## _cr15203 ## Source details **Canonical URL:** [_cr15203](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15203.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15203.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15203.pdf.json) --- ### Recent economic developments - Real GDP expanded by an estimated 1 percent in 2014. - Air arrivals grew by almost 5 percent in 2014; applied room rates improved by 7 percent. - Inflation rose to 2.2 percent in January 2015 (1.2 percent in December 2014), with VAT imposition offsetting declining oil prices. - Unemployment stood at 15.7 percent in November 2014. - Fiscal outcomes: - Fiscal deficit in FY 2013/14 (July to June) is estimated to have narrowed to 3.3 percent of GDP (from 5.4 percent). - Revenue was lower-than-budgeted, but a substantial reduction in current spending, including on wages and salaries, and on goods and services resulted in an overall fiscal deficit below budget target. - Debt-GDP-ratio is estimated to have reached 61 percent in FY2013/14 from 56 percent in FY2012/13. - Key public enterprises continuing to weigh on finances: Bahamasair, Bahamas Electricity Corporation (BEC), Water and Sewerage Corporation (WSC). - External sector and reserves: - External current account deficit surged to 22 percent of GDP in 2014, reflecting large import components of the Baha Mar resort project. - Gross international reserves totaled US$839 million at end-March 2015, equivalent to 2.3 months of next year’s projected imports of goods and services. - Reserves reflect, in part, a net purchase of US$175 million from the government following an external bond placement early last year. - Financial sector: - Nonperforming loans were 16 percent of total loans overdue by 90 or more days in March 2015. - Net domestic assets declined by 2.6 percent through December 2014; private sector credit fell back to its 2009 level. - Banking system’s end–2014 capital adequacy was in excess of 33 percent of risk-weighted assets (central bank target: 17 percent). - Liquid/total asset ratio was 23 percent at end–2014. - In October 2014, government established a special purpose company to take over non-performing commercial loans (US$100 million, 1.1 percent of GDP) of a weak state-owned bank. ### Macroeconomic outlook and risks - Growth projections and drivers: - Growth expected to strengthen over 2015–16 with improvement in U.S. activity and the opening of Baha Mar. - Potential GDP growth estimated at about 1½ percent over the medium term. - Full opening of Baha Mar and two smaller projects would increase hotel room inventory by about 20 percent. - Beyond 2016, growth tapers off as U.S. growth decelerates and base effects from Baha Mar fade. - Inflation and VAT impact: - VAT implementation early 2015 would add an estimated 2½ percentage points to the CPI. - Inflation is expected to remain low over the medium term. - External balances: - Over the medium term, external current account deficit would return to single digits as construction-related outflows are anticipated to be replaced by a rise in travel services receipt. - Risks: - Risks to the outlook are tilted to the downside with significant structural impediments including labor market and energy sector constraints. - Without structural reforms, significantly higher growth than currently projected will be required to absorb new entrants to the labor force and reduce unemployment to single digits over the medium term. - Significant risk that Baha Mar could cannibalize arrivals to other Bahamian destinations unless structural challenges are addressed. ### Executive Board / Directors' assessment and policy advice - Overall assessment: - Directors noted the economy is recovering but the outlook remains challenging; growth expected to remain below pre-global crisis levels and the current account deficit remains elevated. - Structural policy priorities: - Finalize and implement the National Development Program (NDP) to accelerate medium-to-long-term economic and social development, including diversification. - Implement structural reforms to strengthen competitiveness, raise potential growth, and lower unemployment. - Active labor market policies: build on existing training programs and placement services, ease restrictions on labor mobility, enhance efficiency of labor market regulations and institutions, and increase investment in human capital. - Step up reforms of state-owned enterprises, in particular in the energy sector. - Fiscal and external policy advice: - Continue fiscal consolidation and steadfast implementation of the VAT to rebuild buffers and place public debt on a declining path. - Continue revenue reforms, including strengthening tax administration. - Rationalize current expenditures in the context of a medium–term budget framework. - Rebuild international reserves and fiscal buffers to sustain macroeconomic stability. - Financial sector advice: - Continue financial sector reforms, including planned introduction of a new credit bureau. - Continue efforts to strengthen financial sector regulation and supervision. - Adopt policies to address persistently high non-performing loans to allow the banking system to play a more effective role in supporting growth. - Exchange rate policy: - Directors generally agreed the exchange rate peg has continued to serve The Bahamas well. - To support the peg going forward, structural reforms to improve competitiveness are important to avoid placing an excessive burden on fiscal policy. ### Key statistics (selected, as reported) - Real GDP growth: 0.6 (2011), 2.2 (2012), 0.0 (2013), 1.0 (2014), 1.8 (2015), 2.8 (2016) - Nominal GDP: -0.3 (2011), 4.4 (2012), 2.4 (2013), 0.9 (2014), 5.0 (2015), 4.1 (2016) - Consumer price index (annual average): 3.2 (2011), 2.0 (2012), 0.4 (2013), 1.2 (2014), 2.1 (2015), 1.5 (2016) - Unemployment rate: 15.9 (2011), 14.4 (2012), 15.8 (2013), 15.0 (2014), 14.8 (2015), 13.9 (2016) - Saving rate (percent of GDP): 12.4 (2011), 10.0 (2012), 9.3 (2013), 6.9 (2014), 8.3 (2015), 10.9 (2016) - Investment rate (percent of GDP): 27.5 (2011), 28.3 (2012), 27.0 (2013), 28.8 (2014), 20.8 (2015), 19.2 (2016) - Central government revenue and grants (percent of GDP): 18.1 (2011), 17.9 (2012), 16.3 (2013), 17.1 (2014), 18.4 (2015), 18.8 (2016) - Central government expenditure (percent of GDP): 21.9 (2011), 22.0 (2012), 21.7 (2013), 20.5 (2014), 21.4 (2015), 20.9 (2016) - Central government overall balance (percent of GDP): -3.8 (2011), -4.3 (2012), -5.4 (2013), -3.3 (2014), -3.0 (2015), -2.1 (2016) - Primary balance (percent of GDP): -1.1 (2011), -2.0 (2012), -3.0 (2013), -0.8 (2014), -0.1 (2015), 0.6 (2016) - Central government debt (percent of GDP): 45.0 (2011), 48.4 (2012), 56.3 (2013), 60.9 (2014), 63.0 (2015), 63.2 (2016) - Current account balance (percent of GDP): -15.1 (2011), -18.3 (2012), -17.7 (2013), -21.9 (2014), -12.5 (2015), -8.3 (2016) - Gross international reserves (end of period; millions of U.S. dollars): 885 (2011), 810 (2012), 742 (2013), 788 (2014), 820 (2015), 886 (2016) - Reserves in months of next year's G&S imports: 2.2 (2011), 2.0 (2012), 1.8 (2013), 2.2 (2014), 2.2 (2015), 2.3 (2016) - GDP (in millions of Bahamian dollars): 7,890 (2011), 8,234 (2012), 8,432 (2013), 8,511 (2014), 8,939 (2015), 9,305 (2016) ### Risks overview and structural impediments - Spillover risks stem mainly from the U.S. economy via trade and financial channels; oil price shocks are also important. - Potential adverse drivers identified: - Normalization of U.S. monetary policy strengthening the dollar and worsening competitiveness vis-à-vis non-U.S. dollar pegged competitors. - Adverse U.S. economic shocks, weaker-than-projected global activity, and disappointing Baha Mar performance. - Offsetting/uncertain effects: - Winding down of Baha Mar construction and lower oil prices expected to reduce imports going forward. - Policy credibility and fiscal risks: - VAT implementation setbacks and weak fiscal consolidation could undermine policy credibility, heighten long-term debt sustainability risks, and adversely affect the country’s credit rating. - Financial stability tail risks: - Persistently elevated NPL ratio poses a tail–risk threat. - Geopolitical risk: - U.S./Cuban rapprochement poses an un-quantified risk to the tourism-based model. ### Reigniting strong and inclusive medium-term growth - Key structural challenges: - Need to attract sufficient tourist demand to absorb large impending increase in supply. - Labor market rigidities, persistent high unemployment, skills mismatches. - Significant impediments to SME growth. - General constraints to investment: 2015 World Bank Doing Business rank of The Bahamas 97th out of 189 countries and Distance to (best practice) Frontier score of 61.37 out of 100; low rankings in getting credit, protecting investors, and registering property. - Labor market and inclusivity: - Unemployment has remained in double digits since the global financial crisis. - Gini coefficient estimated at 46 percent in 2011. - 2014 World Economic Forum global gender gap rank: 35th out of 142 countries. - Staff recommendations to boost inclusive growth: - Finalize and implement the NDP; enhance active labor market policies; build on vocational and on-the-job training and job placement services; attract skilled Diaspora Bahamians; ease intra-Caribbean labor mobility. - Long-run priorities: improve educational outcomes, align curricula with skills demand, align wages to productivity, enhance labor market regulations and institutions. - Increase investment in infrastructure and human capital. - Improve electricity supply: boost efficiency of the electricity company, consider appropriate pricing, expand alternative energy use, and improve monitoring and arrears collection. - Reform SOEs urgently (BEC, Bahamasair, WSC) to lower operating costs, rationalize tariffs, increase capital investment, strengthen regulatory framework, and improve service quality. - Authorities’ views: - Authorities agreed on need for higher and more inclusive growth and reducing youth unemployment; NDP seen as critical; BIPA established to monitor priority projects and finalize the NDP. - On energy reforms, authorities plan to outsource management of BEC to a private sector company to run BEC on a fully commercial basis, implying tariff rationalization and potential creation of an independent regulator. ### Rebuilding fiscal and external buffers — medium-term fiscal framework (percent of GDP) - Revenue (Fiscal year ends June 30th): - FY12/13 16.3, FY13/14 17.1, FY14/15 18.4, FY15/16 18.8, FY16/17 19.6, FY17/18 19.9, FY18/19 20.1, FY19/20 20.2 - Of which: VAT: FY12/13 1.5, FY13/14 2.5, FY14/15 3.0, FY15/16 3.0, FY16/17 3.0, FY17/18 3.0 - Expenditure: - FY12/13 21.7, FY13/14 20.5, FY14/15 21.4, FY15/16 20.9, FY16/17 20.8, FY17/18 20.6, FY18/19 20.6, FY19/20 20.5 - Of which: Net acquisition of nonfinancial assets: FY12/13 2.9, FY13/14 2.6, FY14/15 2.7, FY15/16 2.6, FY16/17 2.6, FY17/18 2.6, FY18/19 2.6, FY19/20 2.6 - Memorandum items: - Primary balance 2/: FY12/13 -3.0, FY13/14 -0.8, FY14/15 -0.1, FY15/16 0.6, FY16/17 1.5, FY17/18 2.0, FY18/19 2.2, FY19/20 2.4 - Overall fiscal balance: FY12/13 -5.4, FY13/14 -3.3, FY14/15 -3.0, FY15/16 -2.1, FY16/17 -1.2, FY17/18 -0.7, FY18/19 -0.5, FY19/20 -0.3 - Debt-to-GDP ratio: FY12/13 56.3, FY13/14 