## _cr16224

## Source details

**Canonical URL:** [_cr16224](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16224.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16224.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16224.pdf.json)

---

### VAT Impact
- VAT introduced in January 2015.
- Reform measures implemented:
  - eliminated the 10 percent hotel room tax;
  - reduced import tariffs on a number of items;
  - adjusted several domestic tax rates including rates on property taxes, business licenses, and stamp duties.
- Revenue impact:
  - Overall, estimates suggest a significant net increase in tax revenue.
- Impact on headline inflation:
  - VAT introduction increased annual CPI inflation in 2015 by about 2 percentage points (estimate based on a parsimonious forecasting model relating headline inflation to the change in government debt and US inflation; VAT impact approximated by the part not explained by underlying fundamentals).
  - Monthly data show a temporary spike in January 2015:
    - Headline and median inflation increased by about 2½ to 3½ percentage points in January.
- Differential pass-through across consumption subcomponents:
  - Immediate and near-complete pass-through for subcomponents accounting for about 26 percent of the consumption goods in the retail price index: food, beverages, furnishings and household equipment, health, communication and recreation.
  - Incomplete pass-through for other subcomponents, including:
    - housing, utilities and energy (more than 30 percent of the total);
    - education;
    - restaurants and hotels;
    - miscellaneous services.
  - Reasons for heterogeneity: compensating factors in tax reform (e.g., reduction in the hotel room tax), lower energy prices, differences in price elasticities, competition, regulated and administered prices.
- Interaction with demand and external factors:
  - VAT was introduced when consumer demand was relatively depressed (high unemployment, large negative output gap) and coincided with a large decline in global oil prices; both likely dampened the impact on prices.
  - Little evidence of “inflation smoothing” in months prior to VAT introduction.
- Relation to international evidence:
  - Consistent with findings such as Benedek, De Mooij, Keen, and Wingender (2015) for Europe that only about one third of VAT increases are directly passed through to consumer prices, with most of the increase contemporaneous.

### Macroeconomic policies geared towards stability
- Policy constraints and strategy:
  - Small, open island economy with strong commitment to a fixed exchange regime (US$1=B$1) and extensive capital flow management system; limited policy buffers.
  - Monetary policy constrained by eventual increase in U.S. interest rates.
  - Fiscal policy focus: ensure debt sustainability; main lever to respond to external shocks is fiscal tightening centered on reducing current expenditure while protecting necessary social spending.
- Fiscal consolidation and VAT contribution:
  - Authorities expect strong VAT collection together with reforms to enhance revenue administration raising additional revenue of up to 2½ percent of GDP.
  - Authorities’ plan: reduce the FY2015/16 fiscal deficit to 1.5 percent of GDP and achieve a near balanced budget by 2017/18 (authorities’ view).
  - Staff projections: fiscal deficit projected to narrow to 3 percent in FY2015/16; deficit expected to decline further in FY2016/17, with debt stabilizing around the same time.
  - Recommendation: credible reforms toward a medium-term budget framework to balance continued consolidation and near-term support for recovery.
- Investment and growth-enhancing spending:
  - Room to shift spending from current to productive infrastructure: information and communication technology, transportation, public utilities, projects supporting economic diversification, increasing domestic value added in tourism, and enhancing resilience to natural disasters.
  - Use of responsible public-private partnerships where relevant.
- Structural reforms priorities:
  - Staff finds negative TFP growth and smaller contributions from capital accumulation and labor reduced potential growth since 2000; non-accelerating rate of unemployment increasing.
  - Urgent reforms recommended to:
    - strengthen the business environment (contract enforcement, insolvency frameworks, property registration, access to credit, reduce administrative burden/time to start a business);
    - raise human capital and reduce skill mismatches (improve educational outcomes, strengthen apprenticeship and vocational programs, ease labor mobility restrictions, reverse brain drain);
    - improve competitiveness by reducing costs (reduce energy and utility costs, align wages with productivity, advance SOE reforms).
  - Recent energy sector actions: external management company engagement; parliament passed legislation reforming Bahamas Electricity Company; independent regulator established; refinancing legacy debts and funding capital improvements.
  - Recommendation: extend reforms to other SOEs, ensure regular financial reporting and consistent monitoring.
- Credit growth and NPL resolution:
  - Discussions on placing distressed mortgage assets in SPVs protracted due to social concerns.
  - Recommendation: consider comprehensive resolution framework including possibly a specialized agency; finalize credit bureau to build comprehensive debtor information.
- Authorities’ views (selected):
  - On track to achieve deficit target in FY2015/16; expect to reallocate spending for Hurricane Joaquin reconstruction; expect further deficit reduction to below 1 percent next year mainly through modernization of revenue administration, stronger enforcement, and spending control; cautious about VAT exemptions and prefer increasing social assistance rather than VAT exemptions; considering pension reform toward defined contribution regime.
- Fiscal and external sustainability:
  - Primary fiscal balance expected to return to a surplus over the next two years.
  - Central government debt to GDP ratio expected to stabilize at 67 percent of GDP by FY2016/17 and begin to decline gradually thereafter.
  - Fiscal vulnerabilities beyond central government:
    - SOE debt amounted to an additional 17.4 percent of GDP in December 2015.
    - Unfunded public pension liabilities of $2.2 billion (about 26.2 percent of GDP) projected to grow further.
  - Following VAT introduction, focus on other fiscal reforms: review revenue lines and modernize customs, property tax, vehicle fees, and immigration fee administration; steps toward a Central Revenue Agency (CRA) underway.
- Combination of revenue and expenditure reforms:
  - Revenue recommendations:
    - Resist pressures to weaken VAT efficiency through exemptions (e.g., food, medical, insurance) which could amount to an estimated ¾ percent of GDP in revenue losses.
    - Address social concerns via targeted safety net adjustments.
    - Review tax exemptions and concessions (including tourism); consider eliminating low-revenue yielding fees and duties and simplifying domestic taxes (e.g., business license fee regime).
    - Continue progress toward a fully-fledged CRA; establish VAT audit program.
  - Expenditure recommendations:
    - Rationalize current expenditure within a medium-term budget framework.
    - Contain further growth in current spending and gradually unwind crisis-related spending increases.
    - Resist pressure to increase public wages and employment given low labor productivity; strengthen payroll management.
    - Advance SOE reforms and address pension risks through parametric reforms and medium-term defined contribution system.
  - PFM reforms:
    - Improve fiscal reporting, introduce procedural rules to support expenditure discipline, prepare a medium-term fiscal framework document for parliament, consider a simple rule to contain spending volatility.

### Addressing challenges from loss of CBRs
- Steps taken:
  - Central bank survey in June 2015 on correspondent banking activities; plan to reissue in 2016.
  - CFATF recognized progress; updated report and policy recommendations to be discussed following December 2015 onsite mission.
  - Central bank finalized amendments to AML/CFT Guidelines and introduced new Wire Transfer regulations.
  - Authorities participate in regional bodies to create collective solutions; emphasis on effective implementation of AML/CFT regulations.
- Authorities’ actions:
  - State-owned bank engaged consultants to develop rehabilitation plan: strengthen risk management, enforce collection, revise market focus, improve governance.
  - Authorities committed to monitoring industry, assisting banks, encouraging risk-based approach, coordinating with regional counterparts.
- Financial sector regulation and supervision (Box 3 selected findings):
  - 2013 FSAP: no short-term threats; independent and strong oversight; strict firewalls between domestic and offshore sectors.
  - CBB proposing hybrid approach to bank resolution following IMF TA in 2015.
  - Bank stress tests (June 2015): CARs in excess of 30 percent on average; under a 200 percent NPL increase scenario CARs remain above 17 percent regulatory minimum except one bank (still above trigger rate).
  - Basel II/III:
    - Implementation commenced in 2016Q1.
    - First reporting under new framework: January 2016 for commercial banks, end-March for international firms.
    - CBB analysis: banks’ capital levels remain robust overall though some institutions “likely to be stressed”; assuming full implementation of CCB and total eligible capital, only one bank would fall short; with CCB and countercyclical buffer, four banks would not meet additional requirement.
  - Credit unions:
    - CBB assumed authority for domestic credit union system of nine institutions (assets ~3.5 percent of domestic banking system assets); upon adoption, credit union deposits have Deposit Insurance Corporation protection.
  - Credit Bureau:
    - Preparatory work continues; legislation expected to be presented to the parliament soon; operations starting 12-16 months after legislative approval.
  - FATCA reporting commenced in September 2015.
- Loss of CBRs (Box 4):
  - Six institutions (mainly domestic commercial banks and standalone international banks), representing about 19 percent of domestic banking system assets, have recently lost CBRs; all affected institutions either had additional CBRs, found replacements, or negotiated continuation (sometimes at additional annual fee).
  - Money transfer business impacts: one domestic bank closed its Western Union franchise in summer 2015; another MTB provider was notified about possible termination.
  - Adverse operational impacts: prolonged clearance procedures; higher investment and staffing costs from additional reporting requirements.
  - Reasons for termination: stricter application of source country regulations (mainly U.S.), perceived AML compliance costs outweigh profits, risk-based approaches leading to reluctance to service institutions linked to MTBs or online gaming.
  - Replacements: other major global banks provided replacements; Canadian banks not interested in taking over correspondent banking business.
  - Risks if continued withdrawal: uncertainty for business, adverse implications for financial sector and economy, especially for international banks and MTBs; potential for market concentration; additional costs likely passed to customers; withdrawal of Canadian banks could cause major disruptions.
  - Remittances: overall remittance outflows average about 1 percent of GDP in last three years (around $100 million); share of incoming remittances in recipient countries cited (e.g., around 2.5 percent of total in Haiti and 0.4 percent in Jamaica).

### Data, technical assistance, and gaps
- Data coverage and timeliness gaps: national accounts, public sector accounts, external accounts.
- IMF staff support: VAT implementation, adoption of IPSAS on an accrual basis, strategic and medium–term budgeting, compiling and publishing quarterly national accounts and IIP statistics.

### Staff appraisal — key findings and recommendations
- Economic activity:
  - Real GDP growth stalled in 2015; air tourism arrivals growth insufficient to offset weaker domestic demand.
  - Headwinds: fiscal consolidation, end to construction and uncertainties over opening of Baha Mar megaresort, weaker goods exports.
  - Outlook: real GDP growth projected to increase gradually and receive a temporary boost when Baha Mar opens.
- Fiscal policy and revenue:
  - VAT introduction commended for contributing to macroeconomic stability and strengthening policy credibility.
  - Authorities urged to resist exemptions to the VAT regime and ensure continued strong implementation.
  - Recommendations: move toward a fully-fledged central revenue agency; continue modernization of customs and property tax administration; review tax exemptions and concessions (including tourism); simplify domestic taxes that are not business-friendly.
- Fiscal consolidation:
  - Further consolidation critical to rebuild fiscal and external buffers and boost investor confidence.
  - Suggested actions: spending rationalization; contain public wage increases; extend SOE reform beyond energy sector; modernize PFM.
  - Shift composition toward growth-enhancing infrastructure spending and a medium-term budget framework; address pension-related fiscal pressures.
- Structural reforms and competitiveness:
  - Potential growth estimated at only 1 to 1½ percent over the medium term; negative TFP growth; high youth and structural unemployment.
  - Staff recommends shifting spending to productive infrastructure and prompt implementation of NDP reforms to strengthen business environment, human capital, and reduce costs.
- Financial sector:
  - Renewed efforts to resolve NPL overhang to spur credit growth.
  - Progress welcomed: addressing AML/CFT gaps and implementing Basel II/III.
  - Encourage strengthening of risk-based supervision, crisis management framework, compliance efforts, and stakeholder communication to address de-risking challenges.

### Macroeconomic overview and projections (selected indicators)
- Real GDP (annual percent changes): 2012: 3.1; 2013: 0.0; 2014: -0.5; 2015: -1.7; 2016 (Est.): 0.5; 2017 (Proj.): 1.0
- Nominal GDP (annual percent changes): 2012: 6.5; 2013: 1.5; 2014: 1.1; 2015: 2.7; 2016 (Est.): 2.1; 2017 (Proj.): 3.1
- CPI (annual average): 2012: 1.9; 2013: 0.4; 2014: 1.2; 2015: ...; 2016 (Est.): 1.9; 2017 (Proj.): 0.9; 2018 (Proj.): 1.2
- Unemployment rate (percent): 2012: 14.4; 2013: 15.8; 2014: 14.6; 2015: ...; 2016 (Est.): 13.4; 2017 (Proj.): 15.6; 2018 (Proj.): 14.9
- Saving rate (percent of GDP): 2012: 10.9; 2013: 10.1; 2014: 9.2; 2015: ...; 2016 (Est.): 12.0; 2017 (Proj.): 14.0; 2018 (Proj.): 14.3
- Investment rate (percent of GDP): 2012: 28.8; 2013: 27.7; 2014: 31.2; 2015: ...; 2016 (Est.): 27.2; 2017 (Proj.): 25.4; 2018 (Proj.): 25.0
- GDP (US$ millions), 2014: 8,618
- GDP per capita (US$), 2014: 23,926
- Population (thousands), 2014: 360
- Poverty rate (percent), 2013: 12.8
- Unemployment rate (percent), November 2015: 14.8

### Fiscal developments and central government operations (selected figures)
- Central government revenue and grants (percent of GDP): 2012: 17.8; 2013: 16.0; 2014: 16.9; 2015: 19.5; 2016 (Est.): 20.8; 2017 (Proj.): 21.9
- Central government expenditure (percent of GDP): 2012: 23.3; 2013: 22.4; 2014: 22.5; 2015: 23.9; 2016 (Est.): 23.8; 2017 (Proj.): 24.6; 2018 (Proj.): 24.2; 2019 (Proj.): 24.0; 2020 (Proj.): 23.6
- Overall balance (percent of GDP): 2012: -5.5; 2013: -6.4; 2014: -5.6; 2015: -4.4; 2016 (Est.): -3.0; 2017 (Proj.): -2.7
- Primary balance (percent of GDP): 2012: -3.2; 2013: -4.1; 2014: -3.1; 2015: -1.7; 2016 (Est.): -0.1; 2017 (Proj.): 0.2
- Central government debt (percent of GDP): 2012: 48.0; 2013: 55.4; 2014: 60.2; 2015: 64.4; 2016 (Est.): 65.9; 2017 (Proj.): 67.0; 2018 (Proj.): 66.8; 2019 (Proj.): 66.0; 2020 (Proj.): 65.3; 2021 (Proj.): 64.4
- Operations of central government (millions of B$):
  - Revenue: FY13/14: 1,451; FY14/15: 1,702; FY15/16: 1,864; FY16/17: 2,006; FY17/18: 2,121; FY18/19: 2,212; FY19/20: 2,306; FY20/21: 2,387
  - Tax revenue: FY13/14: 1,246; FY14/15: 1,500; FY15/16: 1,679; FY16/17: 1,816; FY17/18: 1,924; FY18/19: 2,007; FY19/20: 2,094; FY20/21: 2,169
  - VAT receipts (in millions B$): FY13/14: 219; FY14/15: 599; FY15/16: 624; FY16/17: 666; FY17/18: 693; FY18/19: 718; FY19/20: 740
  - Expenditure (total): FY13/14: 1,930; FY14/15: 2,084; FY15/16: 2,128; FY16/17: 2,258; FY17/18: 2,329; FY18/19: 2,399; FY19/20: 2,460; FY20/21: 2,498
  - Wages and salaries (millions B$): FY13/14: 624; FY14/15: 640; FY15/16: 662; FY16/17: 679; FY17/18: 695; FY18/19: 723; FY19/20: 749; FY20/21: 772
  - Interest payments (millions B$): FY13/14: 212; FY14/15: 233; FY15/16: 259; FY16/17: 266; FY17/18: 273; FY18/19: 280; FY19/20: 286; FY20/21: 288
  - Net incurrence of liabilities (total, millions B$): FY13/14: 479; FY14/15: 382; FY15/16: 265; FY16/17: 251; FY17/18: 208; FY18/19: 187; FY19/20: 154; FY20/21: 110
  - Net incurrence of liabilities by source (millions B$):
    - Domestic: FY13/14: 51; FY14/15: 258; FY15/16: 212; FY16/17: 201; FY17/18: 166; FY18/19: 150; FY19/20: 123; FY20/21: 88
    - Foreign: FY13/14: 428; FY14/15: 124; FY15/16: 53; FY16/17: 50; FY17/18: 42; FY18/19: 37; FY19/20: 31; FY20/21: 22

### External sector and competitiveness (selected)
- Current account balance (millions US$): 2013: -1,494; 2014: -1,898; 2015: -1,352; 2016 (Est.): -1,026; 2017 (Proj.): -997; 2018 (Proj.): -863; 2019 (Proj.): -765; 2020 (Proj.): -769; 2021 (Proj.): -753
- Current account balance (percent of GDP): 2013: -17.5; 2014: -22.0; 2015: -15.3; 2016 (Est.): -11.4; 2017 (Proj.): -10.7; 2018 (Proj.): -8.9; 2019 (Proj.): -7.6; 2020 (Proj.): -7.4; 2021 (Proj.): -7.0
- Travel (net, millions US$): 2012: 2,022; 2013: 2,097; 2014: 2,140; 2015: 2,318; 2016 (Est.): 2,428; 2017 (Proj.): 2,688; 2018 (Proj.): 2,965; 2019 (Proj.): 3,130; 2020 (Proj.): 3,285
- Gross international reserves (millions US$): 2012: 810; 2013: 742; 2014: 788; 2015: 812; 2016 (Est.): 850; 2017 (Proj.): 859; 2018 (Proj.): 909; 2019 (Proj.): 923; 2020 (Proj.): 958; 2021 (Proj.): 981
- Reserves in months of next year's imports of G&S: 2012: 2.0; 2013: 1.8; 2014: 2.3; 2015: ...; 2016 (Est.): 2.4; 2017 (Proj.): 2.5; 2018 (Proj.): 2.4
- Staff projects current account improvement to around 7 percent of GDP over the medium term, allowing modest rebuilding of external buffers.
- External position assessment: weaker than suggested by fundamentals and desirable policy settings; reserves broadly adequate by standard metrics but fall short when accounting for small-island specific factors.

### Banking and financial sector (selected)
- Banking sector: NPLs have declined but remain elevated; banking liquidity is high and increasing; capital buffers continue to increase; interest rate spread supports bank profitability; credit growth remains negative.
- Financial sector importance: accounts for more than 10 percent of GDP and 2.7 percent of total employment.
- Global de-risking trends: temporary interruptions of CBRs in some institutions; continued measures could adversely affect the financial sector and broader economy.

### Risk Assessment Matrix (selected risks, likelihoods, impacts, policy responses)
- Further significant delay in Baha Mar opening
  - Likelihood: Medium
  - Potential Impact: Medium
  - Policy Response: Coordinate with stakeholders; continued fiscal consolidation; implement structural reforms to boost investor confidence and attract FDI.
- Natural disasters (severe weather related)
  - Likelihood: Low
  - Potential Impact: Medium
  - Policy Response: Budgetary provisions for disaster mitigation; enhance resilience through infrastructure investment; build fiscal and external buffers.
- Tighter or more volatile global financial conditions (including further surge in the US dollar; dislocation in capital flows; reduced correspondent banking services “de-risking”)
  - Likelihood: High (for tighter/volatile global financial conditions); Medium for dislocation in capital flows
  - Potential Impact: Medium
  - Policy Response: Continued fiscal consolidation centered on reducing current expenditure; diversify growth drivers; strengthen competitiveness; strong implementation of AML/CFT regulations; monitor CBRs.
- Sharper-than-expected global growth slowdown
  - Likelihood: Medium
  - Potential Impact: High
  - Policy Response: Continued fiscal consolidation; diversify growth drivers; strengthen competitiveness.
- Persistently lower energy prices
  - Likelihood: Medium
  - Potential Impact: Low
  - Policy Response: Use as opportunity to speed-up energy sector reform.
- Emergence of Cuba as a competitor in tourism
  - Likelihood: High
  - Potential Impact: Medium
  - Policy Response: Build broader tourist base; develop synergies with Cuba; position hotel industry as high-end niche.

