The Bahamas: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, April 15, 2019
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- Published: April 15, 2019
Recent Performance and Outlook
- Real GDP grew by 2.3 percent in 2018.
- Growth is projected at 2.1 percent in 2019, underpinned by continued tourism sector growth.
- Unemployment: positive jobs growth noted, but the unemployment rate remains high and is projected to decline only gradually.
- Inflation averaged 2.2 percent in 2018 and is projected to fall to 1.6 percent in 2019 as the temporary effect of the VAT rate increase fades.
- Medium-term growth is projected to converge to potential of 1½ percent as tourism growth normalizes.
- Key downside risks:
- Significant slowdown in the U.S. and other advanced economies could adversely affect the tourism-dependent economy.
- Reputational risks in the offshore sector despite strengthened regulatory and transparency standards.
- High vulnerability to hurricanes and climate change.
- Policy implication: Continued commitment to fiscal responsibility and sound macro-financial policies is indispensable.
Fiscal Reforms and Public Financial Management
- Fiscal Responsibility Law (FRL):
- Effective implementation will bolster policy credibility and ensure durable gains from fiscal consolidation.
- Commitment to maintaining the pace of fiscal adjustment in line with FRL targets aims to bring public debt towards the anchor of 50 percent of GDP.
- Fiscal outturns and near-term positions:
- Fiscal deficit is projected to narrow to 2.1 percent of GDP, close to the 1.8 percent target for FY2018/19.
- Weaker-than-expected revenue performance attributed to grace periods for revenue measures and legal disputes.
- Recognition of sizeable arrears highlights need for stronger public financial management (PFM) systems.
- Recommended legislative and institutional priorities:
- Enact the Public Financial Management, Public Debt Management, and Procurement Acts.
- Operationalize the Fiscal Council to improve budgeting, transparency, and accountability.
- Expenditure policy:
- Near-term need for expenditure restraint to deliver FY2018/19 target.
- Government should further rein in current expenditures to safeguard public investment.
- Medium-term fiscal measures:
- Decisive measures needed to reduce debt, including reforms in public pensions and health, while balancing inclusive growth and disaster preparedness.
- Tax policy:
- The Bahamas does not levy income or capital gains taxes; revenues rely mostly on VAT, business license fees, and international trade taxes.
- Recommendation: comprehensive review of the tax regime in light of global tax trends and prospective WTO accession to achieve a more equitable and less distortionary tax system.
- Recommendation: quantitative review of existing tax and other investment incentives to strengthen transparency and inform policy.
Boosting Resilience to Natural Disasters
- Financial preparedness actions taken:
- Secured contingent credit line with the Inter-American Development Bank.
- Re-subscribed to disaster insurance through the Caribbean Catastrophe Risk Insurance Facility (CCRIF).
- Speedy establishment of the Natural Disaster Fund recommended to complement existing financial tools.
- Physical resilience:
- Invest in physically resilient infrastructure, including building code enforcement and coastal management.
Strengthening the Financial Sector
- Banking sector soundness:
- 2019 FSAP found healthy profits and high capital and liquidity ratios.
- Credit growth is hampered by non-performing loans (NPLs) and lack of information about potential borrowers.
- Key recommendations to improve banking sector performance:
- Progress supervision of credit underwriting and timely resolution of NPLs.
- Introduce a local real estate price index to improve visibility into the residential housing market and NPL valuations.
- Operationalize the credit bureau to strengthen quality and pace of credit activity and improve assessment of lending standards.
- Resolution and governance:
- Strengthen the central bank’s recovery and resolution powers to enhance banking sector resilience.
- Complete planned legislative reform and enhance governance of public asset management companies following recapitalizations of the Bank of The Bahamas.
- Strengthen governance arrangements for state-controlled financial institutions to ensure effective and independent supervision.
- International sector framework:
- Implement new unified business licensing fee framework removing preferential tax treatment for non-resident entities.
- Strengthen economic presence requirements for non-resident firms and entity transparency regarding beneficial ownership.
- Monitor potential spillovers into the domestic financial system from unification of banking license regimes.
- Anti-money laundering / Countering financing of terrorism (AML/CFT):
- FATF continues to identify The Bahamas as a country with strategic AML/CFT deficiencies.
- Progress in improving technical compliance is welcome; further revision of laws, regulations, supervisory guidelines, and codes of conduct recommended.
- Move focus to implementation to demonstrate effectiveness of the AML/CFT regime, including actions in line with the FATF Action Plan.
Monetary Policy, Liquidity, and Financial Innovation
- Monetary stance and structural liquidity:
- Accommodative monetary policy stance is appropriate given the cyclical position and the negative credit gap.
- A large structural liquidity surplus exists due to exchange controls and absence of a well-developed domestic securities market.
- Policy recommendations:
- Deepen domestic sovereign debt market through regular auctions.
- Central Bank of The Bahamas (CBOB) should continue to reduce its holdings of government debt.
- Adopt amendments to the CBOB law to strengthen governance and define limits on government lending.
- Digital finance and inclusion:
- CBOB plans to pilot a digital central bank currency to boost financial inclusion.
- New financial technologies can advance inclusion, but risks—especially to financial stability, cybersecurity, and AML/CFT—need careful assessment and safeguards reflected in project design.
- Modernize payment systems and use proven technologies to expand geographic penetration of digital payments.
External Accounts, Competitiveness, and Structural Reforms
- Current account and external sustainability:
- Current account deficit increased to 15.9 percent of GDP in 2018, partly reflecting one-off factors related to Baha Mar completion and an overvalued real effective exchange rate.
- Significant—albeit declining—current account deficits are projected to continue, financed mainly by foreign direct investment.
- Policy implication: With strong commitment to the exchange rate peg, structural reforms to boost competitiveness alongside fiscal consolidation and accumulation of foreign exchange reserves are critical to strengthen external buffers.
- Structural reform priorities:
- Address long-standing structural impediments to boost private investment and lower cost of doing business.
- Priorities include lowering energy costs, improving private sector credit access, and tackling skills mismatches in the labor market.
- Planned accession to the World Trade Organization (WTO) makes tackling remaining impediments more urgent.
Statistics and Data
- Recent improvements:
- Enhanced General Data Dissemination System and increased fiscal data reporting frequency noted as important steps.
- Recommendation:
- Invest further in producing comprehensive and frequent information on national and external accounts, the labor market, and household surveys to enable better informed policy making and timely responses.
Mission and Acknowledgements
- An IMF team visited Nassau from April 1-12, 2019 for the 2019 Article IV consultation.
- The team thanked Bahamian authorities, private sector interlocutors, and civil society representatives for candid and productive discussions.
IMF staff concluding statement of the 2019 Article IV mission to The Bahamas (April 15, 2019).