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---

### Background
- The Bahamas comprises about 30 inhabited islands.
- The economy’s two main drivers are tourism and financial services.
- Onshore financial system: 276 banks and trust companies (eight commercial banks, with a strong presence of Canadian banks).
- Offshore operations: International Business Corporations (IBCs) under the IBC Act, 2000.
- As of end-2007, total public sector debt was about 40 percent of GDP, mostly domestic.
- Credit ratings: Standard and Poor’s reaffirmed sovereign rating BBB+ with a stable outlook (May 2011). Moody’s affirmed an A3 bond rating but revised the outlook from stable to negative (August 2011).

### Recent Economic Developments (2008–2010)
- Growth and sectors
  - Real GDP: contracted by about 1½ percent in 2008 and 5½ percent in 2009; grew by about one percent in 2010.
  - 2010 rebound led by trade, hospitality, transport, and government services.
  - Construction and offshore financial services sectors continued to contract in 2010.
- Inflation and prices
  - Inflation: 1½ percent (y-o-y) in 2010.
  - Food prices declined by over 1 percent.
  - Fuel and transportation prices rose by about 2½ percent.
- External sector and reserves
  - External current account deficit: broadly stable at 11½ percent of GDP (2010).
  - Reserves: US$860 million at end-2010 (about 2½ months of next year’s imports of goods and services).
- Central government fiscal position (FY 2010/11)
  - Total revenues increased owing to sizeable one-off transactions related to stamp taxes on Baha Mar and transfer of ownership of the Bahamas Oil Refining Company (1½ percent of GDP).
  - Excluding one-offs, revenues increased by about ½ percent of GDP.
  - Expenditure increased more than proportionately, including higher spending on goods and services.
  - Central government deficit rose to 4.7 percent of GDP.
  - Sale of 51 percent of Bahamas Telecommunications Company (about 2½ percent of GDP) eased financing pressures.
- Public debt
  - Central government debt at end-2010: 48 percent of GDP (up from about 34 percent two years earlier).
  - Total public debt reached almost 62 percent of GDP.
  - Domestic debt accounts for more than 80 percent of public debt; debt is mostly in variable rate instruments and held mainly by commercial banks, public corporations, and pension funds.
- Banking sector
  - Banks’ capital-adequacy ratios: well above the minimum requirement of 17 percent.
  - Non-performing loans (NPLs): NPLs-to-total loans ratio over 10 percent; provisioning to NPLs appears to be below peers.

### Outlook — Near-term and Medium-term Projections and Risks
- Near-term (2011)
  - Real GDP projected at about 2 percent in 2011, driven by tourism and construction activity.
  - Inflation projected to rise to about 2½ percent.
  - Balance of payments: overall surplus of about US$94 million owing to strong FDI and private capital inflows.
  - Staff estimates central government deficit would increase to about 5 percent of GDP by end-June 2012 and central government debt to about 50 percent of GDP.
  - Monetary policy: Central bank lowered the discount rate to 4½ percent (from 5¼ percent) in June 2011.
- Medium-term (2012–2016)
  - Output growth expected to rise to 2½–3 percent in 2012–13, driven by tourism and new FDI projects (notably Baha Mar).
  - Baha Mar construction effects (2012–13):
    - Workforce could increase by up to 4,400 persons.
    - US$750-900 million could be injected into the economy.
    - Project documents estimate 400,000 additional stay-over arrivals and direct tax revenues of about US$60 million (¾ percent of 2011 GDP) per year.
  - Growth thereafter projected to remain in the 2½–3 percent range with upside potential if key projects materialize.
  - External current account deficit expected to narrow to about 13 percent of GDP by end-2016.
  - Central government deficits expected to remain at almost 4½ percent of GDP per year, raising central government debt-to-GDP ratio to close to 56 percent and overall public debt to about 69 percent by 2016.
- Staff projection table highlights (in percent of GDP unless otherwise indicated)
  - Real GDP (2008–2016): -1.3, -5.4, 1.0, 2.0, 2.5, 2.7, 2.3, 2.5, 2.7
  - Inflation (average, 2008–2016): 4.4, 2.1, 1.0, 2.5, 2.0, 2.0, 2.0, 2.0, 2.0
  - Overall fiscal balance (central government, FY basis): -1.8, -4.5, -4.4, -4.7, -5.0, -4.4, -4.3, -4.3, -4.4
  - Central government debt (2008–2016): 32.6, 37.9, 45.4, 48.6, 49.9, 51.8, 53.4, 54.8, 55.9
  - External current account balance (2008–2016): -14.9, -11.4, -11.7, -17.1, -19.1, -20.2, -18.2, -15.2, -13.3
  - Gross international reserves (US$ millions, 2008–2016): 563, 816, 860, 955, 927, 975, 1,035, 1,154, 1,284
  - Reserves in months of next year's goods & services imports (2008–2016): 1.8, 2.6, 2.3, 2.3, 2.1, 2.2, 2.3, 2.5, 2.7
  - Note: Gross international reserves include an SDR allocation of US$178.9 million in September 2009.
- Downside risks
  - Slower-than-expected U.S. recovery could dampen tourism and economic activity.
  - External accounts sensitive to increases in international food and fuel prices.
  - Exposure to the real estate sector could reduce collateral values and increase bank vulnerability if recovery stalls.
  - Vulnerability to hurricanes and natural disasters; Hurricane Irene hit The Bahamas in August (impact relatively small).
  - Contingent liabilities from the failed insurance company CLICO and weak performance of non-financial public corporations.

### Box 1 — Expanding Tourism Potential: Challenges and Strategy (highlights)
- Geography and demographics
  - Archipelago of 700 islands and about 2,000 cays; total land mass about 14,000 square km over almost 260,000 square km of territorial waters.
  - 70 percent of population of 350,000 lives in New Providence.
- Tourism structure
  - New Providence accounts for 55–60 percent of tourist activity; model: large seaside resorts (e.g., Atlantis Resort).
  - Family Islands model: small boutique hotels and luxury private villas targeting wealthy tourists and second-home owners.
- Seasonality and market diversification
  - Capacity utilization: near 100 percent in peak winter to less than 30 percent in late summer.
  - Strategy to diversify markets toward Latin America (Brazil, Argentina); attracted daily flights from Panama City hub.
  - Increasing South American arrivals could mitigate cyclical tourism revenue patterns.
- Developing the Family Islands
  - Main challenges: high per capita cost of infrastructure, utilities, and social services (including health).
  - Proposed solutions: satellite health units with efficient emergency travel; “magnet” resorts to attract jet services plus hubbing with smaller aircraft; large resorts providing economies of scale for desalination, power generation, and enclave industries.
- Diversification beyond tourism
  - Some outer islands (e.g., Andros) have large water and land resources suitable for agriculture.
  - Development requires rapid reduction in costs of doing business in The Bahamas.

### Policy Discussions — Consolidation Strategy (authorities’ stance)
- Authorities’ objectives
  - Strengthen fiscal performance and place public debt on a sustainable path through revenue and expenditure measures and improved debt management.
  - Commitments to revenue mobilization, improving the business environment, and strengthening financial system soundness.
- Revenue measures (authorities’ initiatives)
  - Improve tax administration: strengthen customs; consolidate collection of several taxes in one institution.
  - Introduce procedures to reduce smuggling of tobacco products.
  - FY 2011/12 budget contemplates centralizing collection of taxes (business, property, stamp, hotel occupancy, and casino) while increasing spending on new initiatives (e.g., introduction of e-government), extending tax holidays, and lifting the freeze on public wages.
- Fiscal policy and public finances (authorities’ actions)
  - Introducing time limits and transition arrangements for fiscal incentives under the Industries Encouragement Act.
  - Seeking to reduce transfers to public corporations, including by encouraging private-public-partnership arrangements.
  - Consolidating tax collection and prioritizing greater coordination of debt management at the Ministry of Finance and the Central Bank.
- Staff recommendations and observations
  - Medium-term strategy is welcomed but not sufficient; a stronger fiscal effort is needed to place government debt-to-GDP on a declining path.
  - Priority should be revenue mobilization; most dynamic sectors generate a small share of revenue and growth does not translate proportionately to higher fiscal revenues.
  - Reforms to broaden the tax base (e.g., adoption of a domestic consumption tax) should be a key priority.
  - Time limits on the Industries Encouragement Act could be extended to other fiscal incentive regimes.
  - Staff urged early implementation of revenue reform (e.g., a consumption tax), warning delays may result in additional external risks and fiscal pressures.
- Fiscal metrics (preserved exactly)
  - Government expenditure is projected to remain at about 20 percent of GDP over the medium term.
  - The government’s wage bill accounts for over 40 percent of revenues, and is projected to rise following the lifting of the wage freeze adopted in FY 2010/11.
  - Transfers to public enterprises are high, and interest costs are rising.
- Public enterprises
  - Financial position of several public enterprises (including Bahamas Air, and the electricity and water and sewerage companies) appears to be weak.
  - Lack of timely information on the contribution of public enterprises to the overall fiscal stance is a vulnerability.
  - Several public enterprises are inefficient and require recurrent government transfers to operate.
  - A strategy to lower the drag of these enterprises on public finances (including through divestments) is urgently needed.
- Fiscal transparency improvements urged
  - Improving revenue forecasting;
  - Preparing consolidated accounts for the public sector; and
  - Making public all tax incentives (including costs, main terms and conditions, and beneficiaries).