### Reserve adequacy metrics
- International reserves: US$981 million (end-March 2015).
- Reserves relative to Fund’s suggested level: around 72 percent.
- Reserves coverage under SIDS measure: 45 percent.
- Reserves well above 100 percent of short-term debt.
- Adjusting for FDI-related imports, reserves are more than 3 months of imports.
- Note: capital controls on residents and some nonresident outflows are an important mitigating factor.

### Debt Sustainability Analysis — key messages and scenarios
- Central government debt increased due to weaker fiscal stance and low growth but expected to stabilize at 67 percent of GDP and decline gradually.
- Debt stock and financing:
  - Central government debt reached 64.4 percent of GDP in FY 2014/15, up by 4.2 percentage points.
  - Baseline: debt peaks at 67 percent of GDP in FY2016/17 and falls to 64.4 percent over the medium term.
  - Gross financing requirement declines from 8.4 percent of GDP in FY 2014/15 to about 3.2 percent of GDP.
- Debt profile:
  - 72 percent of total debt held in local currency.
  - Short-term debt is 12.7 percent of total debt (denominated in local currency).
  - Weighted average time to maturity: domestic bonds 9.6 years; external bonds 16 years.
- Staff baseline assumptions:
  - Real growth averages 1.6 percent over the medium term.
  - Inflation expected at 1.6 percent.
  - Primary balance projected to improve to a surplus of 1.7 percent at end of forecast period.
- Sensitivity and stress tests (debt as percent of GDP at end of projection period unless noted):
  - Real GDP growth shock: debt could rise to 73.6 percent (baseline ~64.4 percent).
  - Primary balance shock: debt could rise to around 70 percent.
  - Real interest rate shock: debt could rise to around 70 percent.
  - Real exchange rate shock: debt could rise to 68 percent.
  - Combined macro–fiscal shock: debt could rise to 78 percent of GDP; gross financing requirements could rise to 6.1 percent of GDP in 2020/21.
- Adverse scenario approaches:
  - Constant primary balance (held at FY2015/16 level -0.1 percent of GDP): debt rises to 73.7 percent of GDP in 2020/21.
  - Historical average approach (from 2017: real GDP growth 0.3 percent and primary balance -1.9 percent): debt rises to 91.8 percent of GDP; gross financing requirements rise to 9.3 percent of GDP.
- Natural disaster (hurricane) shock:
  - Baseline real GDP growth reduced by 2.5 percent in 2017 and 1.5 percent in 2018.
  - Primary balance worsens by 1.25 percent and 0.75 percent of GDP in the same years.
  - Debt level rises to 73.6 percent of GDP by 2021.
- Fiscal contingent liabilities and public-sector risks:
  - Debt of public entities: 17.6 percent of GDP in 2014/15.
  - Government-guaranteed portion of public entities' debt: 8.2 percent of GDP.
  - Unfunded pension liabilities: around $2.2 billion (about 26.2 percent of GDP).
  - Implicit debt of social security system estimated at about 50 percent of GDP in 2015 and projected to grow.

### Annex II — The Public Pension System: a case for reform
- System composition:
  - Predominantly partially funded and unfunded defined benefit schemes.
  - Pension obligations expected to rise in next two decades due to population aging.
- Government Pension Scheme:
  - Non–contributory; retirement pensions from age 65; accrual 1/60 of pensionable earnings per year up to 40 years for general public service.
  - Government pensioners represent 15 percent of public workforce.
  - Pension payments from the budget averaged 1 percent of GDP and 7.3 percent of tax revenue per year in 1994–2014.
  - Accrued pension liabilities totaled B$1.5 billion in 2012 (17.9 percent of GDP).
  - Projected by 2030: pension payments B$230million (1.5 percent of GDP); pension liabilities B$3.7 billion (24 percent of GDP).
- Public Entities Pension Scheme:
  - Most public entities have non–contributory schemes; typical retire at 60 with 2 percent of pensionable earnings per year up to 40 years.
  - Combined pension shortfall B$0.7 billion (8.3 percent of GDP).
  - Budget support to loss-making public entities: B$116.8 million (1.4 percent of GDP) in FY2014/15.
- National Insurance Scheme (NIS):
  - Contributory, partially funded, PAYG; covers 70 percent of labor force.
  - Reserves about 20 percent of GDP in 2014; could cover about 7.6 years of benefit payments without additional revenue.
  - Income from contributions: 2.7 percent of GDP; total expenditure: 3.3 percent of GDP.
  - Projection: beyond 2033 the scheme projected to run operational deficits as it matures.
  - High administrative costs: equivalent to about one–quarter of contributions in 2013.
- Options for reform (illustrative package and menu):
  - Illustrative parametric package for NIS: raise contribution rate by 1 percent; freeze benefits for two years; raise retirement age from 65 to 67 — package would nearly wipe out NIS implicit debt (49 percent in 2015).
  - Menu of measures across schemes includes raising retirement age to 67, capping pensionable salary increases, freezing benefits, indexing benefits to CPI, introducing defined contribution systems for new employees, strengthening oversight, reducing administrative costs, expanding coverage, and diversifying investment portfolios.
- Sequencing:
  - Begin measures to contain pension cost increases; over medium term phase in parametric and structural reforms; strengthen oversight and reduce administrative inefficiencies.

### Reserve adequacy and related notes (additional)
- International reserves: US$981 million at end-March 2015 (noted elsewhere as US$980.5 million at end of March in related text).
- Fund’s standard risk-weighted measure: current reserves around 72 percent of suggested level; country-specific factors and capital controls mitigate needs.
- SIDS measure: reserves at 45 percent of recommended level.
- Historical capital flows: net portfolio investment and other private capital flows positive except briefly in 2009 when they fell to zero.
- Increasing reliance on private capital inflows other than FDI and sovereign bond issuance implies increasing risks from shifts in investor sentiment.

*Source: _cr16224.*

### 1. VAT Impact________________________________________________________________________________________ 7

### 1. VAT Impact

### Overview and reform measures
- VAT was introduced in January 2015.
- As part of the VAT reform, the authorities have:
  - eliminated the 10 percent hotel room tax;
  - reduced import tariffs on a number of items;
  - adjusted several domestic tax rates including rates on property taxes, business licenses, and stamp duties.
- Overall, estimates suggest a significant net increase in tax revenue.

### Impact on headline inflation
- Consistent with international evidence of incomplete pass-through, VAT introduction likely had only a temporary and muted impact on consumer inflation.
- After controlling for other determinants, VAT introduction increased annual CPI inflation in 2015 by about 2 percentage points, reflecting less than complete pass-through (estimate based on a parsimonious forecasting model relating headline inflation to the change in government debt and US inflation; VAT impact approximated by the part not explained by underlying fundamentals).
- Monthly data show a temporary spike in headline inflation in January 2015:
  - Headline and median inflation increased by about 2½ to 3½ percentage points in January.
  - The monthly spike is shown relative to average monthly inflation in previous years.

### Differential pass-through across consumption subcomponents
- Pass-through appears to have been immediate and near-complete for subcomponents accounting for about 26 percent of the consumption goods in the retail price index: food, beverages, furnishings and household equipment, health, communication and recreation.
- Pass-through has been incomplete for other subcomponents, including:
  - the largest subcomponent, housing, utilities and energy (more than 30 percent of the total);
  - education;
  - restaurants and hotels;
  - miscellaneous services.
- Reasons for heterogeneous pass-through include:
  - compensating factors in the tax reform (e.g., reduction in the hotel room tax dampening impact on restaurants and hotels);
  - lower energy prices (dampening impact on transportation);
  - differences in price elasticities of consumption, competition, and the impact of regulated and administered prices.

### Interaction with demand and external factors
- The VAT was introduced when consumer demand was relatively depressed (high unemployment, large negative output gap) and coincided with a large decline in global oil prices; both factors likely dampened the impact of VAT on prices.
- There is little evidence of “inflation smoothing” (i.e., increases in inflation in months prior to VAT introduction) in headline inflation.

### Relation to international evidence and methodology
- Results are broadly consistent with international evidence; for example, Benedek, De Mooij, Keen, and Wingender (2015) show using European data that only about one third of VAT increases are directly passed through to consumer prices, with most of the increase taking place contemporaneously.
- The inflation forecast cited is based on a parsimonious model that relates headline inflation to the change in government debt and US inflation; VAT impact is approximated by the unexplained component.

*Source: Box 1. VAT Impact, IMF staff report excerpt.*

### 8.      Macroeconomic policies geared towards stability. The nature of The Bahamas as a small,

### 8.      Macroeconomic policies geared towards stability

### Policy constraints and overall strategy
- The Bahamas is a small, open island economy with a strong commitment to a fixed exchange regime and an extensive capital flow management (CFM) system, as well as limited policy buffers, leaving authorities with few macroeconomic policy tools.
- Monetary policy is constrained by the eventual increase in U.S. interest rates.
- Fiscal policy needs to be geared primarily towards ensuring debt sustainability.
- Main policy lever to respond to external shocks: continued fiscal policy tightening centered on reducing current expenditure while protecting necessary social spending.

### Fiscal consolidation in a low-growth environment
- VAT reform has made an important contribution to maintaining macroeconomic stability and strengthening policy credibility.
- Authorities expect strong VAT collection together with reforms to enhance revenue administration raising additional revenue of up to 2½ percent of GDP.
- Authorities’ plan: reduce the FY2015/16 fiscal deficit to 1.5 percent of GDP and achieve a near balanced budget by 2017/18 (authorities’ view).
- Staff projections: fiscal deficit projected to narrow to 3 percent in FY2015/16; deficit expected to decline further in FY2016/17, albeit at a slower pace, with debt stabilizing around the same time.
- Recommendation: credible reforms to ensure fiscal responsibility, including decisive steps towards a medium-term budget framework, to balance continued consolidation and near-term support for recovery.

