IMF Executive Board Concludes 2019 Article IV Consultation with The Bahamas
IMF News, July 1, 2019
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- Published: July 1, 2019
Recent Economic Performance and Outlook
- Real GDP expanded by 1.6 percent in 2018, up from 0.1 percent in 2017.
- Growth drivers in 2018:
- Tourism supported economic activity.
- Foreign investment projects provided impetus for construction sector activity.
- Inflation:
- The consumer price index (CPI) increased by 2.2 percent on average in 2018 due mainly to the Value Added Tax (VAT) rate increase from 7.5 to 12 percent in July 2018.
- Labor market:
- Unemployment remains high, at 10.7 percent in November 2018, as employment creation has lagged labor force growth.
- External sector:
- The current account deficit widened to 16.4 percent of GDP in 2018, reflecting higher oil prices and imports associated with the conclusion of a large FDI project.
- Fiscal and debt developments:
- The budget deficit narrowed to 3.4 percent of GDP in FY2017/18, down from 5.5 percent a year earlier.
- Central government debt increased to 63.3 percent of GDP in FY2017/18 from 54.4 percent in FY2016/17.
Financial Sector Condition
- Banking system health:
- The banking system is well capitalized.
- Credit to the private sector continued to contract in 2018, even if at a more moderate rate.
- Average non-performing loans (NPLs) declined from a peak of 15.4 percent in 2013 to 9.1 percent in 2018.
- System resilience:
- The financial system is resilient to current stability threats.
- Ongoing priorities:
- Banks have improved balance sheet quality.
- Need to revive credit growth and resolve nonperforming loans.
- Strengthen supervision of credit underwriting.
- Develop a real estate price index and operationalize the credit bureau.
- Complete legislative reform of the banking resolution framework.
- Improve governance of public asset management companies and state-controlled financial institutions.
- Address remaining deficiencies in the AML/CFT framework.
Projections and Medium-Term Outlook
- Growth projections:
- Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1½ percent in the medium term.
- Inflation outlook:
- The increase in inflation is projected to have been temporary.
- Unemployment:
- Unemployment is projected to decline only gradually.
- External accounts:
- External accounts are expected to strengthen over the medium-term, backed by high tourism receipts, fiscal consolidation and lower oil prices.
- The current account deficit is projected to converge to 5 percent of GDP.
- Risks to the outlook:
- Risks to global growth, particularly in key trading partners, have increased.
- Slowing external demand or a tightening of financial conditions in key advanced economies could adversely affect growth prospects.
- Vulnerability to hurricanes and climate change remains high.
- Domestic risk: reform momentum could stall delaying fiscal consolidation and implementation of competitiveness-enhancing reforms.
- International sector risk: reputational risks could intensify despite recent strengthening of regulatory and transparency standards, possibly challenging existing business models.
Executive Board Assessment and Policy Recommendations
- Overall assessment:
- Executive Directors welcomed the strengthening economic activity and the prospect of continued growth, underpinned by prudent policies and comprehensive structural reforms.
- Directors noted high unemployment, rising public debt, and risks associated with external imbalances.
- They underscored the need to rebuild policy buffers, safeguard financial stability, and further enhance resilience to natural disasters.
- Fiscal policy and public financial management:
- Welcomed decisive steps to consolidate the fiscal position and the authorities’ commitment to fiscal sustainability and macro-financial stability.
- Welcomed the enactment of the Fiscal Responsibility Law; effective implementation would bolster policy credibility and ensure durable gains from fiscal consolidation.
- Encouraged steps to further strengthen public financial management systems, tighten expenditure control, and operationalize the fiscal council as planned.
- Recommended a comprehensive review of the tax regime to enhance efficiency and progressivity, including by reducing distortions and other preferential treatment.
- Structural reforms and competitiveness:
- Stressed the importance of advancing structural reforms to boost competitiveness and unlock potential for high and inclusive growth.
- In view of the planned accession to the WTO, recommended prioritizing reforms that tackle high energy costs, improve access to credit, and address skill mismatches in the labor market.
- Lowering the cost of doing business would help attract needed foreign direct investment.
- Financial sector reforms and supervision:
- Noted significant progress in implementing the 2013 FSAP recommendations and that the overall banking system remains resilient.
