Staff Concluding Statement of the 2022 Article IV Mission

IMF News, March 21, 2022

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Staff Concluding Statement of the 2022 Article IV Mission

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• Published: March 21, 2022

Economic impact, recovery, and outlook

• The Bahamas’ tourism-dependent economy was hit hard by the COVID-19 pandemic which came on the heels of the devastation caused by Hurricane Dorian.
• Growth in 2020 was -14½ percent, driven by tourism receipts falling by more than 75 percent.
• Starting in the second half of 2021, the tourism sector experienced a significant rebound, with stopover arrivals doubling relative to 2020.
• Output is estimated to have expanded by around 5½ percent in 2021.
• Real GDP growth is estimated at around 6 percent in 2022, although a full recovery to pre-pandemic levels is not expected before end-2023.
• Inflationary pressures are building in line with global developments and are expected to ease only gradually.
• It will be important to allow higher international food and energy costs to pass through to domestic prices alongside targeted support to protect the poorest members of society.
• The tourism recovery is projected to narrow external imbalances over the medium term and thereby keep international reserves at adequate levels.

Risks to the outlook

• Pandemic re-intensification risks remain: with about 40 percent of the population fully vaccinated, the emergence of new COVID-19 variants could prolong the pandemic and induce renewed economic disruptions.
• Rising cases in source countries could dissuade travel and lead to renewed declines in tourism.
• Higher food and oil prices, including because of the effects of the war in Ukraine, could erode consumer demand and impose a heavy burden on the vulnerable.
• A sharp rise in global risk premia could limit the ability to place new debt and further strain public and private balance sheets.
• Natural disasters related to climate change are a continuous risk.
• Upside: a stronger-than-anticipated global recovery could help support tourism.

Public finances, debt sustainability, and fiscal policy priorities

• The pandemic has significantly weakened public finances; public debt is close to 100 percent of GDP, gross financing needs are high, and fiscal financing costs are elevated.
• The supplementary budget retains some pandemic-related spending (mostly on social programs), cuts the VAT rate from 12 to 10 percent, and raises public salaries and non-contributory pensions.
• Staff estimate that the primary deficit will narrow from about 9 percent of GDP in FY2020/21 to around 3 percent of GDP in the FY2021/22 fiscal year; the economic recovery accounts for about half of this decline.
• The government’s goal to achieve a 1½ percent of GDP fiscal surplus over the medium term is characterized as well-calibrated and consistent with rebuilding fiscal buffers and putting public debt-GDP on a decisive downward path towards the debt target of 50 percent, as laid out in the Fiscal Responsibility Act.
• Authorities aim to increase the revenue-to-GDP ratio to 25 percent through strengthened tax administration, including re-establishment of the Revenue-Enhancement Unit and an updated property tax roll.

Policy recommendations (fiscal)

• Pursue a well-calibrated tax policy reform together with revenue enhancement:
  • Gradually bring VAT rates close to the regional average of 15 percent.
  • Further limit tax concessions.
  • Increase property tax rates on higher value residences.
  • Consider corporate and personal income taxes for large businesses and high earners.
• Reprioritize public spending to promote better social and economic outcomes:
  • Reassess civil service roles and responsibilities to improve efficiency.
  • Publish monthly performance reports for state-owned enterprises starting in the next fiscal year.
  • Continue discussions on civil service pension reforms.
  • Conduct rigorous cost-benefit analyses for capital project selection.
  • Increase spending on health and education, which is noted as well below regional peers.
  • Improve social assistance by obtaining better information on potential recipients (including a timely and comprehensive household survey).
  • Enhance fiscal transparency by timely publication of audited financial statements for public sector entities, including beneficial ownership information of those receiving COVID-related spending.
• Adopt a more robust multi-year debt management strategy:
  • The new debt management committee should systematically track performance of the recently published multi-year government financing strategy and undertake contingency planning.
  • Avoid strategies that may appear to reduce short-term costs but could exacerbate debt distress.

External sector, monetary policy, and financial stability

• The exchange rate peg to the U.S. dollar has served as an anchor of macroeconomic stability.
• Recommendation: allow interest rates to rise, as needed by market conditions, to support the currency peg without having to resort to a drawdown of international reserves.
• If the market environment deteriorates markedly, consider temporary tightening of capital flow management measures.
• Further amendments to the 2020 Central Bank Act are recommended, including lowering the ceiling on credit to the government and restricting central bank purchases of securities issued by public corporations to safeguard institutional and financial autonomy.

