The Bahamas: Staff Concluding Statement of the 2018 Article IV Mission

March 22, 2018

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

An International Monetary Fund (IMF) team led by Fabian Valencia visited The Bahamas from March 7-20 to conduct discussions for the 2018 Article IV consultation.

Macroeconomic Context and Focus of the Consultation

1. The Bahamian economy has turned the corner but significant challenges remain. Near-term prospects are improving on the back of the much-awaited opening of the mega tourist resort Baha Mar and a stronger U.S. economy. But without resolute implementation of structural reforms, medium-term growth would remain subdued. Public debt ratios have declined on the back of a sizable upward revision to nominal GDP, but fiscal deficits remain above debt-stabilizing levels. In this context, the 2018 Article IV consultation focused on policies to ensure fiscal sustainability and to address structural bottlenecks.

Recent Developments

2. Real GDP is estimated to have expanded by 1.3 percent in 2017, supported by the completion of Baha Mar, new foreign direct investment (FDI), and post-hurricane reconstruction activity. Baha Mar has created close to 4,000 jobs so far, helping reduce the unemployment rate to 10.1 percent in November 2017, from 11.6 percent one year earlier. The national accounts have been substantially revised, mainly due to improved coverage, resulting in a 27-percent increase in the level of nominal GDP.

3. The fiscal balance is improving on the back of lower spending. After reaching 5.8 percent of GDP in FY2017, the central government fiscal deficit is expected to decline to the target set in the FY2018 budget, 2.7 percent of GDP. Last August, the new administration announced a 10-percent cut in discretionary spending, the nonrenewal of some temporary workers’ contracts, and a temporary hiring freeze. The bulk of the adjustment has fallen on capital spending. Last November, the government successfully placed an external bond for US$750 million.

4. Commercial banks are liquid and well capitalized but remain cautious in making new loans. Moreover, the stock of nonperforming loans (NPLs) declined to 9.2 percent of total loans at end-2017, from 11.4 percent at end-2016, due mainly to a large sale of NPLs by the Bank of The Bahamas (BOB). Pressures on correspondent banking relationships (CBR) have not resulted in major disruptions so far.

5. The external sector position is weaker than suggested by fundamentals and desirable policy settings. The current account deficit is estimated to have widened to 16.4 percent of GDP in 2017, from 7.7 percent of GDP in 2016, due mainly to a surge in imports related to the completion of Baha Mar. The cyclically-adjusted current account deficit, after deducting FDI-financed imports, is above the level consistent with fundamentals and desirable policy settings. Foreign reserves strengthened to US$1.4 billion by end-2017 and the current level is deemed adequate under traditional benchmarks.

Outlook and Risks

6. Real GDP growth is projected to reach 2.5 percent in 2018 and 2.2 percent in 2019. The baseline scenario is predicated on stronger global growth, particularly in the United States; the phased opening of Baha Mar; and a pickup in FDI. Medium-term growth is projected to remain at 1.5 percent reflecting significant structural impediments. The main external risks to this outlook stem from a weaker- or stronger-than expected performance of the U.S. economy, Baha Mar, and FDI. Natural disasters and the intensification of pressures on CBR are additional near- and medium-term risks. On the domestic side, failure to implement fiscal consolidation or structural reforms could undermine investor confidence and reduce investment.

Key Policy Messages

Fiscal Policy

7. Decisive fiscal consolidation efforts are needed to put the public debt-to-GDP ratio on a firmly downward trajectory. Sustained large fiscal deficits brought central government debt to 57 percent of GDP in FY2017, up from 36.7 percent of GDP in FY2010. The deficit target set in the FY2018 budget is within reach, but an additional adjustment of 2.2 percent of GDP is needed to further reduce the deficit to desirable levels over the medium term. Identifying policy measures to undertake this adjustment, while avoiding an undue compression of capital spending, is critical.

8. Fiscal consolidation needs to focus on reducing current expenditure. Efforts should focus on: i) trimming the wage bill; ii) turning state-owned enterprises (SOE’s) self-sufficient; and iii) reforming the unsustainable civil servants’ pension system, by moving to a contributory regime in the near term and to a defined-contribution scheme in the medium term.

9. Strengthening tax revenues is critical to protect social and infrastructure spending. Laudable efforts, beginning with the introduction of the VAT in 2015, helped lift tax revenues significantly. Continuing with these efforts, with the intent also to make the tax system more progressive, should help offset a reduction in revenues from import duties under an eventual WTO accession. Introducing exemptions from VAT should be avoided as there can be better-targeted instruments to assist low-income households.