60.9, FY14/15 63.0, FY15/16 63.2, FY16/17 63.2, FY17/18 63.1, FY18/19 62.7, FY19/20 62.1 - Medium-term outlook and risks: - Government projects fiscal deficit narrowing to about 2 percent of GDP in FY2015/16 and reaching 0.3 percent in 2019/20. - Primary balance projected to move into a surplus in 2015/16. - Central government debt projected to peak at 63 percent of GDP in FY2014/15, declining marginally to 62 percent in FY2019/20 under baseline DSA. - Gross financing requirements to decline from 5.7 percent of GDP in FY2014/15 to about 2.0 percent of GDP in FY2019/20. - External financing requirement highlighted as a significant risk to the debt profile; mitigation via projected strengthening of the external current account. - Staff recommendations on fiscal policy: - Pace of consolidation broadly appropriate given weak growth outlook. - Intensify implementation of other tax reforms and steadfast implementation of planned fiscal consolidation to place debt levels on a declining path. - Tighten spending control, reform public procurement and payroll management. - Accelerate rationalization of current expenditure within a medium–term budgetary framework to protect VAT benefits and restore fiscal sustainability. - Introduce fiscal responsibility legislation. - Identify contingency measures to meet fiscal targets if downside risks materialize, with priority to protect growth-enhancing capital spending. - Address long-term fiscal pressures in pensions and health insurance given population aging. - SOE fiscal implications: - Government support to Bahamasair and WSC expected to reach US$60 million (0.7 percent of GDP) in FY2014/15. - Aggregate SOE debt was 16 percent of GDP in FY2013/14. - SOE reforms critical to stemming fiscal drag. - Authorities’ views: - Transition to central revenue administration (CRA) expected by end–2015, starting with co-location of VAT and Internal Revenue Departments. - Modernization of customs and property tax departments underway. - In event of revenue underperformance, authorities could cut current spending and prioritize capital spending; government will continue to support SOEs at manageable levels while improving efficiency. - Authorities plan stakeholder consultations and Cabinet recommendations on fiscal responsibility based on a forthcoming discussion paper. ### Financial sector: credit channel, NPLs, and resolution - Credit channel impeded by debt overhang: - Persistently high NPLs and sizeable loan burdens have limited local transmission of an expansionary U.S. monetary stance. - Private sector credit totaling almost 80 percent of GDP (see Annex data). - Staff discussed potential advantages of establishing a specialized agency including a possible successor to the government’s Mortgage Relief Plan to resolve NPLs. - Credit bureau and information sharing: - Planned introduction of a new credit bureau welcomed; broader debt information may initially raise lender reluctance if indebtedness exceeds expectations. - Financial sector resilience and supervision: - Bahamian financial sector remains well capitalized and liquid; stress tests indicate majority of banks resilient to extreme shocks given very high capital-to-risk-weighted-assets ratios. - Implementation of the Basel framework on track; AML/CFT evaluation in train. - Authorities encouraged to enhance compliance and effectiveness of AML/CFT framework in line with the 2012 FATF standard. - Authorities’ views: - Credit growth expected to remain subdued given weak consumer demand, elevated unemployment and tighter bank credit standards. - Banks more aggressively writing off and provisioning for bad debts, foregoing dividends in some cases. - Baha Mar resort expected to employ about 5000 people within 6–7 months of its opening, aiding employment and credit recovery. - Mortgage relief program requires restructuring; a revamped program intended to be re-launched soon. ### Reserve adequacy (Box 1) - At end–March 2015, reserves totaled $839 million, up from $742 million at end-2013, equivalent to 2.3 months of next year’s imports of goods and services. - Reserves exceed all short-term official debt but fall short of the standard 3-months of imports metric. - After adjusting imports for FDI inflows, reserves are currently and are projected to continue meeting the 3-months import test. - Under the broad money-based method, reserve holdings projected to remain below the broad money norm of 20 percent, but related risks are limited given central bank restrictions on capital flows. - Reserves meet the Central Bank’s statutory 50 percent of total bank liabilities measure. - Reserves projected adequate relative to revised risk-weighted benchmark for economies with capital controls (measure for fixed exchange rate regimes with capital controls: 30 percent of short-term debt at remaining maturity + 20 percent of other portfolio liabilities + 5 percent of broad money + 10 percent of exports). - Reserves are much below desirable levels when assessed against the more stringent adjusted measure for small island developing states (SIDS). - Implication: strengthens the case for fiscal consolidation to help build external buffers. ### Debt sustainability, DSA highlights and stress tests - Overall assessment: heat map reveals moderate or low risks to debt sustainability; external financing requirement a significant risk compared with emerging markets benchmark. - Composition and vulnerabilities: - Foreign currency denominated debt rose by 7.6 percentage points to 30 percent in 2013/14. - Large proportion of debt held in local currency; only about 13 percent is short term. - Baseline projections and stress results: - Public debt projected to peak at 63 percent of GDP in FY 2014/15, declining marginally thereafter to 62 percent in FY 2019/20 (baseline). - Gross financing requirements decline from 5.7 percent of GDP in FY 2014/15 to about 2.0 percent of GDP in FY 2019/20. - A combined macro-fiscal shock would raise debt to 74 percent of GDP, and gross financing requirements to 4.4 percent of GDP in FY 2019/20. - Two alternative scenarios (constant primary balance and historical average real GDP growth) indicate public debt could rise to 80 percent of GDP with gross financing requirements rising to 6 percent of GDP. - Selected historical and projected indicators (exact figures preserved): - Nominal gross public debt (percent of GDP): 36.0 (2013), 56.3 (2014), 60.9 (2015), 63.0 (2016), 63.2 (2017), 63.2 (2018), 63.1 (2019), 62.7 (2020) - Public gross financing needs (percent of GDP): 4.9 (2013), 8.3 (2014), 6.8 (2015), 5.7 (2016), 4.3 (2017), 3.1 (2018), 2.6 (2019), 2.4 (2020), 1.9 (projection series shown) - Real GDP growth (percent): 0.5 (2013), 1.1 (2014), 0.5 (2015), 1.4 (2016), 2.3 (2017), 2.2 (2018), 1.6 (2019), 1.5 (2020) - Effective interest rate (percent): 5.8 (2013), 5.1 (2014), 4.6 (2015), 4.9 (2016), 4.0 (2017), 3.7 (2018), 3.4 (2019), 3.2 (2020), 3.0 (projection) - External public debt: - External public debt estimated at 23 percent of GDP in 2013/14 and projected to stabilize at 22 percent in the medium term. - Gross external financing need (percent of GDP): 11.1 (2010), 15.3 (2011), 18.5 (2012), 18.2 (2013), 22.2 (2014), 13.1 (2015), 9.0 (2016), 8.3 (2017), 8.0 (2018), 7.9 (2019), 8.7 (2020). - Policy implications: - Discourage borrowing to build reserves as it increases external debt service burden and vulnerability. - Implement measures to boost medium-term growth potential and steadfastly implement fiscal consolidation to buttress debt sustainability. ### External competitiveness, current account prospects, and energy - CGER ERER approach: suggests exchange rate slightly (2.1 percent) undervalued. - Macroeconomic balance approach: suggests a 16½ percent improvement in external competitiveness would be required to align a 6¼ percent of GDP current account deficit projected for 2020 with a 2 percent “norm”. - EBA-lite: straightforward application for 2015 projected current account deficit (12½ percent of GDP) suggests 38 percent improvement in external competitiveness would be needed to obtain the 2¾ percent of GDP deficit “norm.” Adjusting for one-off effects reduces the “underlying” deficit to about 4½ percent of GDP implying an improvement in external competitiveness of about 7½ percent would be necessary. - Forecast uncertainty and key external drivers: - Lumpiness of investment (notably Baha Mar: some 40 percent of 2012 GDP; increase in tourism capacity by 2,200 rooms—about 16 percent of current capacity; potential employment equivalent to 2½ percent of the labor force). - Prospective changes in petroleum prices (The Bahamas almost totally reliant on imported energy). - Potential increased competition following U.S./Cuban rapprochement. - Energy dependence, costs, and policy response: - Domestic oil import bill: almost US$500 million in recent years, equivalent to 5–6 percent of GDP. - Oil price collapse projected to almost halve the oil import bill in 2015, saving a projected 2½ percent of GDP. - Energy consumption averaged 185 million BTU per capita over 2000–11; per capita electricity consumption 5,700 kWh per capita/year. - Virtually all electricity supplied by two utilities: state-owned BEC provides about 80 percent of total production; remainder by Grand Bahama Power Company. - Bahamas National Energy Policy: 2013–2033 (adopted in 2014) goals include improving energy efficiency, modernizing infrastructure, developing sustainable energy solutions, and improving governance. - Authorities amended in March 2015 the Energy Act to allow for renewable energy self generation (NESG). - Bahamas joined the Carbon War Room’s “10 Island Challenge” to advance 20 MW of solar utility-scale farms. - A private company recently selected to manage BEC; state retains 100 percent ownership. Operating company anticipated to reduce electricity production costs by some one-third (to about $0.30 per KwH). BEC’s liabilities to be taken over and financed by a “rate reduction” bond. ### Financial sector regulatory and supervisory developments (Box 3) - FSAP participation: July 2012 FSAP found no short-term threats to financial stability; oversight independent and strong. - Risk-based supervision and crisis management improvements ongoing; IMF Legal Department and CARTAC technical assistance in 2015. - Basel II/III roadmap: 30-month timeline ending in 2015Q4, with live implementation to commence in 2016Q1; progress reported on schedule. - AML/CFT assessment tentatively scheduled with CFATF in November 2015. - Deposit Insurance Corporation (DIC) implementing a three-year (2013–16) strategic plan to adopt FSAP recommendations. - Credit unions: seven credit unions with assets totaling $345.3 million (3.5 percent of domestic banking system assets) to be brought under CBB supervision; legislation before Parliament. - Credit reporting: CBB issued September 2014 consultation paper on Draft Credit Reporting Bill and Draft Regulations; Request for Solution in November 2014; kickoff scheduled for December 2017. - Tax information and FATCA: Bahamas found “Largely Compliant” in Global Forum Phase 2 Peer Review (November 2013); FATCA reporting scheduled to begin September 2015 after IGA signed November 2014. ### Data, technical assistance, and capacity-building - Data gaps remain in national accounts, consolidated public sector accounts, and economy-wide IIP. - Staff supports compilation and publication of quarterly national accounts and IIP statistics; additional resources needed. - CARTAC and Fund technical assistance missions listed (selected), including VAT implementation support, quarterly national accounts, BPM6 transition, CPI revision, revenue administration, and legal assistance for bank resolution. - Authorities considering publishing BPM6 statistics in June 2015 and IIP statistics in September 2015. - The Bahamas began participating in GDDS in 2003; metadata posted February 14, 2003. *Source: IMF staff report for The Bahamas, Staff Report for the 2015 Article IV Consultation (provided content).