Digital currency and financial sector points

• The Sand Dollar digital currency (CBDC) currently makes up less than 0.1 percent of currency in circulation and there are limited avenues to use it.
• The pandemic slowed education campaigns and technical integration of the CBDC with the banking system; the Bank plans to accelerate these efforts.
• Recommendation: continue strengthening internal capacity on cybersecurity and resilience associated with the Sand Dollar and maintain careful oversight, including to safeguard financial integrity.
• The financial system is well-capitalized and liquid; capital ratios are well above regulatory requirements and system-wide liquidity has increased.
• Pandemic-related loan moratoria have expired, leading to a small increase in non-performing loans; lending conditions remain tight.
• Operationalization of the recently established credit bureau should improve financial inclusion and reduce the cost of borrowing.
• Progress has been made on a bank recovery and resolution regime, but further enhancements are needed:
  • Enhance interagency coordination on systemic matters, potentially via a Financial Stability Council.
  • Update the supervisory framework for bank intervention to use early warning indicators more effectively.
  • Strengthen the Deposit Insurance Corporation’s governance, organizational structure and funding arrangements.

AML/CFT and digital assets

• The Bahamas has exited the “grey list” of the Financial Action Task Force (FATF).
• In line with an action plan agreed with the FATF, authorities set up a register of beneficial ownership, introduced an automated system to collect suspicious transaction reports, and have applied fines for non-compliance.
• Authorities need to ensure effective implementation of risk-based AML/CFT regulation and supervision, including for transactions related to the Sand Dollar and the country’s expanding crypto trading industry.
• The 2020 Bahamas’ Digital Assets and Registered Exchanges Bill (DARE) provides a legal framework for the digital asset space.

Structural reform, productivity, and climate resilience

• Diversification toward a more knowledge-based economy is a long-standing objective.
• Priorities to raise growth potential include energy reforms and educational programs to improve inclusion of young workers and the underemployed.
• Authorities are working with the ILO and employers to implement a national apprenticeship program to address skills gaps.
• Encouraging digitalization, streamlining administrative processes, closing data gaps, and publishing statistics in line with international standards will improve the business climate.
• Climate commitments and resilience measures:
  • Aim to achieve a minimum of 30 percent renewables in the energy matrix by 2030.
  • Introduced measures to protect the marine environment, enhance food security, and improve water conservation.
  • Upgrading the country’s building code and zoning rules is in process.
  • The Bahamas would benefit from a comprehensive disaster resilience strategy and from accessing international financing for climate change-related projects.
  • Consider including natural disaster clauses in the country’s debt contracts.

Selected economic indicators

• Real GDP (annual % change): 2020: -14.5; 2021 est.: 5.6; 2022 proj.: 6.0; 2023 proj.: 4.1
• Unemployment rate (%): 2020: 25.6; 2021 est.: 18.1; 2022 proj.: 13.9; 2023 proj.: 12.7
• Current account balance (% of GDP): 2020: -23.5; 2021 est.: -19.3; 2022 proj.: -18.1; 2023 proj.: -12.6
• CPI inflation (%, end of period): 2020: 1.2; 2021 est.: 5.5; 2022 proj.: 6.7; 2023 proj.: 3.5
• CPI inflation (%, period average): 2020: 0.0; 2021 est.: 3.2; 2022 proj.: 7.3; 2023 proj.: 4.5
• Fiscal overall balance (% of GDP) 1/: 2020: -7.2; 2021 est.: -13.6; 2022 proj.: -6.7; 2023 proj.: -3.5
• Fiscal primary balance (% of GDP) 1/: 2020: -4.1; 2021 est.: -9.4; 2022 proj.: -2.7; 2023 proj.: 0.3
• Government debt (% of GDP) 1/: 2020: 75.1; 2021 est.: 102.8; 2022 proj.: 91.3; 2023 proj.: 87.3
• Note: 1/ Fiscal year (FY, July 1 - June 30)

Staff Concluding Statement of the 2022 Article IV Mission, March 21, 2022.

References

• The Bahamas and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home