The Bahamas: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, November 19, 2024
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- Published: November 19, 2024
Overview and Outlook
- The Bahamian economy has staged a remarkable recovery following Hurricane Dorian in 2019 and the Covid-19 pandemic.
- Activity and employment have recovered to their pre-pandemic levels and inflation has fallen back below pre-pandemic levels.
- Over the medium-term, growth is expected to slow to its long-run potential (of 1½ percent) as capacity constraints in tourism become more binding.
- Barring global commodity price shocks, headline inflation is expected to converge to around 2 percent.
- Risks to the outlook are balanced:
- Upside risks: execution of announced infrastructure and hotel construction projects; higher-than-expected boost from expansion of short-term rentals.
- Downside risks: large public debt rollover needs; risk of natural disasters.
Fiscal Policy, Debt, and Public Finances
- FY24 fiscal deficit: 1.3 percent of GDP, around 2½ percentage points of GDP lower than FY23.
- Central government debt: 78.8 percent of GDP in FY24.
- Central bank advances to the government: now at 2 percent of GDP.
- Authorities’ debt target: 50 percent of GDP by FY31 (used as policy anchor).
- FY25 budget target: overall fiscal balance of –0.5 percent of GDP.
- FY26 budget target: overall fiscal balance of 2.8 percent of GDP.
- Staff baseline incorporates new revenues from the 15 percent qualified domestic minimum top-up tax (QDMTT) on large multinational corporations resident in The Bahamas, expected to generate 1 percent of GDP in new revenues.
- Without additional policy measures, staff warn revenues are likely to underperform and the fiscal balance will be smaller than assumed (especially in FY26), putting the debt target out of reach for FY31.
- Historical context: the budgeted 3½ percentage points of GDP increase in the primary balance between FY24-FY26 was achieved only once in the 18 years prior to the pandemic.
- Alternative fiscal adjustment path proposed:
- Raise the primary balance to 5½ percent of GDP by FY26 and to 7 percent of GDP by FY29 to still bring debt to 50 percent of GDP by FY31 while giving the private sector more time to adjust.
- Potential revenue and fiscal measures listed to achieve adjustment (combinable):
- Replacing the business license fee with a 15 percent profits tax on large domestic firms;
- Introducing a personal income tax for the top earners;
- Eliminating the ceiling on the property tax;
- Reducing tax expenditures;
- Increasing the VAT rate;
- Raising water rates for heavy users;
- Ensuring the collection of patient fees at the Public Hospital Authority.
- Pension reforms:
- Draft civil service pension proposal introduces a contribution for new hires, increases the mandatory retirement age, and eliminates early retirement at age 55.
- Staff recommend supplementing with harmonizing changes to the national (NIB) pension system: gradually raising the contribution rate for the NIB, aligning the minimum retirement age between NIB and civil service systems, and indexing the retirement age to life expectancy for both systems.
- Debt management recommendations:
- Fully staff the debt management office;
- Publish rules for changing composition of securities issued;
- Improve capacity for liability management operations.
- Fiscal transparency and governance recommendations:
- Independently select members of the reconstituted Fiscal Responsibility Council and Public Sector Audit Committee;
- Publish beneficial ownership information for all companies awarded public contracts;
- Publish audited financial statements and procurement information for public corporations.
Financial Stability and Inclusion
- Systemic risks assessed as moderate:
- Credit gap remains negative after several years of credit contraction;
- Household and corporate leverage at modest levels;
- Banks well capitalized and hold a fifth of their domestic assets in cash or reserves;
- High bank exposure to public sector debt is an important vulnerability.
- Liquidity management and monetary-fiscal interactions:
- New liquidity management tools and reductions in central bank advances would decrease systemic liquidity.
- Recommendations: improve liquidity forecasting; introduce interbank repos or 30-day Treasury Bills; reduce statutory limit on central bank advances; repay outstanding stock of advances.
- Suggestion to include a well-defined “escape clause” to allow temporary increase in the limit on central bank advances in exceptional, emergency circumstances.
- Progress on 2019 FSAP recommendations:
- Plans to establish the Bahamas Financial Stability Council expected to be finalized by end-2024.
- Deposit insurance premia increased; bank resolution framework improved.
- Creation of a real estate price index is advancing.
- Supervisory oversight would be aided by collection of loan-level data from bank and nonbank lenders.
- Financial inclusion and fintech:
- Expansion of digital banking and introduction of the moveable collateral register could reduce cost of, and increase access to, credit.