* ### 5.4 percent in FY2012/13. Revenue was lower-than-budgeted, but a substantial reduction in ### _cr15203 - 5.4 percent in FY2012/13. Revenue was lower-than-budgeted, but a substantial reduction in ### Recent economic developments - Real GDP expanded by an estimated 1 percent in 2014. - Air arrivals grew by almost 5 percent in 2014; applied room rates improved by 7 percent. - Inflation rose to 2.2 percent in January 2015 (1.2 percent in December 2014), with VAT imposition offsetting declining oil prices. - Unemployment stood at 15.7 percent in November 2014. - Fiscal outcomes: - The fiscal deficit in FY 2013/14 (July to June) is estimated to have narrowed to 3.3 percent of GDP (from 5.4 percent). - Revenue was lower-than-budgeted, but a substantial reduction in current spending, including on wages and salaries, and on goods and services resulted in an overall fiscal deficit below budget target. - The debt-GDP-ratio is estimated to have reached 61 percent in FY2013/14 from 56 percent in FY2012/13. - Key public enterprises continuing to weigh on finances: Bahamasair, Bahamas Electricity Corporation (BEC), Water and Sewerage Corporation (WSC). - External sector and reserves: - The external current account deficit surged to 22 percent of GDP in 2014, reflecting large import components of the Baha Mar resort project. - Gross international reserves totaled US$839 million at end-March 2015, equivalent to 2.3 months of next year’s projected imports of goods and services. - Reserves reflect, in part, a net purchase of US$175 million from the government following an external bond placement early last year. - Financial sector: - Nonperforming loans were 16 percent of total loans overdue by 90 or more days in March 2015. - Net domestic assets declined by 2.6 percent through December 2014; private sector credit fell back to its 2009 level. - The banking system’s end–2014 capital adequacy was in excess of 33 percent of risk-weighted assets (central bank target: 17 percent). - Liquid/total asset ratio was 23 percent at end–2014. - In October 2014, the government established a special purpose company to take over non-performing commercial loans (US$100 million, 1.1 percent of GDP) of a weak state-owned bank. ### Macroeconomic outlook and risks - Growth projections and drivers: - Growth is expected to strengthen over 2015–16 with the improvement in U.S. activity and the opening of Baha Mar. - Potential GDP growth is estimated at about 1½ percent over the medium term. - The full opening of Baha Mar and two smaller projects would increase hotel room inventory by about 20 percent. - Beyond 2016, growth tapers off as U.S. growth decelerates and base effects from Baha Mar fade. - Inflation and VAT impact: - VAT implementation early 2015 would add an estimated 2½ percentage points to the CPI. - Inflation is expected to remain low over the medium term. - External balances: - Over the medium term, the external current account deficit would return to single digits as construction-related outflows are anticipated to be replaced by a rise in travel services receipt. - Risks: - Risks to the outlook are tilted to the downside. - Significant structural impediments remain, including labor market and energy sector constraints. - Staff projects that without structural reforms, significantly higher growth than currently projected will be required to absorb new entrants to the labor force and reduce the unemployment rate to single digits over the medium term. - There is significant risk that Baha Mar could cannibalize arrivals to other Bahamian destinations unless structural challenges are addressed. ### Executive Board / Directors' assessment and policy advice - Overall assessment: - Directors noted the economy is recovering but the outlook remains challenging; growth is expected to remain below pre-global crisis levels and the current account deficit remains elevated. - Structural policy priorities: - Finalize and implement the National Development Program (NDP) to accelerate medium-to-long-term economic and social development, including diversification. - Implement structural reforms to strengthen competitiveness, raise potential growth, and lower unemployment. - Active labor market policies: build on existing training programs and placement services, ease restrictions on labor mobility, enhance efficiency of labor market regulations and institutions, and increase investment in human capital. - Step up reforms of state-owned enterprises, in particular in the energy sector. - Fiscal and external policy advice: - Continue fiscal consolidation and steadfast implementation of the VAT to rebuild buffers and place public debt on a declining path. - Continue revenue reforms, including strengthening tax administration. - Rationalize current expenditures in the context of a medium–term budget framework. - Rebuild international reserves and fiscal buffers to sustain macroeconomic stability. - Financial sector advice: - Continue financial sector reforms, including planned introduction of a new credit bureau. - Continue efforts to strengthen financial sector regulation and supervision. - Adopt policies to address persistently high non-performing loans to allow the banking system to play a more effective role in supporting growth. - Exchange rate policy: - Directors generally agreed the exchange rate peg has continued to serve The Bahamas well. - To support the peg going forward, structural reforms to improve competitiveness are important to avoid placing an excessive burden on fiscal policy. ### Key statistics (selected, as reported) - Real GDP growth: 0.6 (2011), 2.2 (2012), 0.0 (2013), 1.0 (2014), 1.8 (2015), 2.8 (2016) - Nominal GDP: -0.3 (2011), 4.4 (2012), 2.4 (2013), 0.9 (2014), 5.0 (2015), 4.1 (2016) - Consumer price index (annual average): 3.2 (2011), 2.0 (2012), 0.4 (2013), 1.2 (2014), 2.1 (2015), 1.5 (2016) - Unemployment rate: 15.9 (2011), 14.4 (2012), 15.8 (2013), 15.0 (2014), 14.8 (2015), 13.9 (2016) - Saving rate (percent of GDP): 12.4 (2011), 10.0 (2012), 9.3 (2013), 6.9 (2014), 8.3 (2015), 10.9 (2016) - Investment rate (percent of GDP): 27.5 (2011), 28.3 (2012), 27.0 (2013), 28.8 (2014), 20.8 (2015), 19.2 (2016) - Central government revenue and grants (percent of GDP): 18.1 (2011), 17.9 (2012), 16.3 (2013), 17.1 (2014), 18.4 (2015), 18.8 (2016) - Central government expenditure (percent of GDP): 21.9 (2011), 22.0 (2012), 21.7 (2013), 20.5 (2014), 21.4 (2015), 20.9 (2016) - Central government overall balance (percent of GDP): -3.8 (2011), -4.3 (2012), -5.4 (2013), -3.3 (2014), -3.0 (2015), -2.1 (2016) - Primary balance (percent of GDP): -1.1 (2011), -2.0 (2012), -3.0 (2013), -0.8 (2014), -0.1 (2015), 0.6 (2016) - Central government debt (percent of GDP): 45.0 (2011), 48.4 (2012), 56.3 (2013), 60.9 (2014), 63.0 (2015), 63.2 (2016) - Current account balance (percent of GDP): -15.1 (2011), -18.3 (2012), -17.7 (2013), -21.9 (2014), -12.5 (2015), -8.3 (2016) - Gross international reserves (end of period; millions of U.S. dollars): 885 (2011), 810 (2012), 742 (2013), 788 (2014), 820 (2015), 886 (2016) - Reserves in months of next year's G&S imports: 2.2 (2011), 2.0 (2012), 1.8 (2013), 2.2 (2014), 2.2 (2015), 2.3 (2016) - GDP (in millions of Bahamian dollars): 7,890 (2011), 8,234 (2012), 8,432 (2013), 8,511 (2014), 8,939 (2015), 9,305 (2016) *Source: IMF staff report for The Bahamas, Staff Report for the 2015 Article IV Consultation (provided content).* ### 8. Risks continue to be tilted to the downside although with considerable uncertainty ### 8. Risks continue to be tilted to the downside although with considerable uncertainty ### Risks overview - Spillover risks stem mainly from the U.S. economy via the trade and financial channels; oil price shocks are also important. - The offshore financial system remains substantial; the 2012 FSAP concluded that the domestic financial sector’s susceptibility to offshore spillovers is limited. - Potential adverse drivers: - Eventual normalization of U.S. monetary policy that could further strengthen the dollar, worsening external competitiveness vis-à-vis non-U.S. dollar pegged competitors. - Adverse U.S. economic shocks, weaker than projected global activity, and a disappointing Baha Mar performance. - Offsetting/uncertain effects: - Winding down of Baha Mar construction and lower oil prices expected to reduce imports going forward. - Policy credibility and fiscal risks: - VAT implementation setbacks and weak fiscal consolidation could undermine policy credibility, heighten long-term debt sustainability risks, and adversely affect the country’s credit rating. - Financial stability tail risks: - Persistently elevated non-performing loan (NPL) ratio poses a tail–risk threat. - Geopolitical risk: - Recent rapprochement in U.S./Cuban relations poses an as yet un-quantified risk to the tourism-based economic model. ### Reigniting strong and inclusive medium-term growth - Key structural challenges identified: - Need to attract sufficient tourist demand to absorb a large impending increase in supply. - Labor market rigidities constraining potential labor supply; persistently high unemployment suggests wage rigidities and skills mismatches. - Significant impediments to SME growth. - General constraints to investment: 2015 World Bank Doing Business rank of The Bahamas 97th out of 189 countries and Distance to (best practice) Frontier score of 61.37 out of 100; low rankings in getting credit, protecting investors, and registering property. - Labor market and inclusivity issues: - Unemployment has remained in double digits since the global financial crisis; evidence of structural unemployment and skills mismatches. - Gini coefficient estimated at 46 percent in 2011. - 2014 World Economic Forum global gender gap rank: 35th out of 142 countries; gender imbalances persist in education/job outcomes and political empowerment. - Staff recommendations to boost inclusive growth: - Finalize and implement the National Development Plan (NDP) to review macro performance, institutions, governance, and diversification strategies (including tourism–agriculture linkages). - Enhance active labor market policies: build on vocational and on-the-job training, job placement services, attract skilled Diaspora Bahamians, ease intra-Caribbean labor mobility. - Long-run priorities: improve educational outcomes, align curricula with skills demand, align wages to productivity, enhance labor market regulations and institutions. - Increase investment in infrastructure and human capital to ensure broad-based growth. - Improve electricity supply: boost efficiency of the electricity company, consider appropriate pricing, expand alternative energy use, and improve monitoring and arrears collection. - Reform state-owned enterprises (SOEs) urgently (BEC, Bahamasair, WSC) to lower operating costs, rationalize tariffs, increase capital investment, strengthen regulatory framework, and improve service quality. - Authorities’ views: - Authorities agreed on need for higher and more inclusive growth and reducing youth unemployment; optimistic about potential Baha Mar and other projects lowering unemployment. - NDP seen as critical; Bahamas Investment Promotion Agency (BIPA) established within the Office of the Prime Minister to monitor priority projects and finalize the NDP. - On energy reforms, authorities plan to outsource management of the Bahamas Electricity Corporation to a private sector company to run BEC on a fully commercial basis, implying tariff rationalization and potential creation of an independent regulator. ### Rebuilding fiscal and external buffers - Constraints: - Low fiscal space and modest external buffers limit demand-side policy use. - Exchange rate peg and capital controls constrain monetary policy; scope for fiscal stimulus limited by low international reserves and need to reverse debt trajectory. - VAT and revenue measures: - Broad-based VAT introduced on January 1, 2015 with a standard rate of 7.5 percent and very few exemptions. - VAT implementation relatively smooth; early indications encouraging with authorities on course to initial revenue targets. - Staff urged advancement of other revenue reforms: modernization of customs and property tax administration, establishment of a central revenue agency (CRA). - Medium-Term Fiscal Framework (in percent of GDP) — Staff Projections (Fiscal year ends June 30th) - Revenue: FY12/13 16.3, FY13/14 17.1, FY14/15 18.4, FY15/16 18.8, FY16/17 19.6, FY17/18 19.9, FY18/19 20.1, FY19/20 20.2 - Of which: VAT: FY12/13 1.5, FY13/14 2.5, FY14/15 3.0, FY15/16 3.0, FY16/17 3.0, FY17/18 3.0 - Expenditure: FY12/13 21.7, FY13/14 20.5, FY14/15 21.4, FY15/16 20.9, FY16/17 20.8, FY17/18 20.6, FY18/19 20.6, FY19/20 20.5 - Of which: Net acquisition of nonfinancial assets: FY12/13 2.9, FY13/14 2.6, FY14/15 2.7, FY15/16 2.6, FY16/17 2.6, FY17/18 2.6, FY18/19 2.6, FY19/20 2.6 - Memorandum items: - Primary balance 2/: FY12/13 -3.0, FY13/14 -0.8, FY14/15 -0.1, FY15/16 0.6, FY16/17 1.5, FY17/18 2.0, FY18/19 2.2, FY19/20 2.4 - Overall fiscal balance: FY12/13 -5.4, FY13/14 -3.3, FY14/15 -3.0, FY15/16 -2.1, FY16/17 -1.2, FY17/18 -0.7, FY18/19 -0.5, FY19/20 -0.3 - Debt-to-GDP ratio: FY12/13 56.3, FY13/14 60.9, FY14/15 63.0, FY15/16 63.2, FY16/17 63.2, FY17/18 63.1, FY18/19 62.7, FY19/20 62.1 - Sources: Ministry of Finance; and Fund staff estimates and projections. - Notes: 1/ Fiscal year ends June 30th. 2/ Defined as revenue and grants minus total expenditure (excluding interest payments). - Medium-term outlook and risks: - Government projects fiscal deficit narrowing to about 2 percent of GDP in FY2015/16 and reaching 0.3 percent in 2019/20. - Primary balance projected to move into a surplus in 2015/16. - Central government debt projected to peak at 63 percent of GDP in FY2014/15, declining marginally to 62 percent in FY2019/20 under baseline DSA. - Gross financing requirements to decline from 5.7 percent of GDP in FY2014/15 to about 2.0 percent of GDP in FY2019/20. - External financing requirement highlighted as a significant risk to the debt profile; mitigation via projected strengthening of the external current account. - Main risks to debt sustainability: slower than expected growth and weak fiscal efforts. - Staff recommendations on fiscal policy: - Pace of consolidation broadly appropriate given weak growth outlook. - Intensify implementation of other tax reforms and steadfast implementation of planned fiscal consolidation to place debt levels on a declining path. - Tighten spending control, reform public procurement and payroll management. - Accelerate rationalization of current expenditure within a medium–term budgetary framework to protect VAT benefits and restore fiscal sustainability. - Introduce fiscal responsibility legislation. - Identify contingency measures to meet fiscal targets if downside risks materialize, with priority to protect growth-enhancing capital spending. - Address long-term fiscal pressures in pensions and health insurance given population aging. - SOE fiscal implications: - SOE losses driven by public service mandates, operational inefficiencies, and inadequate regulatory framework. - Government support to Bahamasair and WSC expected to reach US$60 million (0.7 percent of GDP) in FY2014/15. - Aggregate SOE debt was 16 percent of GDP in FY2013/14. - SOE reforms critical to stemming fiscal drag. - Authorities’ views: - Broad agreement with staff on fiscal assessment and commitment to medium-term consolidation. - Transition to a central revenue administration (CRA) expected by end–2015, starting with co-location of VAT and Internal Revenue Departments. - Modernization of customs and property tax departments underway to enhance revenue. - In event of revenue underperformance, authorities could cut current spending and prioritize capital spending; government will continue to support SOEs at manageable levels while improving efficiency. - Authorities plan stakeholder consultations and Cabinet recommendations on fiscal responsibility based on a forthcoming discussion paper. ### Exchange rate peg, reserves, and competitiveness - The US$1=B$1 peg and capital controls have anchored price and financial stability, supporting living standards. - Risks from peg: - Appreciation of U.S. dollar with U.S. monetary normalization could strain competitiveness relative to other major currencies. - With foreign exchange reserves expected to remain modest over the medium term, macro resilience improvements via diversification (including tourism) are crucial. - Structural reforms to improve competitiveness are urgent to avoid excessive burden of adjustment on fiscal policy. - Authorities’ views on reserves and competitiveness: - Current international reserves within target levels US$800–US$850 million (above 90 percent of base money). - Further accretion to reserves depends on tourism earnings growth and foreign direct investment. - Authorities will take measures as necessary to protect reserves from falling below target levels. - Authorities acknowledge opening of Cuba to U.S. tourists presents challenges but are confident the Bahamian product can compete. ### Enhancing financial sector stability and monetary stance - Monetary policy: - Given the fixed exchange rate, modest reserves, continued slow growth, and contained “core”—non-VAT related, non-energy—inflation, neither loosening nor tightening is appropriate at present. - Upward adjustments may eventually be required as U.S. policy rates increase. - Financial sector vulnerabilities: - Persistently elevated NPL ratio is a tail-risk to financial stability. - 2012 FSAP indicates limited domestic susceptibility to offshore spillovers, but offshore system remains substantial. _Source: _cr15203 - 8. Risks continue to be tilted to the downside although with considerable uncertainty_ ### 24. Staff noted that the Bahamian credit channel remains impeded by a nagging debt ### _cr15203 - 24. Staff noted that the Bahamian credit channel remains impeded by a nagging debt overhang ### Credit channel, NPLs, and debt overhang - Persistently high NPLs, in the context of the CFM regime, have further limited the local transmission of the expansionary U.S. monetary stance. - Private sector conditions: sizable loan burdens, subdued employment prospects, tightened credit requirements → new loan demand creation remained muted amid overall deleveraging. - Authorities and some banks have recent efforts to address long-standing NPLs; staff discussed potential advantages of establishing a specialized agency, including a possible successor to the government’s Mortgage Relief Plan. - Expected benefits of resolving the debt overhang: - Preserve financial stability. - Allow specialized management to maximize the value of distressed assets. - Permit banks to focus on lending, thereby supporting the recovery. - Constraints to accelerated mortgage resolution: - Banks remain reluctant for both economic and social reasons to press for accelerated resolution of nonperforming mortgages despite facilitating bankruptcy laws. - Excessive time delays and high costs of property registration and inefficiencies in enforcement of contracts likely weighed on resuscitation of bank lending. - Recently introduced rules for civil procedure focused on streamlining court proceedings and promoting less costly dispute resolutions may prove beneficial. ### Credit bureau and information sharing - Staff welcomed the planned introduction of a new credit bureau, including its broad scope. - Caveat: while more comprehensive information on existing debt obligations and repayment histories would eventually facilitate access to credit, it may initially raise additional lender reluctance if the true level of private sector indebtedness exceeded expectations. ### Financial sector resilience and supervision - The Bahamian financial sector remains well capitalized and liquid. - Recent banking system stress tests indicated that the majority of banks remain resilient to the most extreme shocks given their very high capital to risk-weighted assets ratios. - Authorities are strengthening the regulatory and supervisory framework largely in accord with FSAP recommendations (Box 3). - Implementation of the Basel framework was on track, and the AML/CFT evaluation was, after some delay, in train. - Authorities are encouraged to enhance compliance and effectiveness of the AML/CFT framework in line with the 2012 FATF standard. ### Authorities’ views (as reported) - Credit growth outlook: - Agreed that credit growth will remain subdued given weakness in consumer demand, elevated unemployment and tighter bank credit standards. - Banks were more aggressively writing off and provisioning for bad debts, in some cases incurring sizable losses, and foregoing dividends. - Resumption of lending seen as dependent on improvement in employment prospects, particularly as The Baha Mar resort opens. - The resort is expected to employ about 5000 people within 6–7 months of its opening. - On the credit bureau, authorities noted credit exposures may not be unexpectedly high upon its introduction since banks are conducting due diligence and are dealing with the same set of borrowers. - Mortgage relief program: - Government’s previous mortgage relief program required restructuring to enhance effectiveness. - Banks had already restructured many mortgages, but a revamped program was still needed and intended to be re-launched soon. ### Data, technical assistance, and capacity - Data provision is generally adequate for economic surveillance, but gaps remain in coverage and timeliness, including: - National accounts. - Consolidated accounts of the public sector. - Economy-wide international investment position (IIP). - Staff supports authorities’ efforts to compile and publish quarterly national accounts and IIP statistics; additional resources are needed to address remaining data shortcomings. - CARTAC advisors have identified TA areas including: - Continuing assistance with implementation of VAT. - Strategic and medium-term budgeting. - Adopting the 6th edition of the Balance of Payments Manual. - Developing estimates of The Bahamas’ IIP. ### Staff appraisal: growth, fiscal policy, exchange rate, and financial-sector policy - Growth and outlook: - Economic activity is slowly recovering, but outlook holds significant uncertainty. - Real GDP growth remains well below pre-global crisis levels as tourism faces headwinds from persistent softness in the high-value-added segment and increased competition from low cost regional destinations. - Domestic demand weighed down by weak macroeconomic outlook, high household indebtedness, and high unemployment. - Even with opening of Baha Mar, medium term growth outlook remains weak. - Policy priorities: - Finalize and implement the NDP to propose strategies to accelerate economic, institutional, and social development over medium term and long run. - Enhance active labor market policies; build on vocational and on-the-job training, job placement services, attract skilled Bahamians in the Diaspora, and ease restrictions on intra-Caribbean labor mobility. - Long-term: improve educational outcomes, reduce skills mismatch, enhance efficiency of labor market regulations and institutions, and increase investment in infrastructure and human capital. - Fiscal consolidation: - Critical to sustaining macroeconomic stability over the medium term. - Planned pace of consolidation appears broadly adequate but implementation risks remain. - VAT is off to a good start; progress on other revenue reforms has been slow given limited implementation capacity. - With debt projected to remain elevated in the medium term, accelerated rationalization of current expenditure in the context of a medium–term budgetary framework is warranted to help restore fiscal sustainability. - Fiscal consolidation is critical to rebuilding external buffers and sustaining the peg. - Over the medium term, policies should be implemented in pensions and health insurance to put these on a fiscally sustainable footing, notably in view of population aging. - Exchange rate peg and capital controls: - Peg and system of capital controls continue to serve as anchor for price and financial stability. - Peg likely to face tensions with eventual normalization of U.S. monetary policy, and should the U.S. dollar appreciate further relative to other major currencies. - Given low international reserves, structural reforms to improve competitiveness are urgently needed to avoid placing an excessive burden of adjustment on fiscal policy. - Financial-sector recommendations: - Authorities should consider merits of an adequately capitalized specialized agency to help resolve debt overhang in the banking system. - Policies to facilitate addressing persistently high NPLs so banking system can better support growth, including: - Encouraging further responsible provisioning and write-down of bad loans. - Improving operations of the land registry. - Continue progress to strengthen financial sector regulation and supervision. ### Reserve adequacy (Box 1) — key facts and metrics - At end–March 2015, reserves totaled $839 million, up from $742 million at end-2013, equivalent to 2.3 months of next year’s imports of goods and services. - Reserves have and are projected to easily exceed all short-term official debt, but are expected to fall short of the standard 3-months of imports metric. - After adjusting imports for FDI inflows, reserves are currently and are projected to continue meeting the 3-months import test. - Under the broad money-based method, the country’s reserve holdings are projected to remain below the broad money norm of 20 percent, but related risks are relatively limited given central bank restrictions on capital flows (all outward capital transfers require exchange control approval, and outflows of resident-owned capital are restricted). - Reserves meet the Central Bank’s statutory 50 percent of total bank liabilities (comprising reserve money, government and other public sector deposits). - The country’s reserves holdings are projected to be adequate relative to the recently revised risk-weighted benchmark for economies with capital controls; the measure for fixed exchange rate regimes with capital controls is 30 percent of short-term debt at remaining maturity + 20 percent of other portfolio liabilities + 5 percent of broad money + 10 percent of exports. - Reserves are much below desirable levels when assessed against the more stringent adjusted measure for small island developing states (SIDS); the measure for fixed exchange rate regimes is defined as 95 percent of short-term debt at remaining maturity + 10 percent of broad money + 35 percent of exports. - Implication: Strengthens the case for fiscal consolidation to help build external buffers. ### Inclusive growth and labor market (Box 2) — key statistics and diagnostics - Per capita GDP (nominal) grew from US$5,000 in 1975 to around US$23,000 in 2013. - Poverty rate: 12.8 percent in 2013 up from 9.3 percent in 2001. - Population distribution: New Providence and Grand Bahama account for about three-quarters of the poor and 85 percent of the country’s population. - Income inequality: Gini coefficient estimated at 46 percent in 2011. - Expatriates: 12 percent of the employed in 2011 were non–Bahamians. - Unemployment: - Rose to 14.2 percent in 2009 from 8.7 percent in 2008 following the onset of the global financial crisis. - Since then, the unemployment rate has averaged 15 percent with that of the youth (15–24 years) doubling the national rate. - Less than a quarter of high school graduates enroll for tertiary education; estimated 4000 youth added to labor force annually. - Crime: United Nations Office of Drugs and Crimes estimates the homicide rate for The Bahamas at around 30 per 100,000 in 2012. - Labor force participation: 73 percent in 2014. - Growth–employment elasticity: estimated to average 0.5 percent for The Bahamas (implying without structural reforms higher real GDP growth will be needed to absorb new entrants and reduce unemployment). - Productivity and wages: labor productivity has not kept pace with real wage growth in the last decade. - Policy prescriptions for inclusive growth: - Reignite medium term growth, remove impediments to job creation, strengthen active labor market programs, and combat crime. - Streamline social safety net programs. - Reform education system to better align curricula with skills demand and improve educational outcomes. - Align wages to productivity, and enhance efficiency of labor market and immigration regulations and institutions. *International Monetary Fund staff report on The Bahamas (excerpts).* ### Box 3. Recent Financial Sector Regulatory and Supervisory Developments ### Box 3. Recent Financial Sector Regulatory and Supervisory Developments ### FSAP participation and overall assessment - In July 2012, The Bahamian authorities participated in a Financial Sector Assessment Program. - The FSAP mission found no short-term threats to financial stability. - The mission concluded that the oversight of the financial system is independent and strong, particularly with respect to banking supervision. - Authorities continue to further improve the regulatory and supervisory system. ### Risk-based supervisory framework and crisis management - The Central Bank of the Bahamas (CBB) and other regulatory authorities continue strengthening their frameworks. - Technical assistance: - IMF Legal Department: March 2015 (discuss bank resolution, crisis management framework). - CARTAC: April 2015 (to the Securities Commission regarding risk-based supervision). - Banking system stress tests for credit quality, liquidity and interest rate sensitivity indicated most recently that, with the exception of one institution (now undergoing restructuring), the banking systems’ capital buffers are resilient to extreme shocks. ### Basel II/III implementation - A roadmap for implementing Basel II/III was introduced in 2013. - Timeline envisaged: a 30-month timeline ending in 2015Q4, with live implementation to commence in 2016Q1. - Progress reported as on schedule, with most foreign-owned institutions already observing Basel III. ### Anti-money laundering / Combating the financing of terrorism (AML/CFT) - The authorities had committed to undergo an assessment within 18 months of the FSAP. - Consistent with the greater flexibility in the timing of assessments relative to FSAPs as agreed in March 2014, this assessment is tentatively scheduled to be undertaken by the Caribbean Financial Action Task Force (CFATF) in November 2015. ### Deposit Insurance Corporation (DIC) - The DIC, under the supervision of the CBB, is implementing a three-year (2013–16) strategic plan to adopt FSAP recommendations. - Strategic plan priorities include: - improving transparency and disclosure; - generating adequate pre-funding (and identify ex ante borrowing resources); - ensuring prompt payout periods. ### Credit unions - Seven credit unions with assets totaling $345.3 million (3.5 percent of the domestic banking systems’ assets) are to be brought under the regulatory and supervisory ambit of the CBB. - Legislation is before Parliament. - The CBB undertook its first onsite inspection of credit unions during 2014. - Upon adoption of the legislation, credit union deposits will have DIC protection. ### Credit Bureau and credit reporting framework - The CBB issued in September 2014 a consultation paper containing key provisions of a Draft Credit Reporting Bill and Draft Regulations. - Followed in November 2014 with a Request for Solution, with a kickoff scheduled for December 2017. - The proposal aims for a wide coverage of potential creditors, with mandatory reporting by financial institutions, and regulatory required reporting for public utilities, hire/purchase entities, and public registers. ### Tax Information Exchange Agreements (TIEA) and FATCA - The Bahamas was found to be “Largely Compliant” in the Global Forum’s Phase 2 Peer Review report (November 2013) with respect to TIEA. - Reporting under FATCA is scheduled to begin in September 2015 following the signing of an Intergovernmental Agreement (IGA) with the United States in November 2014. *Box 3. Recent Financial Sector Regulatory and Supervisory Developments — IMF staff compilation from the source document.