### Growth Strategy
- Near-term outlook
  - Real GDP in 2011 projected at 2 percent, driven by tourism recovery and launch of large investment projects.
- Government strategy components
  - Growth-enhancing measures:
    - Increase airlift and expand coverage to the Family Islands, and boost cruise arrivals.
    - Aggressive program to increase FDI from Canada, the U.S., Latin America, and China.
    - Foster development of small- and medium-size enterprises.
  - Improving the business environment:
    - Reduce red tape and streamline administrative procedures (including e-government).
    - Job-readiness program to improve productivity.
  - Combating crime:
    - More resources to law enforcement, expanding courts, and strengthening prosecutorial process.
- Staff views
  - Welcomed broad-based growth strategy and lower reliance on fiscal incentives.
  - Suggested improving economic diversification and employment through innovation in high value-added downstream tourism products.
  - Noted need for investment in public utilities to improve efficiency and provide infrastructure to support growth.
- Notes from source footnotes
  - Large projects include development of the Baha Mar resort, expansion of existing resorts, and continuing construction of the airport and road improvements.
  - A recent agreement with a low-cost U.S. carrier will increase airlift from states along the East coast of the U.S. to Grand Bahama.
  - The Bahamas ranked 77 of 183 countries in the Doing Business 2011 Report, down from 68 in 2010.

### External Stability and Exchange Rate Policy
- Exchange rate peg
  - Fixed exchange rate system has served The Bahamas well; authorities restated commitment to support the peg and continue building reserves.
  - Exchange rate arrangement: Conventional fixed peg; Bahamian dollar pegged to the U.S. dollar at B$1 per US$1.
- Reserves and policy rate context
  - Decision to lower policy rate taken in context of adequate reserves (about US$1,075 million or close to three months of imports) and low inflationary pressures.
- Assessment of exchange rate level
  - Staff and authorities agreed exchange rate level remains broadly in line with medium-term fundamentals.
  - Macrobalance approach suggests projected medium-term current account deficit is close to estimated current account “norm”.
  - Regressions suggest current real exchange rate broadly in line with fundamentals, though results sensitive to assumptions.
- Policy implications
  - Investing in basic infrastructure and ensuring efficient delivery of basic utilities is important to attract revenue-producing FDI and enhance competitiveness.

### Financial Sector — Soundness, Supervision, and AML/CFT
- System soundness and vulnerabilities
  - Capital adequacy ratios (CARs) at end-May 2011: 26 percent, on average, well above regulatory threshold.
  - Excess liquidity: about 20 percent.
  - Banks’ loan portfolios weakened by slowdown; loan arrears and NPLs represent vulnerability.
- Macro-prudential and supervisory measures
  - CAR trigger of 14 percent on banks in place since onset of global crisis.
  - Since November 2009, banks required to seek central bank approval to distribute dividends.
  - Central bank requires debt service-to-income limit of 45 percent and loan-to-value ratio cap of 85 percent on personal loans (measures exist since 2004).
  - Establishment of a credit bureau projected to start operating in early 2013.
- Ongoing supervision enhancements
  - Enhanced risk-based supervision framework and special focus examinations implemented.
  - Initiatives include enhanced supervision of large financial institutions; bringing credit unions under central bank purview; drafting legislation for consolidated supervision; participating in regional supervision efforts and coordinating with Canadian regulators.
  - Update assessment under the Financial Sector Assessment Program scheduled in 2012.
- AML/CFT framework progress
  - Guidelines amended to address enhanced customer due diligence, strengthen internal controls, compliance and audit procedures, improve record keeping for high-risk countries, and establish conditions for third party introducers.
  - Bahamas Compliance Commission supervises groups of professionals that hold client funds and works closely with the Inspector of Financial and Corporate Service Providers.
- Resolution of CLICO-Bahamas
  - Progress reported; settlement more likely following favorable ruling regarding Wellington Preserve in Florida.
  - Staff urged a prompt resolution that minimizes fiscal contingent liabilities.

### Staff Appraisal — Key Conclusions and Policy Priorities
- Economic outlook and risks
  - Bahamas economy has started to recover but unemployment remains high.
  - Real GDP in 2011 projected at 2 percent.
  - Medium-term growth outlook improved compared to 2010 report, but downside risks are high.
  - Domestic risks: delays in fiscal and economic reforms, rising debt, insufficient buffers for natural disasters, and weak competitiveness.
  - External risks: weaker-than-expected U.S. recovery could cap tourism rebound and delay large FDI tourism projects.
- Policy priorities
  - Fiscal consolidation should be main priority to place public debt-to-GDP on a sustainable path and build buffers, including reserves.
  - Strengthen revenue mobilization through improved tax administration and lower tax expenditures.
  - Early implementation of revenue reform (e.g., a consumption tax) is essential.
  - Expenditure restraint needed, especially on wages and transfers.
  - Strengthen weak financial position of public enterprises and enhance fiscal transparency.
- Growth and exchange rate
  - Authorities’ growth strategy broadly appropriate; reducing obstacles to doing business is promising and lower reliance on fiscal incentives is welcomed.
  - Improve basic infrastructure (energy and water) and develop high value-added downstream tourism products to achieve higher growth rates.
  - Fixed exchange rate system continues to serve the country well; staff analysis suggests exchange rate level broadly in line with medium-term fundamentals.
- Financial sector monitoring
  - Recent supervision and macro-prudential measures should enhance resilience.
  - Planned credit bureau and bringing credit unions under central bank purview are welcome.
  - High NPLs and limited provisioning call for intensified monitoring of financial institutions.