### Investing in growth-enhancing infrastructure
- Staff sees room to shift spending away from current spending toward productive, growth-friendly infrastructure.
- Investment priorities: information and communication technology, transportation, public utilities, projects supporting economic diversification, increasing domestic value added in tourism, and enhancing resilience to natural disasters.
- Use of responsible public-private partnerships, where relevant, to reduce the fiscal burden of higher investment.

### Structural reforms to lift potential growth and competitiveness
- Staff findings: negative TFP growth and smaller contributions from capital accumulation and labor contributed to a significant decline in potential growth since 2000; the non-accelerating rate of unemployment has been consistently increasing.
- Persistent competitiveness weaknesses: elevated energy costs and high costs of doing business.
- Authorities completed a comprehensive State of the Nation diagnostic as a first step toward the National Development Plan (NDP); next steps include national dialogue and a comprehensive package of reform measures.
- Urgent shift to implementation of growth-friendly structural reforms focused on:
  - Strengthening the business environment: improve contract enforcement, insolvency frameworks, property registration, access to credit, and reduce administrative burden/time to start a business.
  - Raising human capital and reducing skill mismatches: improve educational outcomes, strengthen apprenticeship and vocational programs, ease labor mobility restrictions, and seek to reverse brain drain of skilled Bahamians.
  - Improving competitiveness by reducing costs: reduce energy and utility costs, better align wages with productivity, advance SOE reforms to reduce operational inefficiencies, foster enabling regulatory environment, and align tariffs with costs of service delivery.
- Recent energy sector actions: external management company engagement; parliament passed legislation reforming Bahamas Electricity Company, establishing an independent regulator, and refinancing legacy debts and funding capital improvements.
- Recommendation: extend reforms to other SOEs, including Bahamasair and the Water and Sewerage Corporation; ensure regular financial reporting and consistent monitoring.

### Policies to revive credit growth and NPL resolution
- Discussions between government and banks about placing distressed mortgage assets in SPVs have been protracted, partly due to social concerns.
- Timely, socially responsible resolution of debt overhang would help unlock resources for private sector financing, supporting growth and financial stability.
- Authorities should consider a comprehensive resolution framework that may include establishing a specialized agency.
- Work on establishing a credit bureau continues; prompt finalization is key to build comprehensive information on debts and repayment histories.

### Authorities’ views (selected)
- Authorities affirmed they remain on track to achieve their deficit target in FY2015/16, citing tighter spending control and seasonality in business license fees and property tax collection.
- They expect to reallocate spending to accommodate Hurricane Joaquin reconstruction spanning several years; project execution capacity constrains near-term capital spending increases.
- Authorities expect further deficit reduction to below 1 percent next year mainly through modernization of revenue administration, stronger enforcement, and spending control.
- Authorities optimistic that new investment projects could boost growth and lower unemployment; view the NDP as critical to strengthen and diversify the economy.
- Authorities recognize need for decisive and timely resolution of NPLs; banks have been more aggressive in restructuring and mortgage relief but progress has been slow.
- Authorities committed to fiscal consolidation, cautious about VAT exemptions, and prefer increasing social assistance rather than VAT exemptions.
- Authorities are taking steps to modernize PFM, move toward a medium-term fiscal framework, and consider pension reform including a move toward a defined contribution regime.

### Ensuring fiscal and external sustainability
- Primary fiscal balance expected to return to a surplus over the next two years despite gradual consolidation.
- Central government debt to GDP ratio is expected to stabilize at 67 percent of GDP by FY2016/17 and begin to decline gradually thereafter.
- Fiscal vulnerabilities beyond the central government:
  - SOE debt amounted to an additional 17.4 percent of GDP in December 2015.
  - Unfunded public pension liabilities of $2.2 billion (about 26.2 percent of GDP) projected to grow further in coming decades.
- Following smooth VAT introduction, focus on other fiscal reforms: review of all revenue lines and modernization of customs, property tax, vehicle fees, and immigration fee administration.
- Steps taken toward a Central Revenue Agency (CRA): online payment of business license fees, electronic customs filing, merging operations of key domestic revenue agencies.
- Introduction of a National Health Insurance (NHI) scheme planned in phases; public consultation ongoing; cost and funding sources yet to be determined.
- Consultation paper on fiscal responsibility legislation released in May 2015; yet to be discussed.

### Combination of growth-friendly reforms to aid consolidation
- Revenue reforms:
  - Staff urges resistance to pressures to weaken VAT efficiency through exemptions (e.g., food, medical, insurance), which could amount to an estimated ¾ percent of GDP in revenue losses.
  - Social concerns should be addressed by targeted safety net adjustments.
  - Review tax exemptions and concessions (including tourism sector); consider eliminating low-revenue yielding fees and duties and simplifying domestic taxes (e.g., business license fee regime).
  - Room exists to raise more revenue through non-distortionary consumption taxes to offset other revenue losses.
  - Continue progress toward a fully-fledged CRA with clear institutional framework and governance to administer most domestic taxes.
  - Further VAT success steps: focus on program development, planning and performance monitoring based on operational data, and establishing an audit program.
- Expenditure reforms:
  - Consolidation has focused on revenue side while government expenditure has drifted upwards after the GFC.
  - Rationalize current expenditure within a medium-term budget framework to preserve VAT benefits, enhance credibility, and strengthen sustainability.
  - Contain further growth in current spending and gradually unwind crisis-related spending increases.
  - Resist pressure to increase public wages and employment given low labor productivity; strengthen payroll management.
  - Enhance efficiency of spending on goods and services and transfers/subsidies for fiscal savings.
  - Advance SOE reforms to reduce budgetary drain.
  - Take measures to address pension risks through parametric reforms and, over the medium term, introduction of a sustainable defined contribution system.
- Medium-term budget framework and PFM reforms:
  - Address weaknesses: out-of-date accounting system and Chart of Accounts; poor integration of capital budgeting into annual budget planning.
  - Immediate steps: improve fiscal reporting, introduce procedural rules to support expenditure discipline, and prepare a medium-term fiscal framework document for parliament as steps toward a fiscal rule.
  - Consider intermediate steps such as a simple rule to contain volatility in spending growth.

### Exchange rate, external position, and competitiveness
- Authorities remain firmly committed to the exchange rate peg: US$1=B$1.
- Authorities moving gradually to reform the CFM system with measures easing personal business transactions and loosening limits on cross-border investments.
- Staff projects an improvement in the current account over the medium term to around 7 percent of GDP, allowing modest rebuilding of external buffers.
- External sector assessment indicates the external position is weaker than suggested by fundamentals and desirable policy settings.
- Reserves: broadly adequate by standard metrics but fall short when accounting for small-island specific factors (exposure to external shocks and natural disasters).
- To maintain external sustainability and improve competitiveness: continued structural reform and further fiscal consolidation are necessary.

### Addressing financial sector challenges
- Recent progress welcomed: strengthened regulatory and supervisory framework, reporting under FATCA, and implementation of Basel II/III.
- Remaining vulnerabilities: need to strengthen crisis management and bank resolution frameworks; implement a comprehensive plan to address financial difficulties and governance of one state-owned bank.
- Global “de-risking” trends have resulted in, thus far temporary, interruptions of correspondent banking relations (CBRs) in some institutions; while not yet causing significant disruptions, continued measures could adversely affect the financial sector and broader economy.
- The financial services sector accounts for more than 10 percent of GDP and 2.7 percent of total employment; further scrutiny could reduce the sector’s contribution to growth and employment and complicate diversification efforts.

*Source: _cr16224 - 8.      Macroeconomic policies geared towards stability. The nature of The Bahamas as a small,*

### 19.      Addressing challenges from loss of CBRs. In addition to strengthening their overall risk-

### _cr16224 - 19.      Addressing challenges from loss of CBRs. In addition to strengthening their overall risk-

### Steps taken to address risks from loss of CBRs
- Central bank conducted a survey in June 2015 to gain a better view of correspondent banking activities and the impact of recent measures; plans to reissue the survey in 2016.
- Caribbean Financial Action Task Force (CFATF) recognized progress made in addressing previously identified deficiencies; updated report and policy recommendations to be discussed at the CFATF plenary later this year (following the December 2015 onsite mission).
- Central bank finalized amendments to its AML/CFT Guidelines and introduced new Wire Transfer regulations.
- Authorities actively participate in regional bodies aiming to create collective solutions to loss of CBRs.
- Emphasis on effective implementation of AML/CFT regulations, ensuring compliance, and promptly addressing gaps to keep pace with evolving international standards.
- Continued evaluation of supervisory and regulatory framework for banks and non-banks to proactively identify and address risks in a timely and assertive manner.

### Authorities’ views and actions
- Commitment to further improve regulatory and supervisory system to ensure financial stability.
- A state-owned bank engaged a consulting firm to develop and implement a rehabilitation plan focused on:
  - strengthening risk management,
  - enforcing collection,
  - revising market focus,
  - improving governance.
- Authorities recognize challenges from global “de-risking” and are committed to:
  - monitoring the industry,
  - providing assistance to banks,
  - encouraging a risk-based approach,
  - working on remaining regulatory gaps,
  - coordinating with regional counterparts to mitigate adverse economic fallout.
- Authorities highlighted an already strong overall AML/CFT regime and called for more clarity on regulatory expectations from international banks and source jurisdictions.