10. Setting up a natural disasters savings fund should enhance fiscal and economic resilience. The Bahamas should set up a savings fund with a target size between 2-4 percent of GDP by setting aside at least ½ percentage point of GDP annually during non-disaster years. In addition, insuring public assets and encouraging the broader use of private insurance would reduce fiscal contingent liabilities. Investing in resilient infrastructure and maintaining up-to-date building regulation, land use, and zoning guidelines are additional critical elements of an adequate disaster risk management strategy.

11. A medium-term fiscal framework, enshrined in the planned fiscal responsibility legislation, should enhance fiscal discipline, transparency, and accountability. The framework should include a permanent deficit ceiling of 1 percent of GDP and a cap on the rate of growth of current expenditure. To allow space for automatic stabilizers to operate, annual budgets should target a deficit of ½ percent of GDP from FY2021 on. Strong adherence to these targets over the medium term would keep the public debt-to-GDP ratio on a firmly downward trajectory and allow accummulating savings into a natural disasers fund. The framework should also mandate an assessment of near and medium-term fiscal risks and enhanced reporting requirements. Completing ongoing reforms to the public financial management system is critical for the effectiveness of a medium-term fiscal framework.

Structural Policies

12. Lifting growth in the medium term requires resolute implementation of structural reforms. Reform priorities include:

  • Advancing energy sector reforms. These reforms should aim at i) upgrading infrastructure; ii) improving energy efficiency among users; and iii) exploiting the potential for cleaner energy sources. Increasing private sector participation in the electricity sector, with adequate regulatory oversight, and moving forward with the issuance of the rate-reduction bond are critical steps to reform the energy sector. Unifying the planning and implementing of energy policy in one institution would facilitate interagency coordination.
  • Steadfast implementation of the credit bureau . Moving swiftly with the implementation of the credit bureau is critical as it will take time for the bureau to populate its database.
  • Streamlining administrative processes . Modernizing government registration/filing processes and establishing intra-agency information exchange systems should facilitate establishing a “one-stop shop” for businesses. Ongoing efforts to improve governance, through the anticorruption reform, and stepping up efforts to fight crime should further enhance the business environment.

  • Expanding vocational and apprenticeship programs. Moving forward with the implementation of the National Apprenticeship Program would help increase the skill set of the young and reduce youth unemployment. More broadly, improving the quality of education should boost human capital and support long-term employment. Finally, improving and disseminating online skills databases and job placement services should facilitate the matching process between employers and job seekers.

Monetary and Financial Sector Policies

13. The planned amendments to the central bank law would bring it closer to international best practices and would strengthen the peg’s credibility. Central bank lending to the government had increased in recent years, but the external sovereign placement from last year faciliated reversing this trend. The draft amendments include provisions to improve central bank governance; clarify its objectives; and tighten limits to central bank lending to the government.

14. A more proactive approach to accelerate the resolution of NPLs should support the economic recovery. The more proactive monitoring of NPLs by the central bank is welcome as it will encourage banks to resolve them faster, particularly as economic conditions improve. Developing real estate price indices would further facilitate the determination of fair value and the resolution of NPLs. The Bank of The Bahamas has strengthened its capital position, but it still requires a sustainable business model, free from political interference, to keep fiscal contingent liabilities contained.

15. Strong compliance with Anti-Money Laundering/Combating the Financing of Terrorism ( AML/CFT) and tax transparency standards should help mitigate the withdrawal of CBR and safeguard the integrity of the financial sector. Ongoing efforts in this direction are welcome. It is critical to work closely with the Caribbean Financial Action Task Force (CFATF) and the FATF to swiftly address the strategic deficiencies in the AML/CFT regime. The administration has committed to implement the OECD's international standards on tax transparency and exchange of information as well as the Base Erosion and Profit Shifting (BEPS) minimum standards.

The team met with Hon. Mr. K. Peter Turnquest, Deputy Prime Minister and Minister of Finance; Mr. John Rolle, Governor of the Central Bank of The Bahamas; and other senior government officials, representatives of the private sector, and civil society.

The IMF team would like to thank the authorities and other interlocutors for their gracious hospitality and frank and open discussions.

IMF Communications Department

PRESS OFFICER: Raphael Anspach

Phone: +1 202 623-7100Email: