inflation (GDP deflator, in percent): 2.4 (2020), -2.3 (2021), -2.4 (2022), 5.9 (2023), 3.8 (2024), 3.2 (2025), 2.6 (2026), 2.4 (2027), 2.3 (projection tail in figure). - Effective interest rate (in percent): 4.9 (2020), 4.6 (2021), 4.9 (2022), 4.7 (2023), 4.5 (2024), 5.0 (2025), 5.0 (2026), 5.0 (2027), 4.9 (earlier/later values). - Change in gross public sector debt (in percent of GDP) cumulative projection: 2.6 (2020), 15.9 (2021), 26.4 (2022), -14.4 (2023), -7.0 (2024), -1.9 (2025), -1.6 (2026), -1.1 (2027), -0.9 (final cumulative), -26.9 (cumulative total reported). - Identified debt-creating flows (in percent of GDP): 2.7 (2020), 16.3 (2021), 26.6 (2022), -14.1 (2023), -5.5 (2024), -1.9 (2025), -1.6 (2026), -1.1 (2027), -0.9 (cumulative), -25.2 (cumulative total reported). - Primary balance and fiscal accounts (in percent of GDP): - Primary deficit: 0.8 (2020), 3.1 (2021), 8.3 (2022), 2.2 (2023), -1.0 (2024), -1.3 (2025), -1.8 (2026), -1.9 (2027), -2.0 (cumulative tail), -5.7 (cumulative). - Primary (noninterest) revenue and grants: 16.3 (2020), 18.2 (2021), 18.7 (2022), 19.4 (2023), 19.5 (2024), 19.7 (2025), 20.0 (2026), 20.0 (2027), 20.1 (tail), 118.8 (cumulative). - Primary (noninterest) expenditure: 17.1 (2020), 21.3 (2021), 27.0 (2022), 21.7 (2023), 18.5 (2024), 18.4 (2025), 18.2 (2026), 18.1 (2027), 18.1 (tail), 113.0 (cumulative). - Automatic debt dynamics (in percent of GDP): 0.6 (2020), 14.6 (2021), 17.1 (2022), -16.5 (2023), -4.8 (2024), -0.7 (2025), 0.0 (2026), 0.7 (2027), 0.9 (cumulative tail), -20.4 (cumulative). - Of which: real interest rate contribution: 1.5 (2020), 5.2 (2021), 6.7 (2022), -1.9 (2023), 0.4 (2024), 1.4 (2025), 2.0 (2026), 2.1 (2027), 2.1 (cumulative). - Of which: real GDP growth contribution: -0.9 (2020), 9.5 (2021), 10.4 (2022), -14.6 (2023), -5.2 (2024), -2.1 (2025), -2.0 (2026), -1.4 (2027), -1.2 (cumulative), -26.5 (cumulative). - Net acquisition of assets (negative reduces financing needs): 1.1 (2020), -1.4 (2021), 1.2 (2022), 0.1 (2023), 0.3 (2024), 0.1 (2025), 0.2 (2026), 0.2 (2027), 0.1 (cumulative), 1.0 (cumulative total reported). - Contingent liabilities and promissory notes: Promissory note for bank resolution reported as 0.3 (2020) and 0.0 thereafter (in percent of GDP). 2023 includes execution of promissory note to the Bank of Bahamas (B$167.7 million / 1.2 percent of GDP). - Public sector debt composition and historical stocks (Table 1, FY2014/15–FY2020/21, in percent of GDP): - Consolidated public sector: 56.6 (FY2014/15), 58.8 (FY2015/16), 61.6 (FY2016/17), 68.7 (FY2017/18), 66.9 (FY2018/19), 82.8 (FY2019/20), 109.2 (FY2020/21). - External: 18.5 (FY2014/15), 20.0 (FY2015/16), 19.6 (FY2016/17), 25.9 (FY2017/18), 23.7 (FY2018/19), 30.4 (FY2019/20), 48.8 (FY2020/21). - Domestic: 38.2 (FY2014/15), 38.7 (FY2015/16), 42.0 (FY2016/17), 42.8 (FY2017/18), 43.2 (FY2018/19), 52.3 (FY2019/20), 60.4 (FY2020/21). - Central government debt: 49.8 (FY2014/15), 51.0 (FY2015/16), 54.5 (FY2016/17), 61.9 (FY2017/18), 59.7 (FY2018/19), 75.0 (FY2019/20), 103.3 (FY2020/21). - Public entities' debt: 13.4 (FY2014/15), 13.9 (FY2015/16), 13.0 (FY2016/17), 12.9 (FY2017/18), 13.1 (FY2018/19), 14.8 (FY2019/20), 16.4 (FY2020/21). - Public sector, gross: 63.2 (2014/15), 64.9 (2015/16), 67.5 (2016/17), 74.8 (2017/18), 72.8 (2018/19), 89.8 (2019/20), 119.7 (2020/21). - Of which: public sector external = same external row repeated above. - Short note: public sector defined as consolidated public sector; cross-holding between central government and public entities excluded. ### External DSA (2017–27) — key figures and projections - External debt-to-GDP and related flows (Table 2, in percent of GDP unless otherwise indicated): - Baseline external debt: 26.2 (2017), 24.9 (2018), 23.7 (2019), 46.2 (2020), 42.5 (2021), 39.8 (2022), 39.3 (2023), 38.3 (2024), 37.7 (2025), 37.2 (2026), 36.8 (2027). - Change in external debt: 6.1 (2017), -1.3 (2018), -1.2 (2019), 22.5 (2020), -3.7 (2021), -2.7 (2022), -0.5 (2023), -1.0 (2024), -0.6 (2025), -0.5 (2026), -0.5 (2027). - Identified external debt-creating flows (4+8+9): 9.6 (2017), 4.2 (2018), -0.9 (2019), 28.7 (2020), 9.8 (2021), 11.5 (2022), 7.6 (2023), 4.4 (2024), 3.7 (2025), 3.1 (2026), 2.5 (2027). - Current account deficit, excluding interest payments: 12.7 (2017), 8.0 (2018), 1.4 (2019), 22.2 (2020), 17.4 (2021), 16.2 (2022), 10.7 (2023), 7.0 (2024), 5.6 (2025), 4.8 (2026), 4.1 (2027). - Deficit in balance of goods and services: 9.4 (2017), 2.9 (2018), -2.4 (2019), 17.7 (2020), 13.5 (2021), 12.2 (2022), 6.9 (2023), 3.4 (2024), 2.3 (2025), 1.5 (2026), 1.1 (2027). - Exports: 30.4 (2017), 37.3 (2018), 39.1 (2019), 16.9 (2020), 26.6 (2021), 34.5 (2022), 39.0 (2023), 41.9 (2024), 42.6 (2025), 43.1 (2026), 43.6 (2027). - Imports: 39.8 (2017), 40.1 (2018), 36.8 (2019), 34.6 (2020), 40.1 (2021), 46.7 (2022), 45.9 (2023), 45.3 (2024), 44.8 (2025), 44.7 (2026), 44.7 (2027). - Net non-debt creating capital inflows (negative): -3.3 (2017), -4.4 (2018), -2.8 (2019), -3.9 (2020), -3.7 (2021), -3.5 (2022), -3.4 (2023), -3.3 (2024), -3.2 (2025), -3.2 (2026), -3.2 (2027). - Automatic debt dynamics: 0.2 (2017), 0.6 (2018), 0.5 (2019), 10.3 (2020), -3.8 (2021), -1.2 (2022), 0.3 (2023), 0.8 (2024), 1.3 (2025), 1.5 (2026), 1.5 (2027). - Residual, including change in gross foreign assets (2-3): -3.4 (2017), -5.5 (2018), -0.3 (2019), -6.2 (2020), -13.5 (2021), -14.2 (2022), -8.1 (2023), -5.4 (2024), -4.3 (2025), -3.5 (2026), -3.0 (2027). - External debt-to-exports ratio (in percent): 85.9 (2017), 66.7 (2018), 60.5 (2019), 273.8 (2020), 159.8 (2021), 115.4 (2022), 100.6 (2023), 91.3 (2024), 88.6 (2025), 86.3 (2026), 84.3 (2027). - Gross external financing need (in billions of US dollars): 1.7 (2017), 1.5 (2018), 0.7 (2019), 2.4 (2020), 2.5 (2021), 2.7 (2022), 2.1 (2023), 2.0 (2024), 1.8 (2025), 1.5 (2026), 1.5 (2027). - Gross external financing need (in percent of GDP): 14.1 (2017), 11.7 (2018), 5.3 (2019), 25.0 (2020), 22.2 (2021), 21.1 (2022), 15.4 (2023), 13.5 (2024), 12.1 (2025), 9.6 (2026), 9.2 (2027). - Historical-average scenario outcome: Scenario with key variables at their historical averages produces external debt of 39.8 (historical scenario values shown). ### Stress tests and alternative scenarios - Stress tests and alternative scenarios illustrated include: - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock, Combined Macro-Fiscal Shock, Combined Macro-Fiscal Shock II. - Representative scenario outcomes (selected highlights from figures and bound tests): - Historical scenario baseline comparisons: Historical scenario produces a higher projected debt path in some cases (example: historical scenario value shown as 73 in a figure box vs baseline 37). - Real depreciation shock (one-time 30 percent real depreciation in 2021) pushes external debt materially higher; figure reports a scenario label "30 % depreciation" with scenario value 55 vs baseline 37. - Non-interest current account shock scenario shows external debt reaching 52 percent of GDP by 2027 (as noted in bound-test summary). - Combined shock (permanent 1/4 standard deviation shocks to nominal interest rate, growth rate, and current account balance) leads to external debt-to-GDP of 47 percent by 2027. ### Market perception and risk assessment indicators - Selected indicators and benchmarks (2021 or as presented): - Gross financing needs benchmark: 15 percent of GDP. - Bond spread (EMBIG, long-term bond spread over U.S. bonds) reported as 822 basis points in figure panels; EMBIG (bp) 4/868 reported in a figure table for a specific point. - Public debt held by non-residents, share of foreign-currency denominated debt, change in share of short-term debt, and external financing requirement are used in heat-map risk assessment with stated benchmark thresholds: - Bond spread thresholds: 200 and 600 basis points. - External financing requirement thresholds: 5 and 15 percent of GDP. - Change in share of short-term debt thresholds: 0.5 and 1 percent. - Public debt held by non-residents thresholds: 15 and 45 percent. - Share of foreign-currency denominated debt thresholds: 20 and 60 percent. - Heat map and evolution of predictive densities for gross nominal public debt include percentile ranges (10th-25th, 25th-75th, 75th-90th) for projections 2020–2027. ### Notes and methodological points - Definitions and scope: - Public sector defined as consolidated public sector; cross-holdings between central government and public entities are excluded (cross-holding among public entities are included). - Debt figures and analyses are based on fiscal year (July - June) except where calendar year is stated. - External DSA uses notation and formulas for automatic debt dynamics and contributions from interest, growth, and exchange rate changes as specified in footnotes. - Data and projection specifics: - Gross financing needs include expected rollover of short-term treasury bills and notes, which amounted about 10 percent of GDP (footnote in figure). - The substantial decline in the GDP deflator during the pandemic sharply increased the real interest rate magnifying the shock under the DSA framework. - External-debt DSA table uses projections for 2017–2027 with detailed line items for current account, exports, imports, net non-debt capital inflows, automatic dynamics, and residuals. *Source: 1bhsea2022001 - 7. External debt.