- Encouraged further efforts to revive credit growth, resolve nonperforming loans, and strengthen supervision of credit underwriting.
- Supported developing a real estate price index and operationalizing the credit bureau.
- Welcomed efforts to strengthen the central bank’s recovery and resolution powers, governance and independence.
- Highlighted the need to complete legislative reform of the banking resolution framework, improve governance of public asset management companies and state-controlled financial institutions, and address remaining AML/CFT deficiencies.
- International sector and data transparency:
- Looked forward to the swift implementation of the new framework for the international sector aimed at enhancing transparency and monitoring.
- Encouraged vigilance against potential spillovers into the domestic financial system from the unification of banking license regimes.
- Welcomed initiatives to advance financial inclusion while emphasizing caution on the issuance of a central bank digital currency, mindful of possible risks to financial stability.
- Welcomed the recent subscription to the enhanced General Data Dissemination System and looked forward to further progress in improving the availability and quality of economic data.
Selected Social and Economic Indicators (highlights)
- Social indicators (2018 unless noted):
- GDP (US$ millions), 2018: 12,425
- GDP per capita (US$), 2018: 32,997
- Population (thousands), 2018: 377
- Unemployment rate (percent), Nov 2018: 10.7
- Key economic series (annual percent change or percent of GDP as presented):
- Real GDP: 2015: 0.6; 2016: 0.4; 2017: 0.1; 2018: 1.6; 2019 (Proj.): 1.8; 2020 (Proj.): 1.7
- Consumer price index (annual average): 2016: 1.9; 2017: -0.3; 2018: 2.2
- Saving rate (percent of GDP): 2016: 14.1; 2017: 20.5; 2018: 7.5; 2019 (Proj.): 10.9; 2020 (Proj.): 12.5
- Investment rate (percent of GDP): 2016: 26.2; 2017: 26.4; 2018: 26.3; 2019 (Proj.): 23.9; 2020 (Proj.): 23.0; (2021 column shows 22.9)
- Credit to the private sector (annual change): 2016: -1.1; 2017: -2.0; 2018: -3.0; 2019 (Proj.): -1.5; 2020 (Proj.): 1.0; (2021 column shows 1.5)
- Exports of goods and services (annual change): 2016: -8.7; 2017: 18.9; 2018: -1.4; 2019 (Proj.): 11.8; 2020 (Proj.): 8.2; 2021 (Proj.): 6.4
- Travel receipts (gross): 2016: 3.0; 2017: 29.3; 2018: -2.6; 2019 (Proj.): 12.0; 2020 (Proj.): 8.5; 2021 (Proj.): 5.5
- Fiscal and external balances (percent of GDP):
- Central government revenue and grants: 2016: 15.0; 2017: 16.3; 2018: 17.2; 2019 (Proj.): 16.6; 2020 (Proj.): 19.4; 2021 (Proj.): 19.7
- Central government expenditure: 2016: 18.8; 2017: 22.7; 2018: 20.0; 2019 (Proj.): 21.7; 2020 (Proj.): 21.1; 2021 (Proj.): 19.0
- Overall balance: 2017: -5.5; 2018: -3.4; 2019 (Proj.): -2.3
- Primary balance: 2017: -1.7; 2018: -3.3; 2019 (Proj.): 1.1
- Central government debt: 2016: 49.7; 2017: 50.4; 2018: 54.4; FY2017/18: 63.3; 2019 (Proj.): 63.1; 2020 (Proj.): 61.9
- Current account balance: 2016: -12.0; 2017: -6.0; 2018: -12.9; 2019 (Proj.): -16.4; 2020 (Proj.): -12.2; 2021 (Proj.): -10.3
- Memorandum items:
- Gross international reserves (End of period; millions of U.S. dollars): 2015: 812; 2016: 904; 2017: 1,417; 2018: 1,196; 2019 (Proj.): 1,250; 2020 (Proj.): 1,275
- External debt-service ratio (in percent of exports of G&S): 2016: 5.7; 2017: 9.7; 2018: 9.1; 2019 (Proj.): 19.5; 2020 (Proj.): 8.9
IMF Executive Board Concludes 2019 Article IV Consultation with The Bahamas, July 1, 2019.
