Bahamas: Staff Concluding Statement of the 2023 Article IV Mission

IMF News, November 27, 2023

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Bahamas: Staff Concluding Statement of the 2023 Article IV Mission

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• Published: November 27, 2023

The Macro Outlook

• Real GDP growth: 14.4 percent in 2022; projected 4.3 percent in 2023; 2.3 percent in 2024; 1.8 percent in 2025.
• Unemployment: fell to 8.8 percent in 2022; 8.9 percent projected in 2024.
• Tourism led a broad-based expansion; international flight and cruise arrivals rose well above pre-pandemic levels in 2023, bringing the economy back to estimates of potential output.
• Inflation: peaked at 7.1 percent in July 2022; fell to 2.3 percent in July 2023. CPI Inflation (end of period): 5.5 percent in 2022; 3.6 percent projected in 2023; 2.9 percent projected in 2024; 2.4 percent projected in 2025. CPI Inflation (period average): 5.6 percent in 2022; 3.4 percent in 2023; 3.1 percent in 2024; 2.6 percent in 2025.
• Downside risks: a fall in tourism demand from source-market slowdowns; renewed pressures on global food and oil prices affecting lower-income households and the balance of payments; high exposure to climate change and natural disasters with potential domestic financing challenges.

Creating a More Efficient and Progressive Fiscal Framework

Findings

• Fiscal deficit reduced to 4.1 percent of GDP in FY2022/23.
• Central government debt: 84 percent of GDP at end-June 2023.
• Authorities’ intent: reduce deficit to 0.9 percent of GDP in 2023/24 and reach an overall surplus of 2.1 percent of GDP by FY2026/27.
• Authorities’ planned adjustment mainly from a 3½ percent of GDP increase in revenue collections and ½ percent of GDP in additional capital spending funded by lower current spending.
• Authorities project public debt to reach 68 percent of GDP by FY2026/27.

Staff assessment and risks

• Based on current policies, fiscal deficit expected to be 2.6 percent of GDP in 2023/24 (considerably larger than budget expectation).
• Over the medium-term, debt would fall to 78 percent of GDP by 2027/28 but gross financing needs would remain high for the next several years (at around 20 percent of GDP).
• Even if debt is judged sustainable under this path, a faster reduction is recommended to lessen sovereign stress and lower the interest burden.

Policy recommendations

• Implement comprehensive tax reforms to raise revenues and improve progressivity:
  • Leverage the implementation of the OECD global minimum corporate tax by trading partners to introduce a well-designed corporate income tax and a personal income tax on the highest earners.
  • Rationalize preferences, loopholes, and exemptions in the tax system.
• Achieve efficiency gains in spending programs and improve financial management of state-owned enterprises (SOEs) to offset pressures from an aging population.
• Reorient spending toward education, healthcare, targeted social transfers, and infrastructure that increases climate resilience.
• Strengthen debt management to reduce vulnerabilities from high rollover needs:
  • Continue reforms to primary and secondary debt markets to increase liquidity and incentivize longer-duration domestic holdings.
  • Central bank to facilitate T-bill issuance by competitive auction and extend this across maturities; improve investor relations and transparency of sovereign issuance plans.
• Place more binding limits on central bank financing of the fiscal deficit:
  • Authorities amended the Central Bank Act to prohibit financing via the primary bond market and imposed a lower limit on central bank advances, but the current limit remains above regional peers with pegged regimes.
  • Reduce the limit on central bank financing and accompany with a well-defined “escape clause” for exceptional circumstances (e.g., a large scale natural disaster).
  • Repay central bank advances, already at the ceiling, to strengthen credibility of the exchange rate regime.
• Governance and transparency reforms:
  • Apply mandatory publication of beneficial ownership information to all providers obtaining public contracts (currently mandatory only for contracts funded by an international funding agency).
  • Regular publication of procurement documents and audited financial statements of SOEs.
  • Establish an independent process to select fiscal council members.
  • Ensure deviations from PFM Act targets are time-bound and guided by clear plans to revert to targets.