* ### 2. The Bahamas is already feeling the impacts of climate change. In 2019, Hurricane Dorian ### The Bahamas is already feeling the impacts of climate change ### Climate impacts and recent disaster history - In 2019, Hurricane Dorian caused $3.4 billion in damages, around 25 percent of GDP. - During 2011-2020, damages related to natural disasters in The Bahamas accounted for 3.2 percent of GDP per year on average, the second largest in the region. - Over the most recent decade, The Bahamas was hit by six hurricanes and several tropical storms, producing significant and enduring economic impacts, including physical and human capital destruction. - Tourism contributes around 50 percent to GDP, making The Bahamas one of the most tourism-dependent countries in the world; tourism is highly vulnerable to more frequent and severe floods, droughts, and hurricanes linked to warmer global temperatures and rising sea levels (IPCC, 2021). - Environmental threats include Stony Coral Tissue Loss Disease (SCTLD), which has traveled up to 50 meters per day and killed thousands of corals. ### Ongoing mitigation and adaptation measures - National commitments and targets: - Economy-wide reduction of greenhouse gas emissions of 30 percent by 2030 compared to the Business as Usual (BAU) scenario. - National target of achieving a minimum of 30 percent renewables in the energy matrix by 2030. - Designation of a 20 percent permanent forest state under the Forestry Act to improve harvesting practices, reduce forest ecosystem vulnerabilities, and increase carbon sequestration across several pine islands. - Regulatory and fiscal measures: - Authorities are upgrading the country’s building code and zoning rules. - Various tax incentives exist (for instance when purchasing an electric vehicle or installing solar panels). - Marine and resource conservation: - Protection of 20 percent of the nearshore marine environments to conserve habitats including grouper and bonefish, coral reefs, seagrass meadows, mangrove nurseries, and migratory bird habitats. - Measures to enhance food security, sustainable food production, and water conservation. ### Fiscal buffers, insurance, and current coverage gaps - The natural disaster fund was depleted following Hurricane Dorian (2019). - The Bahamas has 3 tropical cyclone policies with the Caribbean Catastrophe Risk Insurance Facility (CCRIF), each covering a section or zone of the archipelago. - For Hurricane Dorian, the CCRIF policy paid out about $11 million (0.1 percent of GDP), a fraction of total damages. - The Bahamas also has access to a $100 million contingent loan arrangement from the Inter-American Development Bank (IDB), which was drawn fully following Hurricane Dorian. - Insurance penetration relative to average climate-related damages: - The Bahamas: 1.7 percent. - Caribbean region average: lower than some peers; The Bahamas is above the Caribbean average but much lower than the average for LAC countries (around 11 percent). - Barbados benchmark: 32 percent insurance penetration. - Household insurance prevalence: currently most homeowners hold insurance only when they have an outstanding mortgage. ### Macroeconomics of disaster resilience: strategy and benefits - Recommended three-pillar Disaster Resilience Strategy (DRS): 1. Enhance structural (physical) resilience through ex-ante investments (resilient roads, bridges, buildings, early warning systems, building codes, zoning). 2. Build financial resilience via fiscal buffers and pre-arranged financial instruments. 3. Strengthen post-disaster and social resilience for speedy disaster response. - Cost-benefit and optimal adaptation principles: - Include indirect benefits (e.g., crowding in private investment) when calculating adaptation benefits. - Consider external support to reduce net adaptation costs. - Implement adaptation until marginal avoided damages equal adaptation project costs; residual damages will remain as eliminating them would be disproportionately costly. - Staff simulation results for The Bahamas (physical resilience investment): - Investment in resilient capital can boost GDP by about 2 percent and the fiscal balance by around 1.6 percent over a 30-year horizon. - After a natural disaster, output would be around 0.2 percent higher three years later and the level of public debt 1/3 percentage point lower (temporary short-run gains once capital is 8 percent resilient). - Long-run investment assumptions in simulations: - Analysis considers annual public investment of 1½ percent of GDP in line with