### Vulnerabilities and Debt Sustainability (selected figures and indicators)
- Key social and economic indicators (selected exact figures from Table 1)
  - GDP (US$ millions), 2010: 7,700
  - GDP per capita (US$), 2010: 21,773
  - Population (thousands), 2010: 353.7
  - Life expectancy at birth (years), 2010: 74.4
  - Adult literacy rate, 15 & up (percent), 2007: 95.643
- External sector (selected figures)
  - Current account balance (millions USD, Table 5 projections): -900 (2010), -1,383 (2011), -1,637 (2012), -1,816 (2013), -1,706 (2014), -1,497 (2015), -1,370 (2016).
  - Travel (net, millions USD): 1,831 (2010), 1,914 (2011), 2,098 (2012), 2,227 (2013), 2,340 (2014), 2,504 (2015), 2,680 (2016).
  - Gross international reserves (end-period, millions USD): 563 (2008), 816 (2009), 860 (2010), 955 (2011), 927 (2012), 975 (2013), 1,035 (2014), 1,154 (2015), 1,284 (2016).
- Fiscal and debt indicators (selected tables)
  - Real GDP (2008–2016): -1.3, -5.4, 1.0, 2.0, 2.5, 2.7, 2.3, 2.5, 2.7
  - Central government debt (2008–2016, percent of GDP): 32.6, 37.9, 45.4, 48.6, 49.9, 51.8, 53.4, 54.8, 55.9
  - Overall fiscal balance (central government, FY basis): -1.8, -4.5, -4.4, -4.7, -5.0, -4.4, -4.3, -4.3, -4.4
  - Public sector gross financing need (percent of GDP, 2006–2016): 2.5, 3.8, 3.3, 9.3, 6.2, 7.5, 5.2, 5.1, 5.3, 5.3, 5.8
  - Public sector gross financing need (millions USD, 2006–2016): 199.8, 316.0, 274.5, 722.1, 480.2, 602.1, 441.1, 462.1, 500.4, 521.6, 594.0
- Financial sector indicators (Table 7 and Table 6 highlights)
  - NPLs to total loans ratio (2006–2010): 4.2, 4.3, 6.1, 9.4, 10.5
  - Provisions to NPLs (2006–2010): 54.7, 47.9, 46.0, 37.1, 41.9
  - CAR (2006–2010): 24.8, 24.9, 23.5, 26.1, 25.5
  - Credit to private sector (in B$): 6,537 (2008), 6,596 (2009), 6,573 (2010), 6,982 (2011), 7,458 (2012 projection)
  - Credit to private sector (annual percent change): 5.1, 0.9, -0.4, 6.2, 6.8 (2008–2012 series)
- Debt trajectory (Table 4 and Table 8)
  - Central government debt (percent of GDP, 2005–2010): 29.0, 29.9, 31.7, 33.6, 42.5, 48.3 (2005–2010)
  - Total public sector (percent of GDP, 2005–2010): 36.8, 38.9, 40.4, 44.1, 54.3, 61.8 (2005–2010)

### Annex I — Fund Relations, Technical Assistance, and Surveillance
- Membership and quota
  - Joined August 21, 1973; Article VIII.
  - Quota (General Resources Account): 130.30 SDR Million (100.00 percent).
  - Fund holdings of currency: 124.04 SDR Million (95.20 percent of quota).
  - Reserve position in Fund: 6.26 SDR Million (4.80 percent of quota).
  - SDR Department net cumulative allocation: 124.41 SDR Million (100.00 percent).
  - SDR Department holdings: 114.13 SDR Million (91.73 percent of allocation).
- Outstanding obligations and projected payments to Fund (SDR million)
  - Forthcoming Principal / Charges/Interest: 2011: 0.01; 2012: 0.03; 2013: 0.03; 2014: 0.03; 2015: 0.03.
- Exchange rate and Article IV consultations
  - Exchange rate arrangement: Conventional fixed peg; B$1 per US$1.
  - Last Article IV Consultation concluded on October 27, 2010. The Bahamas is on a 12-month consultation cycle.
- Technical assistance (department — dates — purpose) examples
  - STA 2008/2009 — Consumer Price Index
  - MCM/CARTAC August 2009 — Banking supervision
  - FAD September 2009 — Revenue administration
  - CARTAC April 2011 — Revenue Mod./Forecasting
  - CARTAC May 2011 — PFM Reform Action Plan
- IDB financial relations and strategy
  - Active loans as of September 1, 2011: Total amount 113.4; Amount disbursed 70.9 (Transforming Education and Training; Supplementary Financing for the New Providence Transport Program).
  - Net flow projections and disbursements: Proj. 2011 net loan flow 46.1; proj. 2011 net cash flow 40.3 (millions USD).
  - Country Strategy (IDB 2010–2014) priority sectors: energy, water and sanitation, transport, and SME development; projected medium-term infrastructure needs of approximately US$1 billion.
- Statistical issues and data dissemination
  - Statistical data broadly adequate for surveillance; weaknesses remain.
  - Department of Statistics activities: 2010 census; GDP rebasing; CPI methodology updated (base year moved to 2010 from 1995); coverage expanded to include Abaco; planned bi-annual labor force surveys.
  - GDDS participation began in 2003; metadata posted February 14, 2003.
- Table of common indicators required for surveillance (as of September 28, 2011) lists latest observation dates and frequencies for key series (exchange rates, reserves, reserve/base money, broad money, central bank balance sheet, consolidated banking system balance sheet, interest rates, CPI, central government fiscal data, external current account, exports/imports, GDP, gross external debt, and others).

### Executive Board Assessment and Authorities’ Policies (summary)
- Executive Board (PIN No. 11/135, November 4, 2011) conclusions
  - Welcomed gradual recovery but noted unemployment remains high.
  - Identified downside risks: slower U.S. recovery, elevated international food and fuel prices, vulnerability to natural disasters.
  - Policy recommendations emphasized fiscal consolidation, revenue mobilization (including a broad-based consumption tax), expenditure restraint, strengthening public enterprises, enhancing fiscal transparency, building reserves, and intensifying financial sector monitoring.
  - Supported authorities’ request for an FSAP.
- Authorities’ policies and plans
  - Fiscal strategy: medium-term objective to rebuild buffers and eventual return to Government sector debt-to-GDP ratio of 40 percent; no specific near-term targets to preserve fiscal flexibility.
  - Revenue mobilization: launched e-government portal in July; revised 2011 Customs Management Act; created Tax Administration Division (TAD) within Ministry of Finance.
  - Public enterprises and SOE governance: capped direct subsidies to loss-making enterprises; water and sewerage reform with PPPs; renewable energy promotion.
  - Debt management: established Debt Management Committee (central bank, Ministry of Finance, Public Treasury) with Fund and IDB TA support.
  - Monetary policy and reserves: CBOB reduced discount rate by 75 basis points in June 2011; objective to ensure sustainable domestic credit under fixed exchange rate; continued efforts to develop formal reserve targets.
  - Non-bank supervision and financial infrastructure: CBOB to assume oversight for credit unions; planned domestic credit bureau within next 18 months.

*Source: THE BAHAMAS — 2011 ARTICLE IV REPORT (selected excerpts).*

### 1.  Selected Social and Economic Indicators _____________________________________________________ 19

### 1.  Selected Social and Economic Indicators

### Background
- The Bahamas comprises about 30 inhabited islands.
- The economy’s two main drivers are tourism and financial services.
- The onshore financial system has 276 banks and trust companies (eight commercial banks, with a strong presence of Canadian banks).
- Offshore operations are mostly conducted through International Business Corporations (IBCs) operating under the IBC Act, 2000.
- As of end-2007, total public sector debt was about 40 percent of GDP, mostly domestic.
- Standard and Poor’s reaffirmed The Bahamas’ sovereign credit rating as BBB+ with a stable outlook (May 2011). In August (2011), Moody’s affirmed an A3 bond rating but revised the outlook from stable to negative.

### Recent Economic Developments (summary of 2008–2010 developments)
- Growth and sectors
  - Real GDP contracted by about 1½ percent in 2008 and 5½ percent in 2009.
  - In 2010, real GDP grew by about one percent; rebound led by trade, hospitality, transport, and government services.
  - Construction and offshore financial services sectors continued to contract in 2010.
- Inflation and prices
  - Inflation remained subdued at 1½ percent (y-o-y) in 2010.
  - Food prices declined by over 1 percent.
  - Fuel and transportation prices rose by about 2½ percent.
- External sector and reserves
  - External current account deficit remained broadly stable at 11½ percent of GDP (2010).
  - Reserves were US$860 million at end-2010 (about 2½ months of next year’s imports of goods and services).
- Central government fiscal position (FY 2010/11)
  - Total revenues increased owing to sizeable one-off transactions related to stamp taxes on Baha Mar and transfer of ownership of the Bahamas Oil Refining Company (1½ percent of GDP).
  - Excluding large one-off transactions, revenues increased by about ½ percent of GDP.
  - Expenditure increased more than proportionately, including higher spending on goods and services.
  - Central government deficit rose to 4.7 percent of GDP.
  - Sale of 51 percent of Bahamas Telecommunications Company (about 2½ percent of GDP) eased financing pressures.
- Public debt
  - At end-2010, central government debt was 48 percent of GDP (up from about 34 percent two years earlier).
  - Total public debt reached almost 62 percent of GDP.
  - Domestic debt accounts for more than 80 percent of public debt; debt is mostly in variable rate instruments and held mainly by commercial banks, public corporations, and pension funds.
- Banking sector
  - Banks maintained overall capital-adequacy ratios well above the minimum requirement of 17 percent.
  - Non-performing loans (NPLs) rose above 10 percent (NPLs-to-total loans ratio over 10 percent) and provisioning to NPLs appears to be below peers.