* ### 1. Protracted ### 1. Protracted ### Risk scenarios and impacts - Protracted period of slower growth in advanced economies - Likelihood: High - Mechanism: Lower-than-anticipated potential growth and persistently low inflation from a failure to fully address crisis legacies, leading to secular stagnation and lower commodity prices. - Impact: Weaker recoveries in advanced countries, especially the U.S. which accounts for 80 percent of tourism arrivals to The Bahamas, will undermine growth, weaken public finances, and put pressures on the BOP and international reserves. - Policy recommendations: - Diversify growth drivers over the medium term, including building a broader tourist base. - Continued fiscal consolidation. - Strengthen competitiveness. - Protracted period of slower growth in emerging economies - Likelihood: High - Mechanism: Maturing of the cycle, misallocation of investment, and incomplete structural reforms leading to prolonged slower growth. - Impact: A further slowdown of emerging economies would lower medium term growth prospects, particularly as tourism strategy is beginning to be oriented towards growing market share in EMs. - Policy recommendations: - Diversify growth drivers over the medium term, including building a broader tourist base. - Strengthen competitiveness. - Continued fiscal consolidation. - Side-effects from global financial conditions (Persistent dollar strengthening) - Likelihood: Medium - Mechanism: Improving U.S. economic prospects versus the rest of the world leads to a further dollar surge, boosting non-U.S. trade but creating balance sheet strains for dollar debtors. - Impact: Relative to low cost destinations and countries whose currencies are not pegged one-to-one to the dollar, a further dollar strengthening would lower tourism arrivals from the U.S., widen the current account deficit and lower reserves. - Policy recommendations: - Diversify growth drivers and sources over the medium term, including building a broader tourist base. - Strengthen competitiveness. - Geopolitical fragmentation that erodes the globalization process and fosters inefficiency - Likelihood: Medium - Mechanism: Sustained tensions in Russia/Ukraine depress business confidence and heighten risk aversion, amid disturbance in global financial, trade and commodity markets. Heightened risk of fragmentation in the Middle East, leading to a sharp rise in oil prices, with negative spillovers to the global economy. - Impact: Spikes in global oil prices will feed into higher inflation, weaken external current account balance, raise travel costs and possibly lower tourist arrivals. - Policy recommendations: - Cautiously use targeted subsidies to protect low-income earners and vulnerable groups. - Monetary policy should accommodate the direct impact of commodity price shocks while counteracting potential second-round effects. - Further delayed opening, or disappointing performance of Baha Mar - Likelihood: Low - Mechanism: The foreign investors seem knowledgeable in tourism business and a thorough feasibility study was done prior to project commencement. Staff remains conservative about the upside boost on economic activity. - Impact: The uptick in growth currently projected for 2015–16 would not materialize with adverse implication for government revenues. - Policy recommendations: - Coordinate with the foreign investor to address any shortcomings that would lead to further delays. - Continued fiscal consolidation and prompt implementation of the National Development Plan to boost investor confidence and attract FDI. - Setback in the implementation of VAT/Delay in fiscal consolidation - Likelihood: Medium - Mechanism: As with the implementation of a new tax system, the authorities and tax payers are expected to encounter some teething problems from the recently implemented VAT. - Impact: VAT implementation setback could lead to revenue underperformance. Further delays in fiscal consolidation would undermine the credibility of government, and could pose risks to long-term debt sustainability and the country’s investment-grade credit rating. - Policy recommendations: - Speedily address implementation setbacks and transitional issues. - Any slippages should be met with offsetting measures in order to meet budget targets. - Credit risk in the banking sector - Likelihood: Low - Mechanism: The non-performing loan (NPL) ratio remains high. There is some degree of uncertainty on the value of underlying collateral for nonperforming mortgages. - Impact: The banking system’s capital buffers provide shock-absorbing capacity. However, NPLs that remain on the balance sheet for prolonged periods could gradually result in higher provisioning and charge-offs, dragging down banks’ future profitability. - Policy recommendations: - Further strengthen financial sector supervision and oversight. - Quick resolution of the debt overhang in the banking system. - Bond market stress from a reassessment in sovereign risk - Likelihood: Low - Mechanism: Protracted failure to agree on a credible medium term plan for fiscal sustainability in the United States could lead to a sustained loss of confidence. Such developments could undermine the recovery of private domestic demand and severe global market repercussions. - Impact: Weak recovery of private demand in the U.S. will affect tourism arrivals in The Bahamas, which in turns would undermine its growth prospects, weaken public finances, and put pressures on the BOP and international reserves. - Policy recommendations: - Diversify growth drivers and sources over the medium term, including building a broader tourist base. - Strengthen competitiveness. - Continued fiscal consolidation. ### Annex I. Debt Sustainability Analysis — key statistics and projections - "The public debt to GDP ratio will remain elevated, but sustainable in the medium term as the fiscal position strengthens." - Baseline projection (first statement): - Public debt is projected to peak at 63 percent of GDP in FY 2014/15, declining marginally thereafter to 62 percent in FY 2019/20. - Gross financing requirements gradually decline from 5.7 percent of GDP in FY 2014/15 to about 2.0 percent of GDP in 2019/20. - External financing requirement is highlighted as a significant risk to the debt profile. - Main risks to debt sustainability: slower than expected growth and weak fiscal efforts. - Historical and alternative baseline figures (second statement): - Public debt is estimated to have reached 60.9 percent of GDP in FY 2013/14 compared with 56.3 percent in FY 2012/13. - Under the baseline scenario, public debt is expected to peak at 62.8 percent of GDP in FY 2014/15 and thereafter fall slightly to 62.1 percent of GDP in 2019/20, as the fiscal position gradually strengthens with the authorities’ ongoing fiscal consolidation program. - A slight reduction in real interest rates will also help stabilize the debt level. - Financing conditions would improve as gross financing requirements will gradually decline from 5.7 percent of GDP in FY 2015/16 to about [text truncated in source]. *Source: _cr15203 - 1. Protracted (The Bahamas), IMF staff report excerpt.* ### 1.9 percent of GDP in 2019/20. The liquidity in the domestic banking system and a captive investor ### _cr15203 - 1.9 percent of GDP in 2019/20. The liquidity in the domestic banking system and a captive investor base limits rollover risks. ### Debt sustainability overview - Overall assessment: heat map reveals moderate or low risks to debt sustainability. - External financing requirement is highlighted as a significant risk compared with the benchmark for emerging markets. - As a share of total public debt, foreign currency denominated debt rose by 7.6 percentage points to 30 percent in 2013/14. - The composition of public debt remains very favorable: - A large proportion of the debt is held in local currency. - Only about 13 percent is short term. - Projected strengthening of the current account in the medium term is expected to reduce the need for large external financing. ### Projections and macro-fiscal stress tests - Baseline projection results: - A combined macro-fiscal shock would raise debt to 74 percent of GDP, and gross financing requirements to 4.4 percent of GDP in FY 2019/20. - Alternative scenario results: - Two alternative scenarios using constant primary balance and historical average of real GDP growth indicate a sharp further rise of public debt to 80 percent of GDP over the medium term with gross financing requirements rising to 6 percent of GDP. - Macro-fiscal stress tests indicate: - Moderate sensitivity of public debt to a variety of shocks, with the greatest sensitivity to real GDP growth shocks. - Gross financial requirements are especially sensitive to the real interest rate. - Sensitivity to real exchange rate shocks remains the lowest. ### Historical projection biases and fiscal stance - Real GDP assumptions: staff projections for real GDP (2011–2013) were close to outcomes; in the past there was a tendency towards optimism. - Forecast errors and biases: - Median forecast errors for primary balance: -1.04 percent of GDP and -1.19 percent of GDP respectively (projections for primary balance appear to have been relatively optimistic). - Inflation projections tended to be persimistic during 2006–14. - Staff’s projected primary balance over the medium term is broadly consistent with the authorities’ planned fiscal adjustment. - Note on coverage: The coverage is the central government debt only. The operations of public corporations are not compiled into a consolidated set of public sector accounts. ### Key historical and projected indicators (selected exact figures from table and figures) - Nominal gross public debt (percent of GDP): 36.0 (2013), 56.3 (2014), 60.9 (2015), 63.0 (2016), 63.2 (2017), 63.2 (2018), 63.1 (2019), 62.7 (2020), 62.1 (projection series shown). - Public gross financing needs (percent of GDP): 4.9 (2013), 8.3 (2014), 6.8 (2015), 5.7 (2016), 4.3 (2017), 3.1 (2018), 2.6 (2019), 2.4 (2020), 1.9 (projection series shown). - Real GDP growth (percent): 0.5 (2013), 1.1 (2014), 0.5 (2015), 1.4 (2016), 2.3 (2017), 2.2 (2018), 1.6 (2019), 1.5 (2020), 1.5 (projection series). - Inflation (GDP deflator, percent): 1.2 (2013), 2.2 (2014), 1.1 (2015), 1.5 (2016), 2.2 (2017), 1.2 (2018), 1.0 (2019), 1.2 (2020), 1.3 (projection). - Effective interest rate (percent): 5.8 (2013), 5.1 (2014), 4.6 (2015), 4.9 (2016), 4.0 (2017), 3.7 (2018), 3.4 (2019), 3.2 (2020), 3.0 (projection). - Change in gross public sector debt (cumulative, percent of GDP): 2.4 (2013), 7.8 (2014), 4.6 (2015), 2.1 (2016), 0.2 (2017), 0.0 (2018), -0.1 (2019), -0.4 (2020), -0.6 (projection), 1.2 (cumulative series shown). - Identified debt-creating flows (percent of GDP): 2.8 (2013), 5.0 (2014), 3.4 (2015), 2.1 (2016), -0.1 (2017), -0.5 (2018), -0.7 (2019), -1.1 (2020), -1.5, -1.7 (series shown). - Primary deficit (percent of GDP): 1.3 (2013), 4.2 (2014), 1.7 (2015), 1.0 (2016), 0.2 (2017), -0.7 (2018), -1.2 (2019), -1.4 (2020), -1.6, -3.7 (series shown). - Primary (noninterest) revenue and grants (percent of GDP): 16.2 (2013), 16.3 (2014), 17.1 (2015), 18.4 (2016), 18.8 (2017), 19.6 (2018), 19.9 (2019), 20.1 (2020), 20.2, 117.0 (cumulative). - Primary (noninterest) expenditure (percent of GDP): 17.5 (2013), 20.4 (2014), 18.9 (2015), 19.4 (2016), 19.1 (2017), 18.9 (2018), 18.7 (2019), 18.7 (2020), 18.6, 113.3 (cumulative). - Automatic debt dynamics (percent of GDP): 1.4 (2013), 0.8 (2014), 1.6 (2015), 1.1 (2016), -0.3 (2017), 0.2 (2018), 0.5 (2019), 0.3 (2020), 0.1, 1.9 (series shown). - Of which: real interest rate contribution (percent of GDP): 1.6 (2013), 1.3 (2014), 1.9 (2015), 2.0 (2016), 1.1 (2017), 1.5 (2018), 1.5 (2019), 1.2 (2020), 1.0, 8.3 (series shown). - Of which: real GDP growth contribution (percent of GDP): -0.1 (2013), -0.5 (2014), -0.3 (2015), -0.8 (2016), -1.4 (2017), -1.3 (2018), -1.0 (2019), -0.9 (2020), -0.9, -6.4 (series shown). - Residual, including asset changes (percent of GDP): -0.4 (2013), 2.9 (2014), 1.3 (2015), 0.0 (2016), 0.3 (2017), 0.5 (2018), 0.6 (2019), 0.7 (2020), 0.8, 2.9 (series shown). ### External public debt and external DSA highlights - External public debt (central government and public corporations) estimated at 23 percent of GDP in 2013/14 and projected to stabilize at 22 percent in the medium term. - Bound test results: external public debt profile is moderately sensitive to shocks to the non-interest current account and the real exchange rate. - Table A1.1 (External Debt Sustainability Framework) selected figures: - Baseline: External debt 14.7 (2010), 15.4 (2011), 17.8 (2012), 19.9 (2013), 23.2 (2014), 23.2 (2015), 23.1 (2016), 23.1 (2017), 22.8 (2018), 22.7 (2019), 22.5 (2020). - Change in external debt (percent of GDP): 0.3 (2010), 0.7 (2011), 2.4 (2012), 2.1 (2013), 3.3 (2014), -0.1 (2015), -0.1 (2016), 0.1 (2017), -0.3 (2018), -0.1 (2019), -0.2 (2020). - Current account deficit, excluding interest payments (percent of GDP): 9.4 (2010), 14.5 (2011), 17.4 (2012), 16.9 (2013), 21.0 (2014), 11.4 (2015), 7.3 (2016), 6.6 (2017), 6.3 (2018), 6.2 (2019), 6.1 (2020). - Gross external financing need (in percent of GDP): 11.1 (2010), 15.3 (2011), 18.5 (2012), 18.2 (2013), 22.2 (2014), 13.1 (2015), 9.0 (2016), 8.3 (2017), 8.0 (2018), 7.9 (2019), 8.7 (2020). - External debt-to-exports ratio (percent): 36.3 (2010), 36.6 (2011), 39.9 (2012), 46.3 (2013), 55.4 (2014), 55.2 (2015), 51.8 (2016), 50.0 (2017), 48.1 (2018), 47.0 (2019), 45.8 (2020). - Gross external financing need (in billions of US dollars): 0.9 (2010), 1.2 (2011), 1.5 (2012), 1.5 (2013), 1.9 (2014), 1.2 (2015), 0.8 (2016), 0.8 (2017), 0.8 (2018), 0.8 (2019), 0.9 (2020). ### Underlying assumptions used in baseline and scenarios (selected exact values) - Baseline scenario underlying assumptions (in percent unless otherwise indicated): - Real GDP growth: 1.4 (2015), 2.3 (2016), 2.2 (2017), 1.6 (2018), 1.5 (2019), 1.5 (2020). - Inflation: 1.5 (2015), 2.2 (2016), 1.2 (2017), 1.0 (2018), 1.2 (2019), 1.3 (2020). - Primary Balance: -1.0 (2015), -0.2 (2016), 0.7 (2017), 1.2 (2018), 1.4 (2019), 1.6 (2020). - Effective interest rate: 4.9 (2015), 4.0 (2016), 3.7 (2017), 3.4 (2018), 3.2 (2019), 3.0 (2020). - Constant Primary Balance scenario assumes Primary Balance = -1.0 (2015–2020) with Effective interest rate series 4.9, 4.6, 4.6, 4.5, 4.5, 4.5 (2015–2020). - Historical scenario (selected): Real GDP growth 1.4 (2015), 0.6 (2016–2020 in table), Primary Balance -1.0 (2015), -1.7 (2016–2020), Effective interest rate 4.9, 4.6, 4.8, 4.9, 5.1, 5.2 (2015–2020). ### Policy implications and recommendations (as stated) - Discourage the practice of borrowing to build reserves because it: - Increases the country’s external debt service burden. - Leaves government’s balance sheet more vulnerable to external shocks. - Recommendation to buttress debt sustainability: - Implement policy measures to boost growth potential in the medium term (given greatest debt sensitivity to real GDP growth shocks). - Steadfast implementation of fiscal consolidation program to achieve a more sustainable debt path. *As of September 05, 2014 — Fund Staff Calculations.* ### Annex II. External Current Account Prospects and External ### _cr15203 - Annex II. External Current Account Prospects and External ### External competitiveness: CGER, MB, and EBA-lite results - CGER ERER approach: exchange rate suggested to be slightly (2.1 percent) undervalued. - Macroeconomic balance approach: suggests a 16½ percent improvement in external competitiveness would be required to align the 6¼ percent of GDP current account deficit projected for 2020 with the 2 percent “norm”. - External Balance Assessment (EBA) “lite” (noted as possibly of limited applicability in “special cases”): - A straightforward application for the 2015 projected current account deficit (12½ percent of GDP) suggests a 38 percent improvement in external competitiveness would be needed to obtain the 2¾ percent of GDP deficit “norm.” - Adjusting for combined one-off effects (Baha Mar-related construction expenses and less-than-full-year tourism earnings estimated to account for about a combined 5¾ percent of GDP) and the assumed import component from standard non-debt creating foreign direct investment capital flows (some 2¼ percent of GDP) reduces the “underlying” current account deficit to about 4½ percent of GDP. This adjusted scenario implies an improvement in external competitiveness of about 7½ percent would be necessary to result in the current account “norm.” - Staff conclusion: on balance, these methods suggest an improvement in external competitiveness may be necessary to achieve external sustainability, but the scale of uncertainty regarding the degree of misalignment is considerable. ### Forecast uncertainty and key external drivers - Major sources of uncertainty: - Lumpiness of investment, notably the Baha Mar project: some 40 percent of 2012 GDP; sizable increase in tourism capacity by 2,200 rooms—about 16 percent of current capacity; potential employment equivalent to 2½ percent of the labor force. - Prospective changes in petroleum prices (The Bahamas almost totally reliant on imported energy). - Potential increased competition following the U.S./Cuban rapprochement. - Implication: forecasts of future external balances are especially uncertain; a broad approach should be taken in viewing external prospects given the unusual degree of uncertainty. ### Saving, investment, and external sustainability - Historical patterns: - Investment/GDP ratio: remained relatively stable since the turn of the century at about 26 percent of GDP, but with marked compositional changes (mid-2000s Atlantis expansion and recent Baha Mar activity). - National saving: appears to have exhibited a trend decline this century. - Factors influencing low/declining saving rates in Caribbean economies (as cited): - Persistently weak post-boom economy. - Prolonged worsened terms of trade (result of higher petroleum prices). - Possibly lower returns to saving. - One-off increase in consumption in anticipation of the VAT’s introduction in 2015 may have contributed to the decline in the Bahamian saving rate last year. - Forward-looking staff scenario risks: - Without decisive implementation of a national development plan that improves growth prospects, staff foresee a strong possibility of a slow-growth scenario, with the domestic debt overhang and labor market mismatches damping employment prospects, retarding income growth and restraining increases in saving rates. - Weak demand and breakdown of the credit channel reduce domestic investment prospects and potential output growth rate. - Policy focus implied: need for policies that support growth and bolster domestic saving. ### Basic external performance indicators and buffers - Tourism and competitiveness: - The Bahamas perceived as a comparatively desirable tourist destination targeting more affluent clientele; documented as relatively expensive in a “Week at the Beach” index. - Share of Caribbean tourism arrivals stabilized at a lower level than early 2000s, but The Bahamas’ share of Caribbean tourism receipts (and its share of Bahamian GDP) has remained more robust; opening of Baha Mar anticipated to boost these shares. - Real effective exchange rate: - Relative to comparators, The Bahamas’ REER has been stable reflecting close economic ties with the U.S. - Foreign direct investment: - Magnitude of foreign direct investment continues to be substantial, averaging over 6 percent of GDP over the last five years (noted that this is thought to be understated as it fails to include re-invested earnings). - External buffers and prudence: - In light of limited external buffers, efforts to further improve external competitiveness would be prudent. ### Spillovers and external shock transmission (VAR results, 1990–2014) - Model: 5-variable VAR including U.S. GDP, S&P 500, oil prices, Bahamas GDP and Bahamas public debt, annual data for 1990-2014. - U.S. GDP shock: - A shock that raises U.S. GDP by one percent contemporaneously increases Bahamian GDP by 2¼ percentage points. - The positive effect persists for one additional year before dissipating. - Oil price shock: - A one percent shock to oil prices causes Bahamian GDP to contemporaneously decline by 0.08 percentage points, with the effect strengthening somewhat for three years following the shock. - S&P 500 shock: - A one percent shock to the S&P 500 contemporaneously increases Bahamian GDP by 0.13 percentage points. - The effect intensifies in the year after the shock, rising to 0.3 percentage points before dissipating. - Bahamian public debt shocks: - Shocks to Bahamian public debt do not have a significant effect on Bahamian GDP (likely influenced by the relatively low level of Bahamian debt). - U.S. interest rate shocks: - Incorporating either U.S. 10 year Treasury bond yields or U.S. 6-month LIBOR into the VAR: shocks did not have significant effects on the Bahamian economy; magnitude of Bahamian GDP response close to zero. - Variance decomposition: - A decomposition of variance indicates shocks to U.S. GDP and oil prices explain a large fraction of fluctuations in Bahamian GDP. - At a 5-year horizon, both explain over 30 percent of the variation in Bahamian GDP, dominating the influence of shocks to the S&P 500 index and the others. ### Financial sector structure, trends, and prospects (selected statistics and observations) - Size and importance: - Private sector credit totaling almost 80 percent of GDP. - Financial intermediation services narrowly defined account for more than 10 percent of GDP (with spillovers to affiliated real estate, business services, and tourism). - Financial sector taxes and fees: total only about 1–2 percent of GDP in recent years but account for some 6–10 percent of total government revenues. - Employment: financial sector employs about 3 percent of the labor force (less than 1 percent in the offshore subsector). - Offshore sector trends: - Offshore sector assets declined from a 67 times domestic GDP in 2011 to less than one-half that amount in 2013 (and further to 22 times GDP in September 2014). - Despite asset declines, employment and GDP shares in the offshore sector have yet to be appreciably affected. - Insulation of domestic banking sector: - 2013 FSAP concluded domestic commercial banking sector well insulated from offshore sector; connections minimal (confined to intra-group activities). - Only ½ percent of domestic banking sector’s assets and liabilities are with offshore counterparties. - Selected financial sector statistics (2010–13) — numeric series preserved as presented: - Financial intermediation (share of GDP): 11.4, 11.4, 12.5, 12.0 - Employment (percent of total employment) — Domestic: 2.4, 2.4, 2.3, 2.3 - Employment (percent of total employment) — Offshore: 0.7, 0.7, 0.7, 0.6 - Government revenue from the financial sector — Percent of GDP: 1.3, 1.8, 1.0, 1.1 - Government revenue from the financial sector — Percent of central government revenues: 7.9, 10.1, 5.8, 6.8 - Assets (share of GDP) — Domestic banks: 118, 115, 117, 116 - Assets (share of GDP) — Offshore banks: ..., 6,478, 3,737, 2,938 - Assets (share of GDP) — Licensed Mutual Funds: 1,742, 1,056, 1,365, 1,519 - Policy/operational implications: - Domestic banking system must deal effectively with legacy costs of previous over-lending (noted as high NPLs widening lending/deposit rate spread). - Continued vibrancy of the financial sector will depend on changes in the international regulatory environment, maintaining