staff’s baseline projections. - In the long-run steady-state reached in 30 years, 80 percent of the existing capital stock becomes resilient. - If authorities raised public investment to 2½ percent of GDP, the steady state would be reached in 20 years. ### Financial resilience measures: options, costs, and trade-offs - Three major financial options to complement physical adaptation: 1. Sovereign insurance: - Premium decomposed into actuarially fair premium (expected annual average of insured damages) plus a markup. - Markups for disaster insurance have been observed to far exceed 100 percent of the actuarially fair premium (Froot 2001). - The World Bank assumes a markup of 50 percent (World Bank 2017). - Cost of insuring hurricane risk is thus high. 2. Contingency fund: - Receives regular government contributions and stands ready for emergencies. - Net return equals return on capital less administrative costs. - Fund must invest in liquid assets, so expected return is lower than the interest rate paid on government debt, creating an interest-rate differential cost (government borrows at a high rate and invests at a low rate). 3. Paying down government debt to create fiscal space: - Saves interest payments on loans not taken and reduces default risk, lowering interest payments on outstanding debt. - Disadvantage: issuing government debt in an emergency typically takes more time than payouts from insurance or a contingency fund. - A combined approach where government reduces debt and an institution like the IDB provides fast-track lending after disasters would be mutually beneficial. - Illustration based on historical hurricane damages: - Acevedo (2016) dataset: since 1962, average annual damages amounted to 1.7 percent of 2021 GDP. - Simulation assumptions: - Average damages are assumed to fall entirely on the government (directly or via transfers). - Government options begin in 1962; resilient infrastructure builds over time. - Adaptation scenario: 25 percent of the annual average hurricane damage is invested into adaptation capital each year; adaptation converges to a 65 percent reduction in damages, with residual damages remaining. - Insurance scenario: government expenditure equals actuarially fair premium plus 50 percent markup. - Contingency fund scenario: annual average hurricane damage is paid into the fund; 1 percent of the fund’s volume used for administrative expenses; interest differential modeled with government borrowing at 5 percent and fund earning 2 percent. - Fiscal space scenario: government pays down debt equivalent to average annual hurricane damages; interest savings are treated as a reserve and are not subtracted as lower expenses in the illustration. - Combined fiscal space and adaptation scenario: government invests in adaptation until costs equal marginal benefits and reduces debt by average residual damage per year; identified as the most cost-effective scenario. ### Policy implications and additional considerations - Cost-effective disaster resilience strategy: - Invest in adaptation until marginal costs equal marginal benefits in terms of expected average damage reductions. - Reduce public debt by the average residual damage per year; in illustrative simulations (with adaptation reducing damages by 65 percent), this would amount to 0.6 percent of GDP per year. - These targets align with staff’s recommended overall budget surplus of 1.5 percent of GDP over the medium term (aiming to bring debt to 50 percent of GDP by FY2032/33), and with the envisaged adaptation investment of 25 percent of damages in simulations (or 0.4 percent of GDP per year). - Staff’s consolidation path: permanently raise productive spending by 2½ percent of GDP, raise the revenue-to-GDP ratio by 5 percent of GDP, and cut unproductive spending by 1½ percent of GDP. - Role of international community and concessional financing: - International support can improve efficiency by financing resilience measures rather than post-disaster emergency aid. - Example: 2022 Blue Bond guarantee by the IDB to foster Blue Economy resilience; some support secured from the Green Climate Fund. - Transparency and accountability measures increase donor trust and ensure high-quality investments. - Greater cost-sharing with households and firms: - Extend mandatory private sector property insurance beyond mortgage-linked properties, with targeted subsidies for the poorest households to reduce fiscal burden. - New building codes provide an opportunity to enhance structural resilience. - Rebuilding a liquid natural disaster fund: - Benefits exist in rebuilding a precautionary government natural disaster fund for immediate post-disaster liquidity, even though it is more costly than debt reduction. - A revamped fund could hold liquid assets such as U.S. Treasuries, be managed alongside external reserves at the central bank, and be accessible after predefined disaster conditions are met. - Strategic balance: - Combining physical adaptation and fiscal space creation is presented as a cost-effective and pragmatic approach to disaster resilience for The Bahamas. *International Monetary Fund staff summary of section: “The Bahamas is already feeling the impacts of climate change.”