### Outlook (near-term and medium-term projections and risks)
- Near-term (2011)
  - Real GDP projected to grow at about 2 percent in 2011, driven by tourism and construction activity.
  - Inflation projected to rise to about 2½ percent.
  - Overall balance of payments projected to record a surplus of about US$94 million owing to strong FDI and private capital inflows.
  - Staff estimates central government deficit would increase to about 5 percent of GDP by end-June 2012 and central government debt to about 50 percent of GDP (FY 2011/12 budget measures described).
- Monetary policy
  - Central bank lowered the discount rate to 4½ percent (from 5¼ percent) in June 2011.
- Medium-term (2012–2016)
  - Output growth expected to rise to 2½–3 percent in 2012–13, driven by tourism and new FDI projects (notably Baha Mar).
  - Baha Mar construction effects: during construction (2012–13), workforce could increase by up to 4,400 persons and US$750-900 million could be injected into the economy; project documents estimate 400,000 additional stay-over arrivals and direct tax revenues of about US$60 million (¾ percent of 2011 GDP) per year.
  - Growth thereafter projected to remain in the 2½–3 percent range with upside potential if key projects materialize.
  - Strengthened tourism receipts expected to help narrow external current account deficit to about 13 percent of GDP by end-2016.
  - Central government deficits expected to remain at almost 4½ percent of GDP per year, raising central government debt-to-GDP ratio to close to 56 percent and overall public debt to about 69 percent by 2016.
- Staff projection table highlights (in percent of GDP unless otherwise indicated)
  - Real GDP (2008–2016): -1.3, -5.4, 1.0, 2.0, 2.5, 2.7, 2.3, 2.5, 2.7
  - Inflation (average, 2008–2016): 4.4, 2.1, 1.0, 2.5, 2.0, 2.0, 2.0, 2.0, 2.0
  - Overall fiscal balance (central government, FY basis): -1.8, -4.5, -4.4, -4.7, -5.0, -4.4, -4.3, -4.3, -4.4
  - Central government debt (2008–2016): 32.6, 37.9, 45.4, 48.6, 49.9, 51.8, 53.4, 54.8, 55.9
  - External current account balance (2008–2016): -14.9, -11.4, -11.7, -17.1, -19.1, -20.2, -18.2, -15.2, -13.3
  - Gross international reserves (US$ millions, 2008–2016): 563, 816, 860, 955, 927, 975, 1,035, 1,154, 1,284
  - Reserves in months of next year's goods & services imports (2008–2016): 1.8, 2.6, 2.3, 2.3, 2.1, 2.2, 2.3, 2.5, 2.7
  - Note: Gross international reserves include an SDR allocation of US$178.9 million in September 2009.
- Downside risks
  - Slower-than-expected U.S. recovery could dampen tourism and economic activity.
  - External accounts sensitive to increases in international food and fuel prices.
  - Exposure to the real estate sector could reduce collateral values and increase bank vulnerability if recovery stalls.
  - Vulnerability to hurricanes and natural disasters; Hurricane Irene hit The Bahamas in August (impact relatively small).
  - Contingent liabilities from the failed insurance company CLICO and weak performance of non-financial public corporations.

### Box 1 — Expanding Tourism Potential: Challenges and Strategy (highlights)
- Geography and demographics
  - Archipelago of 700 islands and about 2,000 cays; total land mass about 14,000 square km over almost 260,000 square km of territorial waters.
  - 70 percent of population of 350,000 lives in New Providence.
- Tourism structure
  - New Providence accounts for 55–60 percent of tourist activity; model: large seaside resorts (e.g., Atlantis Resort).
  - Family Islands model: small boutique hotels and luxury private villas targeting wealthy tourists and second-home owners.
- Seasonality and market diversification
  - Capacity utilization ranges from near 100 percent in peak winter to less than 30 percent in late summer.
  - Strategy to diversify markets toward Latin America (Brazil, Argentina); attracted daily flights from Panama City hub.
  - Increasing South American arrivals could mitigate cyclical tourism revenue patterns.
- Developing the Family Islands
  - Main challenges: high per capita cost of infrastructure, utilities, and social services (including health).
  - Proposed solutions: satellite health units combined with efficient emergency travel systems; “magnet” resorts to attract jet services plus hubbing with smaller aircraft to feed nearby boutique hotels.
  - Large resorts could provide economies of scale for desalination, power generation, and enclave industries.
- Diversification efforts beyond tourism
  - Some outer islands (e.g., Andros) have large water and land resources suitable for agriculture.
  - Development of such activities requires rapid reduction in costs of doing business in The Bahamas.

### Policy Discussions — Consolidation Strategy (authorities’ stance)
- Authorities’ objectives
  - Strengthen fiscal performance and place public debt on a sustainable path through revenue and expenditure measures and improved debt management.
  - Commitments to revenue mobilization, improving the business environment, and strengthening financial system soundness.
- Revenue measures (authorities’ initiatives)
  - Improve tax administration: strengthen customs; consolidate collection of several taxes in one institution.
  - Introduce new procedures to reduce smuggling of tobacco products.
  - The FY 2011/12 budget contemplates centralizing collection of taxes (business, property, stamp, hotel occupancy, and casino) but also increases spending on new initiatives (e.g., introduction of e-government), extends tax holidays, and lifts the freeze on public wages from the prior year’s budget.

*Source: THE BAHAMAS — 2011 ARTICLE IV REPORT (selected excerpts).*

### introduction of a revamped business

### introduction of a revamped business license tax.

### Fiscal policy and public finances
- Authorities are:
  - Introducing time limits and transition arrangements for fiscal incentives provided under the Industries Encouragement Act.
  - Seeking to reduce transfers to public corporations, including by encouraging private-public-partnership arrangements.
  - Consolidating tax collection in one unit and planning to stabilize incentives.
  - Giving priority to greater coordination of debt management at the Ministry of Finance and the Central Bank.
- Staff recommendations and observations:
  - The medium-term strategy is welcomed but not sufficient; a stronger fiscal effort is needed to place the government debt-to-GDP ratio on a declining path over the medium term.
  - Priority should be given to revenue mobilization; the most dynamic sectors generate a small share of revenue and growth does not translate proportionately to higher fiscal revenues.
  - Reforms aimed at broadening the tax base, for example through the adoption of a domestic consumption tax, should be a key priority.
  - Time limits applied to the Industries Encouragement Act could be extended to other fiscal incentive regimes.
  - Staff urged early implementation of revenue reform (e.g., a consumption tax), warning that delays may result in additional external risks and fiscal pressures.
- Fiscal metrics and concerns (preserved exactly):
  - Government expenditure is projected to remain at about 20 percent of GDP over the medium term.
  - The government’s wage bill accounts for over 40 percent of revenues, and is projected to rise following the lifting of the wage freeze adopted in FY 2010/11.
  - Transfers to public enterprises are high, and interest costs are rising.
- Public enterprises:
  - Financial position of several public enterprises (including Bahamas Air, and the electricity and water and sewerage companies) appears to be weak.
  - Lack of timely information on the contribution of public enterprises to the overall fiscal stance is a vulnerability.
  - Several public enterprises are inefficient and require recurrent government transfers to operate.
  - A strategy to lower the drag of these enterprises on public finances (including through divestments) is urgently needed.
- Fiscal transparency improvements urged:
  - Improving revenue forecasting;
  - Preparing consolidated accounts for the public sector; and
  - Making public all tax incentives (including costs, main terms and conditions, and beneficiaries).

### Growth strategy
- Near-term outlook:
  - Near-term growth was likely to increase owing to the recovery of tourism and the start-up of large projects.
  - Real GDP in 2011 is projected at 2 percent, driven by the rebound of tourism and the launch of large investment projects.
- Government strategy components:
  - Growth-enhancing measures:
    - Increase airlift and expand coverage to the Family Islands, and boost cruise arrivals.
    - An aggressive program to increase FDI from Canada, the U.S., Latin America, and China.
    - Fostering the development of small- and medium-size enterprises.
  - Improving the business environment:
    - Measures to reduce red tape and streamline administrative procedures (including by launching the e-government system).
    - A job-readiness program aims to improve productivity.
  - Combating crime:
    - Providing greater resources to law enforcement, expanding the courts system, and strengthening the prosecutorial process.
- Staff views:
  - Welcomed the broad-based growth strategy and the lower reliance on fiscal incentives, noting the incentives model had not been effective in promoting sustained growth.
  - Suggested improving economic diversification and employment through innovation in high value-added downstream tourism products.
  - Noted the need for investment in public utilities to improve efficiency and provide adequate infrastructure to support the growth strategy.
- Notes from source footnotes:
  - Large projects include the development of the Baha Mar resort, expansion of existing resorts, and continuing the construction of the airport and road improvements.
  - A recent agreement with a low-cost U.S. carrier will increase airlift from states along the East coast of the U.S. to Grand Bahama.
  - The Bahamas ranked 77 of 183 countries in the Doing Business 2011 Report, down from 68 in 2010.

### External stability and exchange rate policy
- Exchange rate peg:
  - Agreement that the fixed exchange rate system has served The Bahamas well; authorities restated commitment to support the peg and continue building reserves.
- Reserves and policy rate context:
  - Recent decision to lower the policy rate was taken in the context of adequate reserves (about US$1,075 million or close to three months of imports) and low inflationary pressures.
- Assessment of exchange rate level:
  - Staff and authorities agreed that the exchange rate level remains broadly in line with medium-term fundamentals.
  - Macrobalance approach suggests projected medium-term current account deficit is close to the estimated current account “norm”.
  - Regressions suggest the current level of the real exchange is broadly in line with fundamentals, though results are subject to estimation shortcomings and sensitive to assumptions.
- Policy implications:
  - Given uncertainties from a weak global environment, staff noted the importance of investing in basic infrastructure and ensuring efficient delivery of basic utilities to attract revenue-producing FDI and enhance competitiveness.
- Footnote on exchange rate equations:
  - Key variables used include the oil balance, the fiscal balance, net foreign assets, and income growth.
- Authorities’ view:
  - Noted that higher FDI expected in coming years would raise growth and export potential over the medium to long term.

### Financial sector
- System soundness and vulnerabilities:
  - Capital adequacy ratios (CARs) at end-May 2011 were 26 percent, on average, well above the regulatory threshold.
  - Excess liquidity was about 20 percent.
  - Banks’ loan portfolios have been weakened by the slowdown in activity and represent a vulnerability.
- Macro-prudential and supervisory measures:
  - A CAR trigger of 14 percent on banks has been in place since the onset of the global crisis.
  - Since November 2009, banks have been required to seek central bank approval to distribute dividends.
  - Central bank requires a debt service-to-income limit of 45 percent, and a loan-to-value ratio cap of 85 percent on personal loans—measures that exist since 2004.
  - Establishment of a credit bureau, projected to start operating in early 2013, should help mitigate credit risk by collecting information on individuals’ borrowing and bill payment records.
- Ongoing supervision enhancements:
  - Central bank implemented an enhanced risk-based supervision framework and adopted special focus examinations (e.g., credit risk delinquency management).
  - Initiatives include:
    - Enhanced supervision of all large financial institutions;
    - Bringing credit unions under the purview of the central bank;
    - Drafting legislation to facilitate consolidated supervision across different financial sectors (including securities and insurance);
    - Participating in regional supervision efforts and coordinating with Canadian regulators.
  - An update assessment of the Bahamian financial system under the Financial Sector Assessment Program is scheduled in 2012.
- AML/CFT framework progress:
  - Guidelines amended to address enhanced customer due diligence requirements; strengthening internal controls, and compliance and audit procedures; improved record keeping for high-risk countries; and establishing conditions for third party introducers.
  - Central bank focused on ensuring the integrity of local governance and risk oversight arrangements in institutions under its purview given offshore sector control processes may occur outside the jurisdiction.
  - The Bahamas Compliance Commission is a supervisory body for groups of professionals that hold funds on behalf of clients and works closely with the Inspector of Financial and Corporate Service Providers.
- Resolution of CLICO-Bahamas:
  - Progress reported; settlement is now more likely following the favorable ruling regarding the Wellington Preserve in Florida.
  - Staff urged a prompt resolution that minimizes fiscal contingent liabilities.

### Staff appraisal (key conclusions)
- Economic outlook and risks:
  - The Bahamas economy has started to recover from the global financial crisis, but unemployment remains high.
  - Real GDP in 2011 is projected at 2 percent.
  - Medium-term growth outlook has improved compared to the 2010 Article IV staff report, but downside risks are high.
  - Domestic risks: delays in implementing fiscal and economic reforms needed to reverse rising debt, build buffers (including for natural disasters), and improve efficiency and competitiveness.
  - External risks: weaker-than-expected recovery in the United States could cap the rebound of tourism and delay large FDI tourism projects.
- Policy priorities:
  - Fiscal consolidation should be the main policy priority to place the public debt-to-GDP ratio on a sustainable path and to build buffers, including reserves, to mitigate natural disasters and external shocks.
  - Strengthen revenue mobilization through improved tax administration and lower tax expenditures.
  - Early implementation of revenue reform (e.g., a consumption tax) is essential.
  - Expenditure restraint is needed, especially on wages and transfers.
  - Strengthen the weak financial position of public enterprises and enhance fiscal transparency.
- Growth and exchange rate:
  - The authorities’ growth strategy is broadly appropriate; reducing obstacles to doing business is promising and lower reliance on fiscal incentives is welcomed.
  - Further improving basic infrastructure, particularly energy and water provision, and developing high value-added downstream tourism products will be key to achieving higher growth rates.
  - The fixed exchange rate system continues to serve the country well; staff analysis suggests the level of the exchange rate remains broadly in line with medium-term fundamentals and authorities are committed to maintaining the peg and building reserves.
- Financial sector monitoring:
  - Recent measures to strengthen supervision and macro-prudential policies should enhance resilience.
  - Planned establishment of a credit bureau and bringing credit unions under central bank purview are welcome.
  - High level of non-performing loans and limited provisioning call for further intensifying monitoring of financial institutions.

*2011 ARTICLE IV REPORT THE BAHAMAS INTERNATIONAL MONETARY FUND*

### 33.      Staff recommends that the next Article

### _cr11338 - 33.      Staff recommends that the next Article

### Recommendation
- Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Recent macroeconomic developments and outlook
- Real GDP growth: rebounds noted with "BHS real GDP growth (percent)" series shown; staff projection baseline shows Real GDP growth: 2.5 (2016), 2.0 (2012), 2.7 (2013); baseline path in Table 8 Key Macroeconomic Assumptions: 2.5, 1.4, -1.3, -5.4, 1.0, 2.0, 2.5, 2.7, 2.3, 2.5, 2.7 (2007–2016 sequence as shown).
- Tourism and output: "Tourism and output growth have rebounded, despite continued weakness in U.S. labor market."
- Air arrivals and U.S. labor linkages: charts indicate BHS air arrivals (percent change) and USA unemployment rate (RHS) co-movement.

### External sector: current account, reserves, and capital flows
- Current account balance: broad stability but large deficit—calendar-year current account balance figures (Table 5): -16.4, -14.9, -11.4, -11.7, -17.1, -19.1 (2005–2010 sequence shown in Table 1) and projections (Table 5, in millions of U.S. dollars): -1,229 (2008), -894 (2009), -900 (2010), -1,383 (2011), -1,637 (2012), -1,816 (2013), -1,706 (2014), -1,497 (2015), -1,370 (2016).
- Current account as percent of GDP (Table 5): -14.9 (2008), -11.4 (2009), -11.7 (2010), -17.1 (2011), -19.1 (2012), -20.2 (2013), -18.2 (2014), -15.2 (2015), -13.3 (2016).
- Trade and services composition (Table 5):
  - Goods (trade balance) in millions USD: -2,243 (2008), -1,825 (2009), -1,888 (2010), -2,284 (2011), -2,613 (2012), -2,852 (2013), -2,832 (2014), -2,782 (2015), -2,780 (2016).
  - Travel (net) in millions USD: 1,840 (2008), 1,689 (2009), 1,831 (2010), 1,914 (2011), 2,098 (2012), 2,227 (2013), 2,340 (2014), 2,504 (2015), 2,680 (2016).
- Reserves and coverage:
  - Gross international reserves (end-period, millions USD) (Table 5): 563 (2008), 816 (2009), 860 (2010), 955 (2011), 927 (2012), 975 (2013), 1,035 (2014), 1,154 (2015), 1,284 (2016).
  - Reserves coverage in months of next year's G&S imports (Table 5): 1.2 (2008), 1.8 (2009), 2.6 (2010), 2.3 (2011), 2.3 (2012), 2.1 (2016 indicated).
  - Figure caption: "while capital inflows have helped keep reserve coverage stable."