and improving the Bahamian business climate, and expanding the pool of well-trained domestic financial sector employment through active engagement with the domestic educational system. ### Energy dependence, costs, and policy response - Energy dependence and import bill: - The Bahamas almost entirely dependent on imported petroleum products (electrical generation and transportation). - Domestic oil import bill: almost US$500 million in recent years, equivalent to 5–6 percent of GDP. - With the recent oil price collapse, the oil import bill is projected to be almost halved in 2015, saving a projected 2½ percent of GDP. - Energy consumption: - Energy consumption averaged 185 million BTU per capita over 2000–11. - Per capita electricity consumption: 5,700 kWh per capita/year. - Energy consumption per unit of GDP: The Bahamas about the average for tourism-based Caribbean economies and well below commodity-based economies. - Electricity sector structure and inefficiencies: - Virtually all electricity supplied by two utilities: state-owned Bahamas Electricity Company (BEC) provides about 80 percent of total production; remainder provided by Grand Bahama Power Company. - Archipelagic geography and near-complete reliance on fossil fuels result in substantial transmission and distribution losses; high electricity prices relative to North American economies. - Electricity accounts for a substantial component of total expenses in the tourism industry, affecting external competitiveness. - Policy actions: - The Bahamas National Energy Policy: 2013–2033 (adopted in 2014) set four general goals: - improving energy efficiency (including through conservation); - modernizing the energy infrastructure; - become a world leader in developing and implementing sustainable energy solutions; and - having a dynamic and appropriate governance, institutional, legal and regulatory framework, with civic participation. - Authorities have taken actions that should lower production costs, boost energy efficiency, and reduce reliance on imported petroleum. - The Bahamas has ample potential for renewable energy; government proposals to raise the share of renewable sources noted. *Source: Fund Staff Estimates.* ### 6.5 percent of total revenue, substantially more than the 3.7 percent average of the STR’s U.S. survey. While The ### _cr15203 - 6.5 percent of total revenue, substantially more than the 3.7 percent average of the STR’s U.S. survey. While The ### Energy sector reform, generation, and costs - The authorities amended in March 2015 the Energy Act to allow for renewable energy self generation (NESG), which allows for individuals to attach to and sell back excess electricity generation to the national grid. - The Bahamas has joined the Carbon War Room’s “10 Island Challenge,” obliging itself to advance 20 MW of solar utility-scale farms on several islands in the national archipelago. - A private company was recently selected to manage the BEC; the state will retain 100 percent ownership of the BEC. - The envisaged management/operating company’s compensation would be largely based on achieving service level targets relating to: - improved fuel efficiency; - reductions in costs; and - enhanced reliability. - It is anticipated that the operating company would be able to reduce electricity production costs by some one-third (to about $0.30 per KwH). - The BEC’s liabilities would be taken over and financed by a “rate reduction” bond, which would also fund new investments in more efficient electrical generators. - The authorities are considering establishing an independent electricity regulatory authority (possibly the Utilities Regulation and Competition Authority, the current telecoms regulator) to oversee transformation from a monopoly generator/distributor toward one allowing for multiple (including private sector) generators. ### Electricity losses, tariffs, and comparative context - Graphic data (as presented): - Power Utility Companies Energy Losses (in percent of net generation) with state-owned utilities (blue), private utilities (gray), and private-public partnerships (green). (Exact values shown in source excerpt: 50, 34, 24, 23, 20, 15, 15, 12, 10, 10, 9, 9, 9, 9, 8, 7, 0.) - Domestic Electricity Tariffs, 2012 (In US ₵/kWh) — relative positions listed in the source: United States; Trinidad; Suriname; Belize; Jamaica; St. Lucia; Barbados; Curacao; St Vincent; Bahamas; Nevis; Pacific Island States; St. Kitts; Antigua & Barbuda; Dominica; Grenada. - The Bahamas seeks to raise the contribution of renewable energy to 30 percent by 2030. - The IADB’s Energy Matrix: “the technical potential for renewable energy exceeds current energy demand by a factor of 50, although its economic potential, given current technologies, is presumably much less.” ### Competition in tourism and revenue note - The Bahamas competes with other Caribbean economies in providing tourism services; authorities also view family resorts in central Florida and gaming properties in Las Vegas to be major competitors. - A comparative statistic noted at the outset: “6.5 percent of total revenue, substantially more than the 3.7 percent average of the STR’s U.S. survey.” ### Fund relations, membership, and projected payments - Membership Status: Joined August 21, 1973; Article VIII. - Quota and holdings (General Resources Account): - Quota 130.30 SDR Millions 100.00 percent of Quota - Fund holdings of currency 124.04 SDR Millions 95.20 percent of Quota - Reserve position in the Fund 6.26 SDR Millions 4.80 percent of Quota - SDR Department: - Net cumulative allocation 124.41 SDR Millions 100.00 percent of Quota - Holdings 54.15 SDR Millions 43.53 percent of Quota - Outstanding Purchases and Loans: None - Latest Financial Arrangements: None - Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Charges/Interest: 2015 0.03; 2016 0.04; 2017 0.04; 2018 0.04; 2019 0.04 - Total: 2015 0.03; 2016 0.04; 2017 0.04; 2018 0.04; 2019 0.04 - Exchange Rate Arrangement: conventional fixed peg arrangement, with the Bahamian dollar pegged to the U.S. dollar at B$1 per US$1. ### Assessment of data adequacy and statistical developments - Assessment: Data provision is broadly adequate for surveillance; critical macroeconomic data, including comprehensive central government finance statistics, are regularly published in the Central Bank of the Bahamas’ “Monthly Economic and Financial Developments” and “Quarterly Statistical Digest”. - Gaps noted: - Authorities have yet to develop institutional capacity for compilation of international investment position (IIP) statistics and general government accounts data. - The Bahamas has still not started compiling balance of payments statistics consistent with the Balance of Payments Manual 6. - The Fund stands ready to provide technical assistance upon formal request. - CPI methodology update (March 2015): - Revised CPI weights to 2013 from 2006 using results of the 2013 Household Expenditure Survey. - Changed the base period to November 2014 from February 2010. - Expanded coverage to include new local and foreign items; introduced new sample outlets. - Export-Import Price Indices (XMPIs) and Tourism Services Price Index (TSPI): - DoS developing XMPIs to meet international standards; CARTAC missions assisted. - New XMPIs for goods and major services developed; procedures for systematic re-sampling and re-weighting modified. - Quarterly GDP estimates: - CARTAC assisted; a July 2014 mission assessed quarterly volume estimates and noted further work needed for a few industries. - BPM6 and IIP transition: - August 2014 CARTAC mission advised on transition to BPM6; noted most conversion from BPM5 to BPM6 is straightforward. - Authorities need to collect new data on the nonbank private sector. - Authorities are considering publishing BPM6 statistics in June 2015 and IIP statistics in September 2015. - The Bahamas began participating in the General Data Dissemination System (GDDS) in 2003; metadata posted on the Fund’s Dissemination Standards Bulletin Board on February 14, 2003. ### Technical assistance and capacity-building (selected missions and dates) - CARTAC January 2011 CPI Revision - CARTAC April 2011 Revenue Mod./Forecasting - CARTAC May 2011 PFM Reform Action Plan - STA October 2011 Government Finance Statistics - LEG February 2012 Central Bank of The Bahamas Act - MCM February/March 2012 Public Debt Management - STA June 2012 Quarterly National Accounts - LEG July 2012 Payment System Laws - STA Jan 2013 Government Finance Statistics - MCM February 2013 Financial Stability Reporting - FAD April 2013 Tax Reforms for Increased Buoyancy - CARTAC May/September 2013 Central Revenue Agency - CARTAC July 2013 Support for Customs and Excise Department’s Preparation of VAT - FAD January/February 2014 Revenue Administration - FAD March 2014 Tax Administration Readiness to Successfully Launch and Administer VAT - FAD March 2014 Goods and Services Tax - FAD March 2014 VAT Revenue Projection - FAD April 2014 Revenue Impact of Implementing VAT - MCM March 2014 Financial Crisis Management Planning - MCM April 2014 Debt Management - CARTAC June 2014 Price Statistics - CARTAC August 2014 Balance of Payment and International Investment Position - FAD September/October 2014 Revenue Administration - FAD October 2014 Preparation To Launch a Value Added Tax - CARTAC November 2014 Quarterly National Accounts - CARTAC December 2014 Price Statistics - CARTAC December 2014 Risk-Based Supervision of the Securities Market - LEG March 2015 Strengthening The Legal Framework for Bank Resolution and Crisis Management ### Inter-American Development Bank engagement - Country Strategy with The Bahamas 2013-2017 priorities: - (1) Public Finances and Management; - (2) Citizen Security and Justice; - (3) Energy; - (4) Private Sector Development; and - (5) Coastal Risk Management and Climate Change Adaptation. - Bank support aims to: - support Government efforts to ensure macroeconomic sustainability, social stability and employment; - increase resilience to negative impacts of natural disasters and climate change; - foster social cohesion, prevent crime and violence, and strengthen the criminal justice system; - modernize the electricity subsector and diversify the energy matrix; - facilitate diversification of the economy and trading partners; and - build resilience through improved coastal zone management and climate change adaptation measures. - Active Loans as of April 30, 2015 (In millions of U.S. dollars) — Project Name, Approval Date, Approved, Disbursed, Available: - BH-L1027 Air Transport Reform Program (PBL) Dec 14, 2011 47.5 15 32.5 - BH-L1027 Air Transport Reform Program (TC Loan) Dec 14, 2011 2.5 2.0 0.51 - BH-L1028 WSC Support Program––New Providence Water Supply and Sanitation Systems Upgrade Nov 16, 2011 81.0 46 34 - BH-L1016 Trade Sector Support Program Jul 18, 2012 16.5 4 12.3 - BH-L1029 New Providence Transport Program Supplementary Financing II Sep 04, 2012 65.0 59 6 - BH-L1030 Social Safety Net Reform Program Jul 18, 2012 7.5 0.86 6.6 - BH-L1035 Performance Monitoring and Public Financial Management Reform Nov 19, 2014 33 0 33 - Total Loans 7 253 126.86 124.91 *Source: THE BAHAMAS — STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (May 21, 2015).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15203.pdf_