Strengthening the Financial System

Findings

• Preservation of international reserves is critical to support the exchange rate peg.
• Recovery in tourism, external public sector borrowing, and capital flow management measures have supported reserve accumulation despite domestic short-term rates well below those in the United States.
• Sand Dollar usage remains limited; represents a small but growing percentage of money in circulation despite wide diffusion of electronic wallets.
• Regulatory updates to crypto assets include an amendment to the Digital Assets and Registered Exchanges (DARE) Act.

Policy recommendations

• Liquidity and interest rate management:
  • Use liquidity management operations and allow interest rates to rise as needed to mitigate risks from capital flows, reduce banks’ carrying cost of reserves, and narrow spreads between deposit and loan rates.
• Sand Dollar adoption:
  • Continue outreach, maintain formalized governance, identify and manage cybersecurity risks, and improve security infrastructure to boost adoption, financial inclusion, and payment system resilience.
• Crypto asset oversight:
  • Deepen analysis, monitoring, and mitigation of financial stability risks from crypto assets.
  • Allocate more resources for onsite inspections to identify operational deficiencies and reduce reputational risks.
  • Further amend legislation to fully align with global standards such as the Financial Stability Board’s high-level recommendations on crypto assets and the Basel Committee standards on prudential treatment of crypto exposures.
• Financial safety nets and supervision:
  • Fully staff the separate Resolution Unit within the central bank.
  • Establish The Bahamas Financial Stability Council (BFSC) to improve interagency coordination and information exchange.
  • Increase coverage of deposit insurance for domestic banks by raising premiums on banks for all deposit liabilities and improve the Deposit Insurance Corporation’s governance and operational structure.
  • Collect loan-level data to identify systemic risks and design macroprudential policies if needed.

Boosting Resilience and Growth

Climate finance and investment

• Develop credible measurement, reporting and verification frameworks for climate-related projects.
• Design projects with co-benefits across other Sustainable Development Goals and partner with established climate finance institutions.
• Create a domestic framework for climate-related investments to catalyze investor interest in green and blue debt instruments and the sale of carbon credits.
• Develop a framework for Environmental, Social and Corporate Governance bonds and introduce reporting standards for sustainability disclosures by companies.

Energy transition

• Accelerate renewable energy to reduce exposure to global commodity price swings and remove disincentives to private investment created by high, volatile energy prices and supply reliability issues.
• Focus on accelerating solar projects, improving the national electricity company’s governance, incentivizing roof-top solar via subsidies or tax preferences, and encouraging public-private partnerships, particularly on remote islands.
• Authorities’ goal: raise the share of renewables to 30 percent by 2030.

Insurance and disaster preparedness

• Property insurance premiums rising due to high reinsurance costs; decreasing coverage increases fiscal and household vulnerability to extreme weather events.
• Consider partial public funding of micro-insurance products combined with a public mandate for minimum property insurance.
• Build increased fiscal buffers to provide relief after disasters.
• Consider designing financial instruments that incentivize private self-insurance.

Digitalization and public services

• Significant progress in digitalization of public services and data gathering; addressing remaining gaps can reduce frictions that disincentivize private investment and improve targeting of social assistance programs.

The Bahamas: Selected Economic Indicators (as presented)

• Real GDP (annual % change): 14.4 (2022); 4.3 (2023, Proj.); 2.3 (2024); 1.8 (2025).
• Unemployment Rate (%): 10.8 (2022); 8.8 (2023); 8.9 (2024).
• Current Account Balance (% of GDP): -8.2 (2022); -6.2 (2023); -6.1 (2024); -5.8 (2025).
• CPI Inflation (%, end of period): 5.5 (2022); 3.6 (2023); 2.9 (2024); 2.4 (2025).
• CPI Inflation (%, period average): 5.6 (2022); 3.4 (2023); 3.1 (2024); 2.6 (2025).
• Fiscal Overall Balance (% of GDP) 1/: -4.1 (2022); -2.6 (2023); -2.0 (2024).
• Government Debt (% of GDP) 1/: 88.9 (2022); 84.2 (2023); 83.2 (2024); 81.9 (2025).
• Sources: The Bahamian authorities, and IMF staff calculations.
• 1/ Fiscal year (FY, July 1 - June 30).

Bahamas: Staff Concluding Statement of the 2023 Article IV Mission (November 27, 2023).

References

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