### Exchange rate assessment
- Under the peg and with strong real linkages, the Bahamian REER has tracked that of the U.S. dollar.
- REER position: "currently, broadly in line with its equilibrium value." (Figure 3)
- Medium-term current account: "projected to stabilize over the medium term" and "converge to the estimated current account norm."

### Fiscal developments and outlook
- Revenue and expenditure trends:
  - "Revenue has started to recover, ... but expenditure has also increased."
  - Central government revenue and grants (percent of GDP, Table 3): 16.5, 16.8, 17.8, 17.5, 17.8, 18.0, 18.1, 18.1 (FY08/09–FY15/16 sequence shown).
  - Total expenditure (percent of GDP, Table 3): 21.0, 21.2, 22.4, 22.5, 22.2, 22.3, 22.4, 22.5 (FY08/09–FY15/16).
- Fiscal balances and debt:
  - Overall balance (percent of GDP, Table 3): -4.5 (FY08/09), -4.4 (FY09/10), -4.7 (FY10/11), -5.0 (FY11/12), -4.4 (FY12/13), -4.3 (FY13/14), -4.3 (FY14/15), -4.4 (FY15/16).
  - Primary balance (percent of GDP, Table 3 memorandum): -2.6, -2.1, -2.2, -2.6, -2.0, -1.8, -1.7, -1.6 (FY08/09–FY15/16).
  - Central government debt (percent of GDP, Table 3): 37.9, 45.4, 48.6, 49.9, 51.8, 53.4, 54.8, 55.9 (FY08/09–FY15/16).
  - Table 2 nominal central government debt path (millions B$): 3,044 (FY08/09), 3,520 (FY09/10), 3,834 (FY10/11), 4,151 (FY11/12), 4,538 (FY12/13), 4,900 (FY13/14), 5,265 (FY14/15), 5,631 (FY15/16).
- Staff assessment: "Fiscal balances remain weak, ... and central government debt remains on an upward path."

### Tax revenue and regional comparison
- Tax revenue ratio: "The Bahamas' tax revenue ratio is below the regional average... and is lower than all regional peers." (Figure 4)
- Tax revenue by source: "Tax revenues are highly dependent on trade... in contrast with its regional peers." (Figure 4)
- Tax revenue (percent of GDP, Table 3): Tax revenue 14.1, 14.3, 16.3, 16.1, 16.5, 16.7, 16.8, 16.8 (FY08/09–FY15/16).

### Financial sector: credit, asset quality, capital, profitability
- Private sector credit: "Private sector credit remains stagnant" (figure caption).
  - Credit to private sector (Table 6, annual percent change): 5.1, 0.9, -0.4, 6.2, 6.8 (2008–2012 series shown).
  - Credit to the private sector (in B$) (Table 6): 6,537 (2008), 6,596 (2009), 6,573 (2010), 6,982 (2011), 7,458 (2012 projection).
- Nonperforming loans and provisioning:
  - Loan arrears: "loan arrears have continued to increase amidst falling provisioning." Figure shows loan arrears shares rising, and "Provisions to NPLs (RHS)" falling.
  - NPLs to total loans (regional, Figure 5): BHS NPLs rose sharply following the recession; Table 7 NPLs to total loans ratio: 4.2, 4.3, 6.1, 9.4, 10.5 (2006–2010 sequence).
  - Provisions to NPLs (Table 7): 54.7, 47.9, 46.0, 37.1, 41.9 (2006–2010 sequence).
  - Staff note: "As in other countries, NPLs rose sharply following the recession... but provisions are lower than all regional peers."
- Capital adequacy and profitability:
  - Capital to risk-weighted assets ratio (regional comparison Figure 5 / Table 7): 24.8, 24.9, 23.5, 26.1, 25.5 (2006–2010 sequence) — "CARs remain high, as in the rest of the region, partly due to large holdings of government papers... while profitability is stable."
  - Return on assets (regional Figure 5): shown as stable; Table 7 pre-tax net revenue percent of net worth: 20.4, 18.6, 14.8, 10.2, 9.7 (2006–2010).

### Vulnerabilities and debt sustainability
- Public debt trajectory (Table 4 and Table 8):
  - Central government debt (percent of GDP, Table 4): 29.0 (2005), 29.9 (2006), 31.7 (2007), 33.6 (2008), 42.5 (2009), 48.3 (2010).
  - Total public sector (percent of GDP, Table 4): 36.8 (2005), 38.9 (2006), 40.4 (2007), 44.1 (2008), 54.3 (2009), 61.8 (2010).
- Debt-stabilizing primary balance (Table 8): Debt-stabilizing primary balance noted as 0.1 (row label in Table 8 heading area); public sector debt-to-revenue ratio path: 184.7, 198.0, 192.7, 249.3, 297.1, 276.8, 288.9, 294.1, 299.7, 306.4, 311.2 (2006–2016 sequence).
- Change in public sector debt (Table 8): 1.0, 1.8, 1.9, 9.0, 5.8, 0.6, 2.0, 1.7, 1.5, 1.4, 0.8 (2006–2016).
- Identified debt-creating flows and primary deficit (Table 8):
  - Primary deficit (percent of GDP): -0.3, 1.0, 0.4, 3.1, 2.4, 2.4, 2.3, 1.9, 1.7, 1.7, 1.6 (2006–2016).
  - Revenue and grants (percent of GDP): 16.2, 16.0, 17.4, 17.1, 16.3, 17.7, 17.6, 17.9, 18.1, 18.1, 18.1 (2006–2016).
- Public sector gross financing need (Table 8): in percent of GDP: 2.5, 3.8, 3.3, 9.3, 6.2, 7.5, 5.2, 5.1, 5.3, 5.3, 5.8 (2006–2016) and in millions USD: 199.8, 316.0, 274.5, 722.1, 480.2, 602.1, 441.1, 462.1, 500.4, 521.6, 594.0 (2006–2016).
- Stress tests and bound tests (Figures 6–7): baseline and shock scenarios presented (growth shock, primary balance shock, interest rate shock, combined shock, 30 percent depreciation, contingent liabilities). Representative averages in boxes: Growth shock box shows Baseline 56, Growth shock 64; Primary balance shock box shows Baseline 56, PB shock 59; Interest-rate shock box shows Baseline 56, i-rate shock 59 (figure annotations).

### Key social and economic indicators (selected exact figures from Table 1)
- GDP (US$ millions), 2010: 7,700
- GDP per capita (US$), 2010: 21,773
- Population (thousands), 2010: 353.7
- Life expectancy at birth (years), 2010: 74.4
- Adult literacy rate, 15 & up (percent), 2007: 95.643

### Staff-flagged risks and priorities (implied by data and captions)
- Rising loan arrears and declining provisioning increase banking-sector vulnerability despite high CARs.
- Weak fiscal balances and rising central government debt point to the need for fiscal consolidation to stabilize the debt path.
- Heavy reliance of tax revenue on international trade exposes revenue to trade fluctuations; tax ratio below regional peers suggests room for revenue mobilization.
- External deficits and persistent gross financing needs underscore reliance on capital inflows and the importance of maintaining reserve coverage.

*Source: 2011 Article IV Report — The Bahamas (staff report excerpts and tables).*

### ANNEX I. THE BAHAMAS—FUND RELATIONS

### ANNEX I. THE BAHAMAS—FUND RELATIONS

### Membership and Quota
- Membership: Joined August 21, 1973; Article VIII.
- Quota (General Resources Account): 130.30 SDR Million (100.00 percent).
- Fund holdings of currency: 124.04 SDR Million (95.20 percent of quota).
- Reserve position in Fund: 6.26 SDR Million (4.80 percent of quota).
- SDR Department net cumulative allocation: 124.41 SDR Million (100.00 percent).
- SDR Department holdings: 114.13 SDR Million (91.73 percent of allocation).