* ### Annex V. Natural Disaster Clauses in Sovereign Debt ### Annex V. Natural Disaster Clauses in Sovereign Debt ### Overview - Natural Disaster Clauses allow for an automatic extension of debt service in the event of a natural disaster that meets specified parameters (IMF, 2019). - When a disaster as defined in the clause occurs, either principal or interest payments or both would be deferred for a specific period, reducing the sovereign’s gross financing needs. - The International Capital Markets Association (ICMA) developed a standard template in 2018: “Terms for Extendible Hurricane Bonds”. ### Experiences in Caribbean countries - Grenada (2014/15): - Hurricane clause defers up to two semi-annual payments (i.e., 12 months) for all debt service in the event of a qualifying tropical cyclone (determined by wind and storm surge damage). - Deferred interest payment is capitalized; deferred principal is distributed equally on top of the remaining scheduled payments until final maturity. - Trigger event verified using parametric measures by the Caribbean Catastrophe Risk Insurance Facility (CCRIF). - Depending on timing, the clause could provide significant cash flow relief, e.g., of up to 2.6 percent of GDP in 2018 (IMF, 2018). - Barbados (2018/19): - Disaster clauses in most domestic and foreign debt exchanged in the 2018-19 restructuring. - Clause allows deferral of principal and interest payments for up to 24 months when a qualifying natural disaster occurs. - Expanded trigger events to also cover earthquakes and excessive rainfall (in addition to tropical cyclones) and reduced the threshold of losses for activation (Ho and Fontana, 2021). ### Potential inclusion for The Bahamas - Natural disaster clauses could be included in all new sovereign bond and loan issuances by The Bahamas. - Changes to existing debt obligations may not be feasible or desirable; transition to debt instruments with hurricane clauses should be carefully planned, accounting for potentially diverging price dynamics between instruments with and without clauses. - Clauses could be based on the ICMA Terms for Extendible Hurricane Bonds linked to CCRIF triggers. ### Model and simulation approach - Focuses on hurricanes given their prevalence in The Bahamas and correlation between actual damages and GDP. - Simulation follows Mallucci (2020) where international investors price government bonds by arbitrage, accounting for hurricane clauses in all sovereign debt outstanding. - Price q(y′, h′, b′) of the hurricane bond b with realization of the endowment process y, and realization of the hurricane h is defined as: q(y′, h′, b′) = 1/(1 + r_rf) E[ (1 − d)^(1−r_rel) (1 + (1 − ψ) q^ ) + r_rel/(1 + r_rf) E[(1 − d)^(1−r_rel) (1 + (1 − ψ)) q"|y′) | y] ] - (As in the source, the first term on the right-hand-side is the same as a standard plain vanilla bond with the only exception that in addition to default risk d, investors also need to consider the risk that repayments are delayed, as highlighted by the dummy variable r_rel which takes the value of one when the government decides to activate the hurricane clause. The latter term accounts for the expected discounted value of maturing bonds after the government resumes payments.) - Parameters and inputs: - r_rf is the risk-free rate. - d is the default risk. - ψ is the decay parameter. - Expected value of the endowment is calculated considering the probability of hurricanes. - Calibration: - Full calibration of Mallucci (2020) using data on GDP, sovereign spreads, and hurricanes (frequency and damages) for The Bahamas from 1962 to 2020, subject to data availability. - The steady state of debt-to-GDP was set to 50 percent in accordance with The Bahamas’ fiscal rules. - The baseline model relies on historical data on natural disasters and serves as a lower bound since it does not account for climate-change-driven increases in hurricane frequency or intensity. ### Key simulation findings and statistics - At current levels of sovereign debt (around 100 percent of GDP), hurricane clauses have the potential to increase the price of public debt and therefore lower debt service costs for The Bahamas. - Comparative result as a function of debt-to-GDP: - Hurricane clauses reduce default risk and therefore yields for high and intermediate debt levels. - Yields increase for low debt levels because investors need compensation for the risk that the clause is triggered even when baseline default risk is zero. - Caveat on behavioral response: - The result holds for the unconditional price of government bonds assuming The Bahamas’ borrowing choices remain constant. - If The Bahamas borrows more in response to lower yields from hurricane clauses, overall debt and yields could increase. - Fiscal policy in line with the Bahamian Fiscal Responsibility Act and its debt and deficit targets is recommended to prevent adverse borrowing responses. ### Policy implications and considerations - Inclusion of natural disaster clauses in new issuances can provide liquidity relief and reduce sovereign probability of default, particularly when public debt is elevated. - Market pricing effects are ambiguous: - Individual bonds with such clauses might command higher yields if investors demand compensation for deferral risk. - A significant share of outstanding debt containing clauses can lower overall yields due to reduced default probability. - Implementation considerations: - Careful sequencing and communication when transitioning from instruments without clauses to those with clauses to manage diverging price dynamics. - Where feasible, base triggers on independent parametric verification (e.g., CCRIF) to reduce ambiguity in activation. - Fiscal discipline is necessary to ensure that perceived relief from hurricane clauses does not lead to unsustainable borrowing. *Prepared by Katharina Bergant, Sebastian Grund, and Enrico Mallucci; Annex V. Natural Disaster Clauses in Sovereign Debt (from the source PDF).* ### Annex VII. Progress on Commitments in Rapid Financing (RFI) ### Annex VII. Progress on Commitments in Rapid Financing (RFI) ### Authorities’ Commitments and Implementation Status - Request (June 2020) - Publish procurement contracts of crisis mitigation spending, including beneficial ownership information of companies awarded procurement contracts - Status: No progress. - Recommendation: The authorities are encouraged to obtain and publish beneficial ownership information of companies awarded procurement contracts in the future to enhance transparency and accountability of public funds consistent with the 2020 RFI commitments and recent revision to the international AML/CFT standards set by the FATF. - Report quarterly on COVID-19 mitigation spending - Status: Done. The relevant information is in the quarterly budget performance reports. - COVID-19 mitigation spending and revenue measures should be audited withing 9 months of the end of the fiscal year - Status: Partially implemented. - Details: The Auditor General published a financial audit report covering FY2019-20 of expenditures related to the response to COVID pandemic and Hurricane Dorian, but a performance or value-for-money audit is still ongoing. The other audit report covering FY2020-21 is expected to be completed by end-June, while a special audit of the Food Assistance Program under the COVID program will be done by end-May. - Finalize the Public Procurement Act by end-June 2020 and submit Public Financial Management Bill and Public Debt Management Bill to Parliament by end-2020. - Status: Done with delay. - Details: The Public Procurement Bill was finalized on time, but the Public Financial Management Bill and Public Debt Management Bill were tabled in parliament in early 2021. All bills were passed and enacted in 2021Q3. ### RFI Commitment and Fund Relations—Selected Facts and Figures - RFI commitment: RFI Jun 01, 2020; Date Drawn Jun 03, 2020; Amount Approved (SDR Million) 182.40; Amount Drawn (SDR Million) 182.40. - Emergency Assistance may include ENDA, EPCA, and RFI. - Forthcoming projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: 2022 45.60; 2023 91.20; 2024 45.60. - Charges/Interest: 2022 1.77; 2023 2.36; 2024 1.46; 2025 0.31; 2026 0.01. - Total: 2022 1.77; 2023 47.96; 2024 92.66; 2025 45.91; 2026 0.01. ### Data and Transparency Notes Relevant to RFI Commitments - Assessment of Data Adequacy for Surveillance: Data provision is broadly adequate for surveillance. - The government started publishing the quarterly data of the public sector, including state-owned enterprises, in its “Quarterly Public Debt Statistics Bulletin” in November 2021. - The authorities have yet to compile data on the