### Box 3 — Financial Sector Regulation and Supervision: Update (selected findings)
- 2013 FSAP: no short-term threats to financial stability; independent and strong oversight; strict firewalls between domestic financial system and offshore sector.
- Risk-based supervisory framework/crisis management:
  - CBB expects to issue a consultation paper proposing a hybrid (not purely judicial) approach to bank resolution following IMF technical assistance in 2015.
- Bank stress tests (Financial Stability Report, June 2015):
  - Capital adequacy ratios (CARs) are high on average, in excess of 30 percent.
  - Under a scenario with a 200 percent increase in NPLs, CARs remain above the 17 percent regulatory minimum, with the exception of one bank (whose CAR was still above the trigger rate that would have mandated additional capital).
- Basel II/III:
  - Implementation commenced in 2016Q1.
  - First official reporting under the new framework occurred in January 2016 for commercial banks, and end-March for international firms.
  - CBB analysis suggests banks’ capital levels remain robust under Basel II/III overall, although some individual institutions are “likely to be stressed” by the new requirements.
  - Assuming full implementation of capital conservation buffer (CCB) and total eligible capital, only one bank would fall short.
  - With respect to CCB and countercyclical capital buffer, four banks would not meet the additional requirement.
- Credit unions:
  - CBB assumed regulatory and supervisory authority for domestic credit union system comprising nine institutions (with assets equivalent to about 3.5 percent of the domestic banking systems’ assets).
  - Upon adoption, credit union deposits have Deposit Insurance Corporation protection.
- Credit Bureau:
  - Preparatory work continues; necessary legislation expected to be presented to the parliament soon with operations starting 12-16 months after legislative approval.
- FATCA:
  - Reporting under FATCA commenced in September 2015.

### Box 4 — Loss of CBRs: impacts, causes, replacements, and risks
- General impact:
  - The Bahamas impacted by global “de-risking” trends resulting in additional scrutiny and, in a few cases, temporary interruptions in correspondent banking relations (CBRs).
  - Affected institutions have so far avoided significant disruptions by relying on multiple service providers, switching to alternative providers, or negotiating continuation in CBRs.
- Impact on financial institutions:
  - Six institutions (mainly domestic commercial banks and standalone international banks), representing about 19 percent of domestic banking system assets, have recently lost CBRs.
  - All affected institutions either had additional CBRs, found replacements, or negotiated continuation in service (including against an additional annual fee).
  - Canadian banks and other international banks continue to rely on their head offices and parent banks for CBRs.
  - Money transfer business (MTB) impacted:
    - One domestic bank closed its Western Union money transfer franchise in summer 2015.
    - Another MTB provider was notified about a possible termination of their banking relationship.
  - Adverse operational impacts: prolonged clearance procedures; higher investment and staffing costs from additional reporting requirements and scrutiny.
  - Impacted business segments: credit card payments, cash management services, investment services, clearing and settlement, international wire transfers, remittance services.
- Reasons for termination:
  - Terminations often driven by stricter application of source country (mainly U.S.) regulations and changing regulatory environment costs.
  - Costs of AML compliance perceived to outweigh profits generated by CBR services, especially for smaller local institutions with fewer international transactions.
  - Some terminations appear driven by implementation of a risk-based approach; anecdotal evidence suggests international correspondent banks are uncomfortable providing services to domestic banks that do business with MTBs or on-line gaming operators (“web-shops”), perceived as higher risk.
  - Note: “web-shops” that fulfilled regulatory requirements were issued conditional licenses in November 2015; Gaming Board under Ministry of Tourism supervises gaming industry.
- Replacements:
  - Replacement CBRs provided by other major global banks.
  - Canadian banks present do not seem interested in taking over correspondent banking business.
  - Alternative service providers (second tier U.S.-based banks) generally not seen as credible alternatives.
- Risks and potential broader impacts:
  - To date, impact limited to institutions that lost CBRs; no major disruptions in service.
  - Continued withdrawal could create uncertainty for business, adverse implications for financial sector, and negative effects on the economy.
  - Risks particularly significant for international banks and MTBs due to reliance on international correspondent network for multicurrency payments and settlements.
  - MTBs:
    - The Bahamas does not rely on remittances as a major source of foreign currency income.
    - Termination of services could increase cost or interrupt remittance outflows to other countries in the region.
    - Overall remittance outflows average about 1 percent of GDP in last three years (around $100 million).
    - This represents a small share of incoming remittances in recipient countries (e.g. around 2.5 percent of total in Haiti and 0.4 percent in Jamaica).
  - Domestic banking system:
    - Dominance of Canadian banks (not directly impacted thus far) likely plays an important stabilizing role.
    - Additional loss of CBRs could lead to market concentration.
    - Additional costs from maintaining CBRs likely to be transferred to final customers, increasing cost of doing business and hampering access to financial services.
    - Withdrawal of Canadian banks could cause major disruptions in financial flows and trade finance.
  - Other risks:
    - Further loss of CBRs or higher costs could encourage businesses to move into less regulated parts of the financial system, contributing to growth of an informal banking system.

### Data, technical assistance, and remaining gaps
- Data provision generally adequate for surveillance but gaps remain in coverage and timeliness, including in national accounts, public sector accounts, and external accounts.
- Progress in addressing data shortcomings has been slow.
- IMF staff continues to support authorities’ efforts, including assistance with:
  - VAT implementation,
  - adoption of International Public Sector Accounting Standards (IPSAS) on an accrual basis,
  - strategic and medium–term budgeting,
  - compiling and publishing quarterly national accounts and IIP statistics.

### Staff appraisal — key findings and recommendations
- Economic activity:
  - Real GDP growth stalled in 2015; air tourism arrivals growth insufficient to offset weaker domestic demand.
  - Headwinds: fiscal consolidation, end to construction and uncertainties over opening of Baha Mar megaresort, weaker goods exports.
  - Outlook: real GDP growth projected to increase gradually as headwinds moderate and receive a temporary boost when Baha Mar opens.
- Fiscal policy and revenue:
  - VAT introduction commended for contributing to macroeconomic stability and strengthening policy credibility.
  - Authorities should resist pressures to introduce exemptions to the current broad-based and efficient VAT regime and ensure continued strong implementation.
  - Recommendations: move towards a fully-fledged central revenue agency; continue modernization of customs and property tax administration; review efficiency of tax exemptions and concessions (including tourism); consider simplifying domestic taxes that are not business-friendly.
- Fiscal consolidation:
  - Further consolidation critical to rebuild fiscal and external policy buffers and boost investor confidence amid still rising government debt.
  - Suggested actions: focus on spending rationalization; contain increases in public wage bill; extend SOE reform beyond the energy sector; advance reforms to modernize public financial management.
  - Shift composition towards growth-enhancing infrastructure spending and move towards a medium-term budget framework.
  - Address pension-related fiscal pressures given an ageing population.
- Structural reforms and competitiveness:
  - Mounting structural impediments: potential growth estimated at only 1 to 1½ percent over the medium term; total factor productivity growth is negative; youth and structural unemployment are too high.
  - Staff recommends shifting spending from current to productive infrastructure: information and communication technology, transportation, public utilities, projects supporting economic diversification, increasing domestic value added in tourism, and enhancing disaster resilience.
  - Urges prompt implementation of reforms in the National Development Plan to strengthen the business environment, raise human capital, reduce skill mismatches, and reduce high labor and energy costs.
  - Given the exchange rate peg, improving competitiveness through structural reforms would avoid excessive fiscal burden and help build still low international reserves.
- Financial sector:
  - Renewed efforts needed to resolve overhang of NPLs to spur credit growth.
  - Welcome progress: addressing AML/CFT regulation gaps and implementing Basel II/III.
  - Encourage continued strengthening of risks-based supervision, enhancement of crisis management framework, greater emphasis on risk-based supervision and regulation, strong compliance efforts, and close stakeholder communication to address global “de-risking” challenges.

*IMF staff report excerpt: Addressing challenges from loss of CBRs and related financial sector and macroeconomic assessment.*

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

### _cr16224 - 26.      It is proposed that the next Article IV consultation take place on the standard 12-

### Macroeconomic overview and projections
- Real GDP (annual percent changes): 2012: 3.1; 2013: 0.0; 2014: -0.5; 2015: -1.7; 2016 (Est.): 0.5; 2017 (Proj.): 1.0
- Nominal GDP (annual percent changes): 2012: 6.5; 2013: 1.5; 2014: 1.1; 2015: 2.7; 2016 (Est.): 2.1; 2017 (Proj.): 3.1
- Consumer price index (annual average): 2012: 1.9; 2013: 0.4; 2014: 1.2; 2015: ...; 2016 (Est.): 1.9; 2017 (Proj.): 0.9; 2018 (Proj.): 1.2
- Consumer price index (end of period): 2012: 0.7; 2013: 1.0; 2014: 0.2; 2015: ...; 2016 (Est.): 2.0; 2017 (Proj.): 0.9; 2018 (Proj.): 1.2
- Unemployment rate (percent): 2012: 14.4; 2013: 15.8; 2014: 14.6; 2015: ...; 2016 (Est.): 13.4; 2017 (Proj.): 15.6; 2018 (Proj.): 14.9
- Saving rate (percent of GDP): 2012: 10.9; 2013: 10.1; 2014: 9.2; 2015: ...; 2016 (Est.): 12.0; 2017 (Proj.): 14.0; 2018 (Proj.): 14.3
- Investment rate (percent of GDP): 2012: 28.8; 2013: 27.7; 2014: 31.2; 2015: ...; 2016 (Est.): 27.2; 2017 (Proj.): 25.4; 2018 (Proj.): 25.0

### Key social indicators (levels and rates)
- GDP (US$ millions), 2014: 8,618
- GDP per capita (US$), 2014: 23,926
- Population (thousands), 2014: 360
- Poverty rate (percent), 2013: 12.8
- Unemployment rate (percent), November 2015: 14.8
- Infant mortality rate, 2013: 10.4
- Life expectancy at birth (years), 2014: 75.4
- Human development index (rank), 2014: 55
- Adult literacy rate, 15 & up (percent), 2007: 95.6

### Fiscal developments and central government operations
- Central government revenue and grants (percent of GDP): 2012: 17.8; 2013: 16.0; 2014: 16.9; 2015: 19.5; 2016 (Est.): 20.8; 2017 (Proj.): 21.9
- Central government expenditure (percent of GDP): 2012: 23.3; 2013: 22.4; 2014: 22.5; 2015: 23.9; 2016 (Est.): 23.8; 2017 (Proj.): 24.6; 2018 (Proj.): 24.2; 2019 (Proj.): 24.0; 2020 (Proj.): 23.6
- Overall balance (percent of GDP): 2012: -5.5; 2013: -6.4; 2014: -5.6; 2015: -4.4; 2016 (Est.): -3.0; 2017 (Proj.): -2.7
- Primary balance (percent of GDP): 2012: -3.2; 2013: -4.1; 2014: -3.1; 2015: -1.7; 2016 (Est.): -0.1; 2017 (Proj.): 0.2
- Central government debt (percent of GDP): 2012: 48.0; 2013: 55.4; 2014: 60.2; 2015: 64.4; 2016 (Est.): 65.9; 2017 (Proj.): 67.0; 2018 (Proj.): 66.8; 2019 (Proj.): 66.0; 2020 (Proj.): 65.3; 2021 (Proj.): 64.4
- Operations of the central government (in millions of Bahamian dollars, Prel./Staff Projections snapshots):
  - Revenue: FY13/14: 1,451; FY14/15: 1,702; FY15/16: 1,864; FY16/17: 2,006; FY17/18: 2,121; FY18/19: 2,212; FY19/20: 2,306; FY20/21: 2,387
  - Tax revenue: FY13/14: 1,246; FY14/15: 1,500; FY15/16: 1,679; FY16/17: 1,816; FY17/18: 1,924; FY18/19: 2,007; FY19/20: 2,094; FY20/21: 2,169
  - Value added tax (VAT) receipts (in millions B$): FY13/14: 219; FY14/15: 599; FY15/16: 624; FY16/17: 666; FY17/18: 693; FY18/19: 718; FY19/20: 740
  - Expenditure (total): FY13/14: 1,930; FY14/15: 2,084; FY15/16: 2,128; FY16/17: 2,258; FY17/18: 2,329; FY18/19: 2,399; FY19/20: 2,460; FY20/21: 2,498
  - Wages and salaries (in millions B$): FY13/14: 624; FY14/15: 640; FY15/16: 662; FY16/17: 679; FY17/18: 695; FY18/19: 723; FY19/20: 749; FY20/21: 772
  - Interest payments (in millions B$): FY13/14: 212; FY14/15: 233; FY15/16: 259; FY16/17: 266; FY17/18: 273; FY18/19: 280; FY19/20: 286; FY20/21: 288
  - Net incurrence of liabilities (total, in millions B$): FY13/14: 479; FY14/15: 382; FY15/16: 265; FY16/17: 251; FY17/18: 208; FY18/19: 187; FY19/20: 154; FY20/21: 110
  - Net incurrence of liabilities by source (in millions B$): Domestic FY13/14: 51; FY14/15: 258; FY15/16: 212; FY16/17: 201; FY17/18: 166; FY18/19: 150; FY19/20: 123; FY20/21: 88. Foreign FY13/14: 428; FY14/15: 124; FY15/16: 53; FY16/17: 50; FY17/18: 42; FY18/19: 37; FY19/20: 31; FY20/21: 22

### External sector and competitiveness
- Current account balance (in millions of U.S. dollars): 2013: -1,494; 2014: -1,898; 2015: -1,352; 2016 (Est.): -1,026; 2017 (Proj.): -997; 2018 (Proj.): -863; 2019 (Proj.): -765; 2020 (Proj.): -769; 2021 (Proj.): -753
- Current account balance (percent of GDP): 2013: -17.5; 2014: -22.0; 2015: -15.3; 2016 (Est.): -11.4; 2017 (Proj.): -10.7; 2018 (Proj.): -8.9; 2019 (Proj.): -7.6; 2020 (Proj.): -7.4; 2021 (Proj.): -7.0
- Trade (goods) balance (millions US$): 2013: -2,211; 2014: -2,450; 2015: -2,369; 2016 (Est.): -2,235; 2017 (Proj.): -2,316; 2018 (Proj.): -2,440; 2019 (Proj.): -2,559; 2020 (Proj.): -2,675; 2021 (Proj.): -2,770
- Travel (net, millions US$): 2012: 2,022; 2013: 2,097; 2014: 2,140; 2015: 2,318; 2016 (Est.): 2,428; 2017 (Proj.): 2,688; 2018 (Proj.): 2,965; 2019 (Proj.): 3,130; 2020 (Proj.): 3,285
- Gross international reserves (millions of US$): 2012: 810; 2013: 742; 2014: 788; 2015: 812; 2016 (Est.): 850; 2017 (Proj.): 859; 2018 (Proj.): 909; 2019 (Proj.): 923; 2020 (Proj.): 958; 2021 (Proj.): 981
- Reserves in months of next year's imports of G&S: 2012: 2.0; 2013: 1.8; 2014: 2.3; 2015: ...; 2016 (Est.): 2.4; 2017 (Proj.): 2.5; 2018 (Proj.): 2.4

### Monetary and financial sector developments
- Credit to the nonfinancial public sector (annual percent change): 2012: 14.9; 2013: 23.6; 2014: 4.0; 2015: 7.7; 2016 (Est.): 5.3; 2017 (Proj.): 6.3
- Credit to the private sector (annual percent change): 2012: -0.3; 2013: -1.2; 2014: -2.8; 2015: ...; 2016 (Est.): -1.1; 2017 (Proj.): 0.4; 2018 (Proj.): 0.8
- Liabilities to the private sector (annual percent change): 2012: -0.1; 2013: 0.2; 2014: 1.2; 2015: ...; 2016 (Est.): -0.3; 2017 (Proj.): 1.7; 2018 (Proj.): 3.8
- Money (annual percent change): 2012: 9.8; 2013: 4.2; 2014: 1.6; 2015: 3.8; 2016 (Est.): 1.7; 2017 (Proj.): 3.8
- Quasi-money (annual percent change): 2012: -3.0; 2013: -1.1; 2014: -6.0; 2015: -2.1; 2016 (Est.): 1.7; 2017 (Proj.): 3.8
- Banking system: NPLs have declined but remain elevated; banking liquidity is high and increasing; capital buffers continue to increase; interest rate spread supports bank profitability; credit growth remains negative (as summarized in figures and captions).

### Public debt and consolidated public sector debt dynamics
- Central government debt (percent of GDP) by year (calendar basis): 2009: 42.5; 2010: 47.0; 2011: 48.2; 2012: 52.4; 2013: 58.5; 2014: 64.7; 2015: 66.5
- Central government external debt (percent of GDP): 2009: 9.0; 2010: 9.2; 2011: 10.1; 2012: 12.4; 2013: 14.0; 2014: 18.2; 2015: 18.4
- Central government domestic debt (percent of GDP): 2009: 33.5; 2010: 37.8; 2011: 38.1; 2012: 40.0; 2013: 44.5; 2014: 46.5; 2015: 48.1
- Public corporations' debt (percent of GDP): 2009: 12.1; 2010: 13.6; 2011: 14.5; 2012: 16.3; 2013: 16.0; 2014: 17.6; 2015: 17.4
- Total public sector (percent of GDP): 2009: 54.6; 2010: 60.7; 2011: 62.7; 2012: 68.7; 2013: 73.2; 2014: 81.4; 2015: 82.3
- Consolidated public sector (percent of GDP): 2009: 45.3; 2010: 51.8; 2011: 54.0; 2012: 60.0; 2013: 66.4; 2014: 74.6; 2015: 76.6

### Balance of payments highlights
- Current account shrinkage driven by lower oil prices and travel receipts dynamics: services and travel remain dominant sources of credits.
- Capital and financial account (percent of GDP): 2013: 16.7; 2014: 22.6; 2015: 15.5; 2016 (Est.): 11.8; 2017 (Proj.): 10.8; 2018 (Proj.): 9.4; 2019 (Proj.): 7.7; 2020 (Proj.): 7.7; 2021 (Proj.): 7.2
- Foreign direct investment (percent of GDP): 2013: 4.5; 2014: 2.9; 2015: 0.9; 2016 (Est.): 2.4; 2017 (Proj.): 2.9; 2018 (Proj.): 2.9; 2019 (Proj.): 3.0; 2020 (Proj.): 3.2; 2021 (Proj.): 3.4

### Risk Assessment Matrix — key risks, likelihoods, impacts, and policy responses
- Further significant delay in Baha Mar opening
  - Likelihood: Medium
  - Potential Impact: Medium
  - Policy Response: Coordinate with stakeholders to address shortcomings; Continued fiscal consolidation and prompt implementation of structural reforms to boost investor confidence and attract FDI.
- Natural disasters (severe weather related)
  - Likelihood: Low
  - Potential Impact: Medium
  - Policy Response: Formulate adequate budgetary provisions for disaster mitigation; Enhance resilience through infrastructure investment; Build fiscal and external buffers.
- Tighter or more volatile global financial conditions (including further surge in the US dollar; dislocation in capital flows; reduced correspondent banking services “de-risking”)
  - Likelihood: High (for tighter/volatile global financial conditions labeled High); Medium for dislocation in capital flows
  - Potential Impact: Medium
  - Policy Response: Continued fiscal consolidation centered on reducing current expenditure; Diversify growth drivers over the medium-term; Strengthen competitiveness; Strong implementation of AML/CFT regulations; Continue monitoring the status of CBRs and conduct periodic risk assessments.
- Sharper-than-expected global growth slowdown
  - Likelihood: Medium
  - Potential Impact: High
  - Policy Response: Continued fiscal consolidation centered on reducing current expenditure; Diversify growth drivers; Strengthen competitiveness.
- Persistently lower energy prices
  - Likelihood: Medium
  - Potential Impact: Low
  - Policy Response: Use as an opportunity to speed-up reform of the energy sector.
- Emergence of Cuba as a competitor in tourism
  - Likelihood: High
  - Potential Impact: Medium
  - Policy Response: Continue building a broader tourist base and developing synergies with Cuba; Position the hotel industry as a high-end niche.

### Structural and sectoral observations (from figures and captions)
- VAT has bolstered tax revenues and helped reduce the primary deficit.
- Subsidies and transfers push expenditure up; public sector wages have grown above productivity as shown by Real Wages and Productivity measures (percent, 3-year moving average).
- Both domestic and external debt continue to grow, driven by large post-crisis primary deficits.
- Current account deficit shrinks in part due to lower oil prices; financing has shifted away from FDI.
- REER appreciation poses a challenge; reserves remain uncomfortably low.
- Room exists to reduce costs (including electricity) and to increase educational attainment.
- Banking sector: high and increasing liquidity; NPLs have declined but remain comparatively high; interest-rate spread supports profitability while credit growth remains negative.

*INTERNATIONAL MONETARY FUND*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview and policy message
- Central government debt increased reflecting a weaker than expected fiscal stance and continued low growth, but is expected to stabilize at 67 percent and decline gradually over the medium-term.
- External financing requirement remains a significant risk to the debt profile, mitigated by the projected strengthening of the current account in the medium term.
- Rising fiscal vulnerabilities underline the need to implement staff recommendations, including resolute implementation of fiscal consolidation and structural reforms to lift potential growth.

### Debt stock and gross financing requirements
- Central government debt reached 64.4 percent of GDP in FY 2014/15, up by 4.2 percentage points.
- Baseline projection:
  - Debt peaks at 67 percent of GDP in FY2016/17 and gradually falls to 64.4 percent over the medium term.
  - Gross financing requirement declines from 8.4 percent of GDP in FY 2014/15 to about 3.2 percent of GDP.
- Liquidity and rollover: Ample liquidity in the domestic banking system and a captive investor base will continue to ease rollover concerns.

### Debt profile and vulnerabilities
- Composition and maturities:
  - 72 percent of total debt is held in local currency.
  - Short-term debt is 12.7 percent of total debt and is denominated in local currency.
  - Weighted average time to maturity: domestic bonds 9.6 years; external bonds 16 years.
- Risk assessment:
  - Heat map indicates low to moderate risks to debt sustainability overall.
  - External financing requirement, which surpasses the benchmark for emerging market comparators, remains a significant risk to the debt profile.

### Realism of baseline assumptions and key macro-fiscal projections
- Staff baseline assumptions:
  - Real growth averages 1.6 percent over the medium term.
  - Inflation is expected to remain low at 1.6 percent.
  - Primary balance projected to improve from a small deficit this year to a surplus of 1.7 percent at the end of the forecast period.
- Assessment of realism:
  - No systematic bias in recent real growth forecasts; projections have been close to outcomes.
  - Past projections for the primary balance have been relatively optimistic; inflation outturns have been better than expected.
  - Staff views the projected primary balance path as feasible, leaving room for growth–enhancing expenditures, and less ambitious than the authorities' projected path.

### Macro–fiscal stress tests and sensitivity
- Individual shock outcomes (debt as percent of GDP at end of projection period unless otherwise noted):
  - Real GDP growth shock: debt could rise to 73.6 percent (baseline ~64.4 percent).
  - Primary balance shock: debt could rise to around 70 percent.
  - Real interest rate shock: debt could rise to around 70 percent.
  - Real exchange rate shock: debt could rise to 68 percent.
- Sensitivity of gross financing requirements:
  - Most sensitive to the real interest rate.
- Combined macro–fiscal shock:
  - Debt could rise to 78 percent of GDP.
  - Gross financing requirements could rise to 6.1 percent of GDP in 2020/21.

### Adverse scenarios (alternative approaches)
- Constant primary balance approach:
  - Primary balance held at projected FY2015/16 level (-0.1 percent of GDP) over the medium term.
  - Debt rises to 73.7 percent of GDP in 2020/21.
- Historical average approach:
  - From 2017 onwards, real GDP growth at 0.3 percent and primary balance at -1.9 percent.
  - Debt rises to 91.8 percent of GDP over the medium term.
  - Gross financing requirements rise to 9.3 percent of GDP.
- Policy implication: These scenarios reinforce the need for steadfast implementation of the fiscal consolidation program.

### Natural disaster (hurricane) shock
- Severe shock calibrated on average-sized natural disaster:
  - Baseline real GDP growth reduced by 2.5 percent in 2017 and 1.5 percent in 2018.
  - Primary balance worsens by 1.25 percent and 0.75 percent of GDP in the same years.
  - Debt level rises to 73.6 percent of GDP by 2021.

### Fiscal contingent liabilities and public-sector risks
- Analysis focused on central government due to lack of consolidated general government and public sector data.
- Public entities and pension system risks are significant and could exacerbate the debt path if realized.
- Key figures:
  - Debt of public entities amounted to 17.6 percent of GDP in 2014/15.
  - Government-guaranteed portion of public entities' debt: 8.2 percent of GDP.
  - Unfunded pension liabilities of the public pension system: around $2.2 billion (about 26.2 percent of GDP).
  - Implicit debt of the social security system estimated at about 50 percent of GDP in 2015 and projected to grow further due to population aging.

### External debt and external debt sustainability
- External public debt (central government and public corporations) estimated at 24.2 percent of GDP in 2014/15.
- Projection: external public debt stabilizes at 22.3 percent of GDP over the projection horizon.
- Private sector external debt: residual suggests continued accumulation at a declining pace.
- Bound test results: external public debt profile is moderately sensitive to shocks to the non-interest current account and the real exchange rate.

*Source: Fund Staff Calculations.*

### Annex II. The Public Pension System—A Case for Reform

### Annex II. The Public Pension System—A Case for Reform

### Overview
- The Bahamas public pension system consists predominantly of partially funded and unfunded defined benefit schemes.
- Pension obligations are expected to rise in the next two decades due to population aging.
- Absent reform, the pension system will pose an increasing financial burden.

### A. Government Pension Scheme
- Scheme:
  - Non–contributory scheme providing retirement pensions from age 65 to eligible public officers (mainly direct government employees, the police and the defense force) with at least 5 years of service.
  - For officers in the general public service, with tenure of 30 years, the retirement pension is 1/60 of pensionable earnings each year, up to a maximum of 40 years.
- Costs and liabilities:
  - Government pensioners represent 15 percent of the public work force.
  - Pension payments from the budget averaged 1 percent of GDP and 7.3 percent of tax revenue per year in 1994–2014.
  - Accrued pension liabilities totaled B$1.5 billion in 2012 (17.9 percent of GDP).
  - Projected by 2030:
    - Pension payments: B$230million (1.5 percent of GDP).
    - Pension liabilities: B$3.7 billion (24 percent of GDP).

### B. Public Entities Pension Scheme
- Schemes:
  - Most public entities have non–contributory schemes separate from the government and the NIS.
  - Benefit structure and eligibility vary across entities; typical benefit is retirees from age 60 at 2 percent of pensionable earnings per year, up to a maximum of 40 years.
  - A few entities have introduced defined contribution pensions for new employees.
- Costs and liabilities:
  - Key entities are estimated to spend a combined B$12 million annually (partial, advanced funding of accruing pensions).
  - Combined pension shortfall (unfunded component of future pensions) amounted to B$0.7billion (8.3 percent of GDP).
  - Budget support to loss-making public entities amounted to B$116.8 million (1.4 percent of GDP) in FY2014/15.
  - Entities cited: Water and Sewerage Corporation (WSC), Bahamasair, Bahamas Electricity Corporation (BEC) — affected by public service mandates, operational inefficiencies, inadequate regulatory framework, aged facilities, and generous employment policies.
  - Slow pace of public entities reform could hamper infrastructure, medium term growth, and increase drag on public finances.

### C. The National Insurance Scheme (NIS) Pension
- Scheme:
  - Contributory, partially funded, pay-as-you-go (PAYG) old–age pension.
  - Covers 70 percent of the labor force.
  - Financed by payroll taxes paid by employers and employees.
- Costs, liabilities and funding:
  - Old–age pension benefits stood at 2 percent of GDP in 2013 (three–quarters of total benefits), for pensioners equivalent to 23.4 percent of the employed workforce.
  - Reserves built from cash surplus: about 20 percent of GDP in 2014, invested in domestic assets, which could cover about 7.6 years of benefit payments without additional revenue.
  - Income from contributions: 2.7 percent of GDP.
  - Total expenditure: 3.3 percent of GDP.
  - Projection: Beyond 2033, the scheme is projected to run operational deficits as it matures.
- Demographics and sustainability:
  - Fertility rate: (2 percent in 2010) will stabilize at 2.2 percent in 2030.
  - Life expectancy: projected to reach 79 percent in 2030.
  - Old–age dependency ratio (Age 65+ divided by Ages 16-64) projected to increase four–fold from 9.4 percent in 2010 to 38 percent in 2075.
  - The average age of direct government employees was 43 in 2013.
- Administration:
  - High administrative costs: equivalent to about one–quarter of contributions in 2013.
  - NIS staffing and operations: 579 employees in up to 20 locations; performs registration, collection, and administration of various benefits and will begin registration under the soon-to-be launched National Health Insurance.

### D. Options for Reform
- Rationale:
  - Pension reform is inevitable to contain rising costs and fiscal risks.
- Illustrative staff analysis:
  - A parametric reform package that:
    - Raises the contribution rate by 1 percent,
    - Freezes pension benefits for two years, and
    - Raises the retirement rate from 65 to 67 years,
  - If implemented together, this package will nearly wipe out the NIS implicit debt, estimated at 49 percent in 2015, and put the pension scheme on a sound financial footing.
- Menu of policy recommendations (parametric, structural, and other measures) summarized by scheme:
  - Central Government — Parametric reforms:
    - Extend the retirement age from 65 to 67 percent.
    - Cap salary increases that are pensionable.
    - Freeze pension benefits in nominal terms for a number of years.
    - Adjust the benefit structure, eligibility rules and replacement rates.
    - Index benefits to the CPI.
  - Central Government — Structural reforms:
    - Introduce a defined contribution system starting with new employees.
    - Gradually shift to a fully funded defined contribution system.
  - Central Government — Other measures:
    - Continue fiscal consolidation.
    - Implement policies to alter the demographic profile.
    - Introduce national pension legislation.
  - Public Entities — Parametric reforms:
    - Gradually extend the retirement age from 60 to 67 percent.
    - Cap salary increases that are pensionable.
    - Increase the contribution rate as applicable.
    - Freeze pension benefits in nominal terms for a number of years.
    - Adjust the benefit structure, eligibility rules and replacement rates.
    - Modify indexation provisions, or index to the CPI.
  - Public Entities — Structural reforms:
    - Introduce a defined contribution benefit system starting with new employees.
    - Gradually shift to a fully funded defined contribution system.
  - Public Entities — Other measures:
    - Reform loss-making entities.
    - Strengthen oversight of public entities, including through regular financial reporting.
  - National Insurance Scheme — Parametric reforms:
    - Extend the retirement age from 65 to 67 percent.
    - Increase the contribution rate.
    - Freeze pension benefits in nominal terms for a number of years.
    - Adjust the benefit structure, eligibility rules and replacement rates.
  - National Insurance Scheme — Structural reforms:
    - Introduce a defined contribution starting with new entrants.
    - Gradually shift to a fully funded defined contribution system.
  - National Insurance Scheme — Other measures:
    - Streamline the role of NIS.
    - Reduce administrative cost.
    - Expand the coverage, including to the self employed.
    - Enforce stronger penalties for non compliance with contribution payment.
    - Diversify investment portfolio.
- Recommended sequencing and emphasis:
  - Begin implementing measures to contain increases in pension costs.
  - Over the medium term, gradually phase in more far-reaching reforms (parametric and structural).
  - Strengthen oversight, reduce administrative inefficiencies, and reform public entities to alleviate fiscal pressures.

*Source: Annex II. The Public Pension System—A Case for Reform (extracted from the IMF country report).*

### 7. Reserve adequacy metrics. International reserves stood at US$981 million at end-March

### _cr16224 - 7. Reserve adequacy metrics. International reserves stood at US$981 million at end-March

### Reserve levels and traditional benchmarks
- International reserves stood at US$981 million at end-March 2015.
- Reserves are below traditional international benchmarks:
  - 3 months of next year’s goods and services imports.
  - 20 percent of broad money.
- Adjusting for FDI-related imports, reserves are more than 3 months of imports.
- Reserves are well above 100 percent of short term debt.

### Fund’s standard risk-weighted measure
- The Fund’s standard risk-weighted measure requires coverage against:
  - short-term debt,
  - broad money,
  - medium and long-term external liabilities.
- Results indicate current reserves are at around 72 percent of the suggested level.
- The existence of capital controls (on residents, and certain types on nonresident outflows) is an important mitigating factor.
- Accounting for these country-specific factors, the revised risk-weighted measure shows that reserves appear to be adequate.

### Small island states (SIDS) measure and disaster exposure
- The framework proposed by Mwase (2012) incorporates specifics of small island states and exposure to natural disasters.
- For The Bahamas, the SIDS measure indicates reserves are at 45 percent of the recommended level.

### Capital flows, composition, and risks
- With the exception of 2009 (when they briefly fell to zero), net portfolio investment and other private capital flows have always been positive, supporting reserves.
- All outward capital transfers require Exchange Control approval, and outflows on resident-owned capital are restricted.
- In principle, inward investment in shares and other securities by nonresident is unrestricted, but Central Bank approval is required for the sale and issuance of capital and money market instruments to nonresidents locally.
- The country has been increasing reliance on private capital inflows other than stable FDI inflows, and on sovereign bond issuance, implying increasing risks from shifts in investor sentiment.

### Key statistics and markers (as reported)
- International reserves: US$981 million (end-March 2015).
- Reserves coverage relative to Fund’s suggested level: around 72 percent.
- Reserves coverage under SIDS measure: 45 percent.
- Short-term debt coverage: reserves are well above 100 percent of short term debt.
- Historical note on private capital flows: net portfolio investment and other private capital flows briefly fell to zero in 2009; otherwise positive.

*Prepared by Western Hemisphere Department (staff estimates and Bahamian authorities) — excerpt from informational annex: “Reserve adequacy metrics”.*

### introduction of the VAT in 2015 was a significant achievement and will contribute to the

### _cr16224 - introduction of the VAT in 2015 was a significant achievement and will contribute to the

### Revenue mobilization and administration
- Introduction of the VAT in 2015 was a significant achievement and will contribute to the long-term macroeconomic stability of the country.
- Revenue collection exceeded expectations.
- Taken together with other reforms, should raise additional revenues of 2.5 percent of GDP, bringing the total revenue yield to 22.5 percent of GDP this year.
- Authorities intent on protecting the integrity and efficiency of the VAT regime by resisting pressures to introduce distortionary exemptions.
- Authorities view targeted social spending as a more effective means to assist low-income populations; they have raised minimum wage and increased social spending.

- Ongoing revenue administration reforms expected to yield significant additional revenue, including targeted reforms to:
  - customs,
  - business license,
  - real property taxes.
- Modernization measures implemented:
  - electronic filing of customs import declarations,
  - online payment of customs duties.
- Modernization of the property tax management system is expected to be concluded over the course of upcoming fiscal year under the centralized revenue administration (Department of Inland Revenue).

- Public financial management modernization underway, including revamped accounting systems and other budget reforms.

### Expenditure reforms and fiscal consolidation
- Authorities recognize the importance of expenditure reforms in fiscal consolidation.
- Recent Budget Communication projects at least a 1 percent of GDP reduction in recurrent expenditures per year beyond the coming fiscal year.
- Hurricane Joaquin fiscal costs will be accommodated through spending reallocation amounting to $100 million (1.1 percent of GDP) over several years.
- Authorities remain mindful of fiscal constraints in rolling out the National Health Insurance.
- Public consultation on pension reform will commence, including options to move to a defined contribution-based regime.

### External sector sustainability
- Inflation tempered at 1.9 percent in 2015.
- Introduction of the VAT resulted in some temporary upward pressure on inflation, moderated by low oil prices.
- Fixed exchange rate maintained to reduce uncertainty for foreign investors and provide a credible nominal anchor.
- Current account deficit has come down modestly to 7 percent of GDP.
- Reserves increased to US$980.5 million at the end of March, up by about $172 million since December 2015.
- Reserves levels remain adequate when measured in terms of non-FDI imports and other standard metrics.
- Expected reserve improvement through growth in tourism earnings and foreign direct investment, together with reforms to facilitate stable and organic accumulation of reserves.

### Financial sector resilience
- Bahamian banking system remains well capitalized, profitable, and liquid.
- Progress made on financial sector reforms identified in the 2013 FSAP, including:
  - further strengthening of the regulatory and supervisory framework,
  - reporting under the U.S. Foreign Accounts Tax Compliance Act (FATCA),
  - implementation of the new Basel II/III regime.
- A consulting firm engaged by a state-owned bank to develop and implement a rehabilitation plan to:
  - improve governance,
  - revise market focus,
  - strengthen risk management,
  - enforce collection.

- Authorities recognize need for decisive and timely resolution of non-performing loans (NPLs):
  - Banks have been more aggressive in writing off and provisioning for bad debts and implementing relief or restructuring options for distressed customers.
  - Authorities working with banks to develop a new framework for mortgage relief that will impact significantly more homeowners than the previous program without unduly burdening the budget or rewarding poor lending practices.
  - Details of the new Mortgage Relief Programme expected to be released during forthcoming budget debates; an estimated 1,000 delinquent borrowers are expected to initially qualify.
- Authorities committed to addressing remaining gaps to ensure financial stability.

### De-risking
- Authorities recognize challenges from global de-risking trends affecting a number of countries in the region, including The Bahamas.
- Affected institutions have been able to avoid significant disruptions to date.
- Authorities committed to proactively addressing concerns by:
  - monitoring the industry,
  - providing assistance to banks,
  - encouraging a risk-based approach and work on remaining regulatory gaps,
  - coordinating with regional counterparts to mitigate adverse economic fallout.
- With a strong overall AML/CFT regime in place, authorities are seeking greater clarity on regulatory expectations and requirements from international banks and source jurisdictions and are committed to promptly addressing gaps or concerns.

### Fostering growth and competitiveness
- Authorities prioritize finalization of the National Development Plan (NDP) to accelerate economic, institutional, and social development over the medium and long term.
- The April ‘State of the Nation Report’ was an important milestone in the first phase of the NDP, providing an in-depth diagnostic of The Bahamian economy and society.
- Extensive, non-partisan consultations on the NDP have been undertaken; a first draft of the NDP is expected to be released in the coming months for further consultation.

- Importance placed on improving the business environment and reducing energy costs to bolster competitiveness and facilitate economic diversification.
- Steps taken on electricity sector reform:
  - Introduction of legislation to reform the Bahamas Electricity Corporation (BEC).
  - Management of BEC outsourced to PowerSecure International (US) with a mandate to operate on a fully commercial basis to bring down costs and resolve power supply problems, facilitating tourism and other sectors and enabling long-term investment to expand generation capacity, improve distribution, and reduce cost of power.

- Authorities emphasize continuous improvement in efficiency and transparency of state-owned enterprises (SOEs) to minimize budget implications, lower costs, and improve services.
- Expectation to achieve significant milestones in introducing competition in the cellular market in the coming weeks.
- Recognition of challenges in providing uniform and affordable services to all islands due to high costs and low scope for economies of scale.

### Human capital and labor programs
- Commitment to raising human capital through educational and vocational reforms to lower unemployment and raise potential growth.
- Legislation finalized for the establishment of the University of The Bahamas.
- Recent secondary educational reforms include strengthened standards for school graduates and the introduction of STAR Academy targeting vulnerable children.
- Efforts underway to strengthen workforce training, including establishment of the National Training Agency.
- Government announced on May 25th an additional $22 million to complement last year’s $20 million in support of an apprenticeship program in partnership with the private sector under which employers will be incentivized through a wage subsidy to employ young persons to acquire basic job skills.

*Source: _cr16224 - introduction of the VAT in 2015 was a significant achievement and will contribute to the*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16224.pdf_