### Outstanding Obligations and Projected Payments
- Outstanding Purchases and Loans: None.
- Latest Financial Arrangements: None.
- Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming Principal / Charges/Interest:
    - 2011: 0.01
    - 2012: 0.03
    - 2013: 0.03
    - 2014: 0.03
    - 2015: 0.03
  - Total:
    - 2011: 0.01
    - 2012: 0.03
    - 2013: 0.03
    - 2014: 0.03
    - 2015: 0.03

### Exchange Rate and Article IV Consultations
- Exchange rate arrangement: Conventional fixed peg; Bahamian dollar pegged to the U.S. dollar at B$1 per US$1.
- Article VIII: The Bahamas has accepted the obligations of Article VIII, Sections 2, 3, and 4 and maintains an exchange system free of restrictions on payments and transfers for current international transactions.
- Exchange restrictions: No changes since the last Article IV Consultation.
- Last Article IV Consultation: Concluded on October 27, 2010. The Bahamas is on a 12-month consultation cycle.

### Technical Assistance (department — dates — purpose)
- STA 2008/2009 — Consumer Price Index
- MCM/CARTAC August 2009 — Banking supervision
- FAD September 2009 — Revenue administration
- MCM/CARTAC December 2009 — Credit Union supervision
- STA January 2010 — Consumer Price Index
- STA January 2010 — Export/Import Price Index
- CARTAC March 2010 — Macroeconomic forecasting
- STA May 2010 — Consumer Price Index
- CARTAC January 2011 — CPI Revision
- CARTAC April 2011 — Revenue Mod./Forecasting
- CARTAC May 2011 — PFM Reform Action Plan
- Resident Representative: None

### Financial Relations with the Inter-American Development Bank (IDB)
- Active Loans as of September 1, 2011 (U.S. dollar millions):
  - Transforming Education and Training
    - Approval Date: 11/30/2005
    - Amount: 13.4
    - Amount Disbursed: 5.9
  - Supplementary Financing for the New Providence Transport Program
    - Approval Date: 5/22/2008
    - Amount: 100.0
    - Amount Disbursed: 65.0
  - Total: 113.4 amount; 70.9 disbursed
- Net Flow of IDB Convertible Currencies (U.S. dollar millions):
  - Loan Approval:
    - 2008: 100.0
    - 2009: 0.0
    - 2010: 0.0
    - Proj. 2011: 121.0
  - Loan Disbursements:
    - 2008: 16.2
    - 2009: 24.6
    - 2010: 32.8
    - Proj. 2011: 55.2
  - Repayments (principal):
    - 2008: 6.1
    - 2009: 7.9
    - 2010: 8.6
    - Proj. 2011: 9.4
  - Net Loan Flow:
    - 2008: 10.1
    - 2009: 16.7
    - 2010: 24.2
    - Proj. 2011: 46.1
  - Interest and Charges:
    - 2008: 4.9
    - 2009: 5.8
    - 2010: 5.6
    - Proj. 2011: 5.8
  - Net Cash Flow:
    - 2008: 5.2
    - 2009: 10.9
    - 2010: 18.6
    - Proj. 2011: 40.3

- Recent Country Strategy (IDB 2010–2014):
  - Four priority sectors: energy, water and sanitation, transport, and small and medium enterprises development.
  - Emphasis on infrastructure development given projected medium-term needs of approximately US$1 billion.
  - Program of technical support for adaptive capacity and resilience to climate change.
  - Focus on enhancing competitiveness of smaller-sized local enterprises to support increased participation in international trade agreements.
  - Expectation that tourism-related projects will re-emerge, creating opportunities for the Non-Sovereign-Guaranteed (NSG) loans window.
  - Country Strategy Update planned in 2012 to include at least two additional priority sectors: public finances, and the protection and improvement of social services.

### Statistical Issues and Data Dissemination
- General assessment: Statistical data are broadly adequate for surveillance purposes, but weaknesses remain.
- Data production:
  - Central Bank: Produces annual, quarterly, and monthly reports on macroeconomic developments, monetary and fiscal data; main source of economic information.
  - Public corporations: Operations not compiled into a consolidated set of public sector accounts, although their debt is included in public debt data.
- Department of Statistics (DoS) activities:
  - 2009–2010 focus: Preparation and execution of the 2010 census.
  - Initiatives to improve national accounts, including rebasing GDP.
  - CPI methodology updated with CARTAC technical assistance:
    - Base year moved to 2010 from 1995.
    - Additional categories introduced; higher weights for some items including transport and communication.
    - Coverage expanded to include the island of Abaco in addition to New Providence and Grand Bahama.
  - New export-import price indices for goods and major services developed with CARTAC assistance.
  - Procedures for systematic re-sampling and re-weighting modified.
  - Planned activities: Producing and disseminating comprehensive census data and implementing bi-annual labor force surveys.
- GDDS participation: Began in 2003; metadata posted on the Fund’s Dissemination Standards Bulletin Board on February 14, 2003.

### Table of Common Indicators Required for Surveillance (As of September 28, 2011)
- Exchange Rates: Date of Latest Observation 31/08/11; Date Received 09/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 31/08/11; 09/11; M; M; M.
- Reserve/Base Money: 30/06/11; 09/11; M; M; M.
- Broad Money: 30/06/11; 09/11; M; M; M.
- Central Bank Balance Sheet: 30/06/11; 09/11; M; M; M.
- Consolidated Balance Sheet of the Banking System: 30/06/11; 09/11; M; M; Q.
- Interest Rates: 30/06/11; 09/11; M; M; M.
- Consumer Price Index: 05/11; 09/11; M; M; M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: NA; NA; NA; NA; NA.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: 31/03/11; 07/11; Q; Q; Q.
- Stocks of Central Government and Central Government-Guaranteed Debt: 30/06/11; 09/11; Q; Q; Q.
- External Current Account Balance: 03/11; 09/11; Q; Q; Q.
- Exports and Imports of Goods and Services: 03/11; 09/11; Q; Q; Q.
- GDP/GNP: 2010; 07/11; A; A; A.
- Gross External Debt: 30/06/11; 09/11; Q; Q; Q.
- International Investment Position: NA; NA; NA; NA; NA.

Notes included in table:
- Definitions and coverage details for reserve assets, interest rates, financing composition, general government definition, debt composition, and international investment position.
- Frequency codes: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Public Information Notice — Executive Board Conclusion (PIN No. 11/135, November 4, 2011)
- IMF Executive Board concluded the 2011 Article IV consultation with The Bahamas on November 2, 2011.
- Economic background (2010):
  - Real GDP grew by about 1 percent following a sharp recession in 2008 and 2009.
  - Recovery driven by trade, hospitality, transport, and government services; construction and offshore financial services sectors continued to contract.
  - Inflation: 1.5 percent.
  - External current account deficit: 11.5 percent of GDP.
  - Exports rebounded; non-oil import growth remained subdued.
  - International reserves: US$860 million at end-2010 (about... [text truncated in source]).

*ANNEX I. THE BAHAMAS—FUND RELATIONS (As of September 30,2011)*

### 2.5 months of next year’s imports of goods and services).

### _cr11338 - 2.5 months of next year’s imports of goods and services)

### Fiscal developments and public debt
- Central government deficit rose to 4.7 percent of GDP in Fiscal Year 2010/11 (from 4.4 percent in 2010).
- Total revenues increased owing to large one-off transactions, but expenditure—especially current spending—increased more than proportionately.
- Sale of 51 percent of the shares of the Bahamas Telecommunications Company (about 2.5 percent of GDP) eased financing pressures.
- Government debt-to-GDP exceeded 48 percent of GDP by mid-2011.
- The bulk of government debt is held domestically by commercial banks, public corporations, and pension funds.
- Medium-term projection under current policies: central government deficit projected to remain at about 4.5 percent of GDP.