- Encouraging new financial technologies may require: improvements in data availability; expanding geographic internet connectivity; investing in financial literacy; potentially establishing regulatory sandboxes and/or innovation hubs.
- Digital assets and AML/CFT:
- The 2024 DARE Act widens regulatory oversight and strengthens AML/CFT requirements for digital assets.
- Priorities: ensure sufficient resources for effective oversight; increase onsite inspections; address data gaps.
- Additional steps suggested: require collection, holding, and sharing of originator and beneficiary information; ensure registrable activities exclude anonymity-enhancing services (mixers, tumblers, other high-anonymity technologies); consider expanding scope to include other decentralized finance products and services.
- National risk assessments: authorities finalizing NRA for money laundering, then completing NRA for terrorism financing; findings should feed into an updated national AML/CFT strategy.
- Continue efforts to align beneficial ownership regime with evolving international standards (e.g., registered agents collecting and updating adequate customer information; requiring domestic companies to retain beneficial ownership information of their shareholders).
Growth, Climate Resilience, and Structural Reforms
- Long-term growth drivers and constraints:
- Raise long-term growth by investing in human capital, closing digitalization gaps, relieving capacity constraints in tourism, reducing labor market informality, and fighting crime.
- Incentivize private sector investments in hotel capacity, particularly outside of New Providence.
- Expand vocational and apprenticeship programs; improve skill databases and job placement services.
- Reduce crime via investments in crime mitigation strategies, larger police force, leveraging data analytics, and continuing reforms to criminal justice effectiveness.
- Climate adaptation, resilience, and fiscal implications:
- Public investments in adaptation and preservation of natural capital could increase real GDP by up to 9 percent over the long-term.
- Adaptation investment needs are substantial and likely larger than estimates in the Nationally Determined Contribution.
- Greater revenue mobilization and international/private sector support (particularly grants) will be important to fund adaptation.
- Even further fiscal adjustment may be needed over the medium-term to build a contingency fund for future natural disasters while adhering to the 50 percent debt target in FY31.
- Disaster insurance and moral hazard:
- Government and private sector designing a partially subsidized natural disaster micro-insurance product for the most vulnerable.
- To avoid leakage and minimize fiscal costs, effective targeting of this insurance subsidy is essential.
- Curtail potential moral hazard by integrating disaster risk management into zoning regulations, strengthening enforcement of robust building codes, and improving access to information on climate risks.
- Institutional and policy frameworks:
- Update the 2005 National Policy for the Adaptation to Climate Change and develop a detailed national adaptation plan.
- Consider comprehensive adaptation legislation identifying line ministry responsibilities and establishing an inter-ministerial commission that reports to the Parliament.
- Climate financing and debt instruments:
- Further recourse to climate financing would reduce borrowing costs.
- Authorities have increased access to climate resources through policy-based guarantees from the IDB and plans to join the Development Bank of Latin America and the Caribbean (CAF).
- Undertaking debt-for-nature swaps with third-party guarantors, as contemplated in the 2023/24 budget and initiated in November, could provide resources for preservation of natural habitats.
- Electricity sector reforms:
- Planned reforms aim to modernize transmission and distribution and increase use of renewables.
- Over the medium term, shifting the energy matrix would help narrow the current account deficit, reduce vulnerability to commodity price shocks, and boost growth.
- Preconditions: strengthen institutional framework for public-private partnerships (PPPs) and define clear risk sharing between private and public sectors.
- Improve operations, lower costs, and optimize capital structure of the Bahamas Power and Light Corporation.
Key Economic Indicators (selected)
- Real GDP (annual % change):
- 2023: 2.6
- 2024: 1.9
- 2025: 1.7
- 2026: 1.6
- Unemployment Rate (%):
- 2023: 10.2
- 2024: 10.0
- 2025: 9.8
- 2026: 9.7
- Current Account Balance (% of GDP):
- 2023: -7.7
- 2024: -7.8
- 2025: -7.1
- CPI Inflation (%, end of period):
- 2023: 0.9
- 2024: 1.5
- 2025: 1.8
- CPI Inflation (%, period average):
- 2023: 3.1
- 2024: 1.4
- Fiscal Overall Balance (% of GDP) 1/:
- 2023: -3.8
- 2024: -1.3
- 2025: -1.0
- 2026: 0.0
- Government Debt (% of GDP) 1/:
- 2023: 81.5
- 2024: 78.8
- 2025: 77.5
- 2026: 75.3
The Bahamas: Staff Concluding Statement of the 2024 Article IV Mission, November 19, 2024.