international investment position (IIP) statistics and general government accounts data. - Staff continues to support the authorities’ efforts towards addressing data gaps, including continuing technical assistance to compile and publish IIP statistics. - Government Finance Statistics and Reporting: - The Ministry of Finance has published quarterly budgetary performance reports since FY2018/19 with a lag of one to two months. - The government started publishing its monthly fiscal report in March 2022. - The first detailed public debt report was released in November 2021 in line with the Public Debt Management Act (2021). The report includes central government debt and debt by other public agencies and state-owned enterprises. - The authorities are not reporting debt data to the World Bank’s Public Sector Debt Statistics database. - Auditing status tied to RFI commitments: A financial audit for FY2019-20 was published; performance/value-for-money and other specific audits remain ongoing with expected completion dates (FY2020-21 audit expected by end-June; special audit of the Food Assistance Program by end-May). *Annex VII. Progress on Commitments in Rapid Financing (RFI).* ### 17.1 percent in 2021, after a 75.2 percent reduction in the previous year. The Centers for ### 1bhsea2022001 - 17.1 percent in 2021, after a 75.2 percent reduction in the previous year. The Centers for ### Economic outlook and tourism - Tourist arrivals and growth - CDC de-escalated The Bahamas’ COVID-19 risk advisory rating to Level 1 (low) on April 14, 2022, which should support further gains in tourist arrivals. - Authorities and staff expect growth to remain strong in 2022, before decelerating over the 2023-2025 period. - The outlook remains dependent on global tourism trends and the pandemic’s trajectory. - GDP and recovery context - Reference point: "17.1 percent in 2021" (as reported). - Prior year contraction referenced as a "75.2 percent reduction in the previous year." ### Labor market - Key findings - Unemployment rate declined to an estimated 18.1 percent, from approximately 25.6 percent in 2020, but remains above the 10.7 percent noted prior to the pandemic. - Authorities expect employment to continue to increase in line with the strengthening in tourism and related sectors and foreign investment-driven projects. - Government policies to promote entrepreneurship among micro, small, and medium-sized businesses (MSMEs) should also encourage employment. ### Inflation and prices - Current and projected inflation - Average annual prices rose by an estimated 2.9 percent in 2021 and are expected to rise by 6.7 percent in 2022. - Inflation is projected to remain above average until 2024, when global pressures are expected to abate. - Policy response - Authorities lowered the VAT rate to 10 percent from 12 percent and have eliminated VAT zero-rating for several items to alleviate price pressures and simplify tax administration. ### Fiscal responsibility and sustainability - Fiscal outcomes and projections - Overall fiscal deficit rose to 13.7 percent of GDP in 2021, from 7.2 percent of GDP in 2020. - Staff projects the deficit narrowing to 6.7 percent of GDP in 2022, and reaching 2.2% by 2027. - Debt to GDP ratio estimated at 103.3 percent of GDP in 2021, forecasted to decline to 80.4 percent by 2027. - Authorities’ fiscal strategy and reforms - Emphasis on expenditure efficiency and reallocation to priority areas. - Commitment to limiting overall growth in public sector employment, enhancing performance and profitability of state-owned enterprises, and reforming the government’s pension scheme. - Measures to increase revenue: strengthen tax compliance (especially for vacation rentals and real property taxes), digitize revenue collection, limit tax concessions. - Re-established Revenue Enhancement Unit and Revenue Policy Committee to review government revenue, determine leakages, and provide recommendations. - Expectations - Authorities project that policy measures combined with strong economic recovery will yield faster improvement in fiscal indicators, with a small fiscal surplus expected by 2025. - Legal and financing initiatives - Work ongoing to recalibrate the fiscal strategy and strengthen legislation surrounding fiscal responsibility, public financial management, and debt management; suite of Acts to be amended to increase flexibility, enhance transparency, and improve operational efficiency. - Exploring opportunities to monetize carbon credits, issue resilient debt, and leverage debt for climate swaps; authorities have requested staff technical assistance. ### Monetary and financial sector - Financial stability and credit - Pandemic mitigation measures have expired and the sector remains stable. - Nearly all loans previously under the moratoria in 2020 have returned to regular payments. - Non-performing loans rate firmed to 9.6 percent at end-2021, from 8 percent at the start of the pandemic, but remained below the 15.3 percent high noted following the global financial crisis. - Private sector credit continued to weaken amid banks’ conservative lending stance. - Recently operationalized credit bureau expected to reduce information asymmetries and support credit growth. - Banks are highly capitalized, with capital to risk weighted assets exceeding regulatory benchmarks. - Monetary policy stance - Authorities consider current monetary policy posture appropriate and do not agree that raising the discount rate would be an effective response to global price increases. - As a small open economy with a fixed exchange rate and capital controls, raising the policy rate is seen as unlikely to yield the same results as in other jurisdictions. - External reserves are at historic highs following the strong rebound in tourism and the 2021 Fund special drawing rights (SDRs) allocation; reserves are considered more than adequate to support the peg. - Monetary tightening in the US will likely increase the cost of government foreign currency borrowing. - Regulation, AML/CFT, and digital assets - Central Bank committed to maintaining robust regulatory and supervisory standards and strengthening AML/CFT framework. - Improvements to the beneficial ownership registry supported removal from the FATF "grey list". - Digital Assets and Registered Exchanges Bill 2022 (DARE) developed and enacted to ensure viability and integrity of the emerging digital assets industry. - Central Bank views the Sand Dollar (CBDC) as important for payments modernization, resilience, and financial inclusion; plans to accelerate public information campaigns and build internal capacity, especially in cyber security and surveillance. ### Long-term inclusive growth and resilience - Diversification and digitalization - Authorities view economic diversification, digitalization, and innovation as means to achieve resilient growth. - Working to diversify into the digital assets industry; a leading cryptocurrency exchange began activities in April 2022. - White Paper presented to parliament exploring opportunities in the digital asset landscape. - Refocused Bahamas Investment Board to promote the country and attract foreign investors across various industries. - Initiatives supporting MSMEs and efforts to improve the ease of doing business by streamlining processes at the Bahamas Investment Authority, Registrar General, Department of Inland Revenue, and other entities. - Climate resilience and mitigation - Building resilience to climate change is a priority; building code and zoning rules are being upgraded. - Tax incentives implemented to encourage energy efficient investments, including electric vehicles and solar panels. - Authorities committed to a 30 percent reduction of greenhouse gas emissions by 2030, and sourcing a minimum of 30 percent of energy from renewables by 2030. - Exploring carbon credits for potential revenue. - Climate tagging commenced during the FY2021/22 budget exercise with World Bank support to identify, allocate, and manage expenditures on climate mitigation and disaster risk management; plan to continue climate tagging for FY2022/23 Budget. - Disaster financing - In the event of a natural disaster, options include limited support through Contingent Credit Line at the International Development Bank, a payout from the CCRIF for qualifying events, and resources from the Disaster Relief Fund (which must be replenished following Hurricane Dorian). ### Conclusion and policy emphasis - Recent years have highlighted The Bahamas’ vulnerability to external shocks. - Authorities encouraged by strong rebound in tourism and sustained foreign direct investment but remain aware of downside risks and need for diversification. - Optimistic about opportunities in digital financial services and blue and green economies while adopting a measured approach. - Committed to measures to improve fiscal indicators and place debt on a downward trajectory, while maintaining investment in critical infrastructure and resilience building. - Authorities continue to call for more concessional and grant support from the international community to finance climate change adaptation and welcome Fund efforts in this regard. *Source: 1bhsea2022001.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bhsea2022001.pdf_