### Financial sector soundness and risks
- Banks maintained high overall capital-adequacy ratios (well above the minimum requirement) and prudent levels of provisioning.
- Non-performing loans to total loans rose above 10 percent due to the severe economic downturn.
- Authorities adopted macro-prudential policies and strengthened supervision across sectors and regionally.
- Planned measures and requests:
  - Request for a Financial Sector Assessment Program (FSAP).
  - Establishment of a credit bureau within the next 18 months.
  - Bringing credit unions under central bank oversight in the coming months.
- Supervisory enhancements:
  - More rigorous and frequent stress testing for commercial banks.
  - A systemic risk surveillance committee at the Central Bank of The Bahamas (CBOB).
  - Strengthened insurance and securities legislation: September 2011 insurance legislation; revised 2011 securities legislation.

### Outlook and risks
- Real GDP growth expected to hover around 2.5-3 percent per year.
- Risks to the outlook are tilted to the downside because of uncertainties about the pace of the global recovery and world commodity prices.
- Increased economic activity and improvements in regulatory and supervisory frameworks expected to contain financial sector risks.

### Executive Board assessment (summarized)
- Welcomed gradual recovery but noted unemployment remains high.
- Downside risks identified: slower-than-expected U.S. recovery, elevated international food and fuel prices, vulnerability to natural disasters.
- Policy recommendations emphasized:
  - Steadfast implementation of reforms to place public debt on a sustainable path, build fiscal buffers, and enhance medium-term growth prospects.
  - Strengthen revenue mobilization by improving tax administration and reducing tax expenditures.
  - Consider revenue reforms, such as a broad-based consumption tax, to improve debt dynamics.
  - Exercise expenditure restraint, strengthen financial position of public enterprises, and enhance fiscal transparency.
  - Continue close monitoring of the current account and build foreign exchange reserves.
  - Intensify monitoring of financial institutions in light of high non-performing loans and limited provisioning.
  - Support for authorities’ request for an FSAP.

### Authorities’ policies and plans (statement by Executive Director and Advisor)
- Fiscal strategy:
  - Medium-term objective: rebuild buffers used during the recession; desirable eventual return to Government sector debt-to-GDP ratio of 40 percent.
  - No specific near-term targets/timelines for debt reduction to preserve fiscal flexibility.
  - Prepared to take additional measures to contain recurrent spending and postpone low priority investments if downside risks materialize.
- Revenue mobilization measures:
  - Targeting broad base reforms to strengthen compliance and enforcement.
  - Launched e-government portal in July (year implied 2011) to increase efficient interaction with taxpayers.
  - Revised 2011 Customs Management Act to modernize customs collection.
  - Creation of a Tax Administration Division (TAD) within the Ministry of Finance to manage non-customs revenue; plan for TAD to evolve into a more autonomous body over medium to longer term.
  - Aim to strengthen real property tax compliance and streamline tax concessions with IMF and IDB TA guidance.
- Public enterprises and SOE governance:
  - Direct subsidies to loss-making enterprises capped at reduced levels in last two budgets.
  - Water and Sewerage Corporation reform with public-private partnerships to achieve financial viability.
  - Promotion of competitive renewable energy sources (wind, solar and geothermal) to reduce external oil exposure.
  - Under amended Financial Administration and Audit Act, every public sector entity must prepare an annual report with audited financial statements for tabling in Parliament.
  - Push for more frequent and consolidated monitoring using the 2001 GFS compilation methodology.
- Debt management:
  - Established a Debt Management Committee (central bank, Ministry of Finance, Public Treasury) to propose strategic policies and monitor debt operations.
  - Both the Fund and IDB to provide technical assistance to strengthen the committee.
- Monetary policy and reserves:
  - Objective: ensure domestic credit trends are sustainable under the fixed exchange rate and very open current account.
  - June 2011 decision: CBOB reduced the discount rate by 75 basis points to signal support for broader private sector participation in the recovery.
  - Macro-prudential measures to manage credit expansion and recovery in asset quality.
  - Continued efforts to develop appropriate and more formal targets for reserves.
- Non-bank financial supervision:
  - CBOB to assume oversight for credit unions; consolidation of supervision for other non-bank activities into a second regulator.
  - Strengthening of insurance supervision and enforcement powers for securities.
- Financial infrastructure:
  - Pending establishment of a domestic credit bureau within the next 18 months to enhance risk management and improve pricing of private credit.

### Growth strategies and structural measures
- Focus on boosting medium-term growth potential and diversifying the economic base exploiting archipelagic geography.
- Key elements:
  - Improve business environment and infrastructure.
  - Modernize government service delivery.
  - Invest in public infrastructure and education.
  - Emphasize labor force productivity.
- Specific initiatives:
  - April 2011 privatization of majority ownership in the state-owned telecommunications company.
  - IDB-assisted framework to provide targeted support for SMEs, emphasizing entrepreneurial and business management skills over subsidized financing.
  - Transitional on-the-job skills enhancement project and direct financing resources for startup micro-enterprises; combined cost about 0.3% of GDP.

### Selected economic indicators (highlights from table)
- Real GDP: 2008 -1.3; 2009 -5.4; 2010 1.0; 2011 2.0 (Prel./Proj. labels as in table).
- Nominal GDP: 2008 -1.0; 2009 -5.3; 2010 -1.3; 2011 4.8.
- Consumer price index (annual average): 2008 4.4; 2009 2.1; 2010 1.0; 2011 2.5.
- Unemployment rate (in percent): 2008 8.7; 2009 14.2; 2011 13.7 (2009 figure based on May survey).
- Credit to the nonfinancial public sector: 2008 16.1; 2009 9.3; 2010 39.2; 2011 15.3.
- Credit to the private sector: 2008 5.1; 2009 0.9; 2010 -0.4; 2011 6.2.
- Exports of goods and services: 2008 2.5; 2009 -14.7; 2010 4.4; 2011 7.3.
- Travel receipts (gross): 2008 -2.2; 2009 -10.0; 2010 6.7; 2011 4.5.
- Imports of goods and services: 2008 1.5; 2009 -18.9; 2010 1.1; 2011 9.7.
- Central government (percent of GDP, fiscal year basis) — Revenue and grants: 2008 16.5; 2009 16.8; 2010 17.8; 2011 17.5.
- Central government — Current expenditure: 2008 17.7; 2009 18.0; 2010 19.4; 2011 19.5.
- Central government — Capital expenditure and net lending: 2008 3.3; 2009 3.2; 2010 3.0; 2011 2.9.
- Central government — Primary balance: 2008 -2.6; 2009 -2.1; 2010 -2.2; 2011 -2.6.
- Central government — Overall balance: 2008 -4.5; 2009 -4.4; 2010 -4.7; 2011 -5.0.
- Central government debt: 2008 37.9; 2009 45.4; 2010 48.6; 2011 49.9.
- Current account balance: 2008 -14.9; 2009 -11.4; 2010 -11.7; 2011 -17.1.
- Change in net international reserves (increase -): 2008 -1.4; 2009 -3.2; 2010 -0.6; 2011 -1.2.
- External public debt (end of period): 2008 5.4; 2009 9.8; 2010 11.9; 2011 11.9.
- Gross international reserves (end of period; millions of U.S. dollars): 2008 563; 2009 816; 2010 860; 2011 955.
- Reserves in months of next year's G&S imports: 2008 1.8; 2009 2.6; 2010 2.3; 2011 2.3.
- Reserves in percent of reserve money: 2008 87; 2009 117; 2010 104; 2011 106.
- External debt-service ratio (percent of exports of goods and services): 2008 6.6; 2009 25.4; 2010 11.5; 2011 5.7.
- GDP (in millions of Bahamian dollars): 2008 8,239; 2009 7,806; 2010 7,700; 2011 8,074.

### Conclusion (authorities’ view)
- Authorities will remain alert to changing external conditions and maintain disciplined fiscal policies while pursuing public financial management reforms.
- Continue policy thrusts to diversify and strengthen growth potential and uphold initiatives to bolster financial sector stability.
- Authorities value ongoing technical assistance from the Fund and other IFIs and the constructive policy dialogue.

*Excerpted from IMF staff report and statement by The Bahamas Executive Director and Advisor (November 2, 2011).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11338.pdf_