IMF Executive Board Concludes 2013 Article IV Consultation with The BahamasPress Release No. 14/23
January 23, 2014
On January 17, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Bahamas, and considered and endorsed the staff appraisal without a meeting.1,2
Real Gross Domestic Product (GDP) is projected to grow at nearly 2 percent for 2013, similar to 2012, but well below pre-global crisis performance. Unemployment rose to 16.2 percent in mid-2013. While tourist arrivals and expenditures have been subdued, brisk investment and construction for the Baha Mar resort project have helped support economic activity. As domestic demand remains weak and fuel prices are softening, inflation is generally under control. The fiscal deficit widened to 5½ percent of GDP in the Fiscal Year 2012/13 (July 1-June 30), mainly due to customs revenue underperformance; and the current account deficit reached 17½ percent of GDP in 2012, up from 13½ percent in 2011, largely driven by sustained goods and services imports related to Baha Mar. Foreign reserves were the equivalent of 1.6 months of imports (2.8 months of non-FDI imports) at end-October 2013.
Economic expansion should strengthen from 2014 onward, with higher growth in the U.S. and the opening of Baha Mar helping to reduce the high unemployment rate. The authorities’ budget consolidation efforts should help improve the fiscal position. Central government debt is projected to peak at nearly 60 percent of GDP in fiscal year 2014/15, and to decline to 55 percent of GDP in fiscal year 2017/18. The completion of Baha Mar should reduce construction imports and boost tourism services exports, strengthening external stability. The banking system has ample capital and liquidity buffers. Elevated non-performing loans levels have stabilized, and will likely recede slowly as growth and employment pick up, and the debt overhang is reduced. Nevertheless, private sector demand for bank credit will likely remain subdued over the near term. There remain risks to the outlook, including shortfalls in Baha Mar performance, a delay in fiscal consolidation, and lower than anticipated tourist arrivals in the event that global growth weakens. The risks highlight the need for timely implementation of plans for fiscal consolidation and economic diversification.
Executive Board Assessment
In concluding the 2013 Article IV consultation with The Bahamas, Executive Directors endorsed the staff appraisal, as follows:
The Bahamian economy is recovering from the global financial crisis, but at a painfully slow pace. Economic activity should recover more strongly from 2014 onward with firmer growth in the U.S. and the opening of Baha Mar, helping to reduce high unemployment. However, growth performance over the medium term will also depend on success in addressing a number of challenges going forward, including diversifying tourist source markets and the tourism experience and expanding incoming airlift capacity; advancing efforts to close infrastructure bottlenecks and workforce skills shortages; and strengthening non-tourism sectors. Steadfast and timely execution of needed reforms will be crucial.
Rigorous implementation of the authorities’ fiscal consolidation plan is essential to recapturing medium-term budget and debt sustainability. The VAT is the cornerstone of the fiscal adjustment program; the authorities should ensure its timely and successful launch. On the spending side, the efforts to reinforce expenditure controls and monitoring should be accelerated, especially as regards goods and services spending and transfers; and reforms to improve the weak financial position of key public corporations and rein in transfers and subsidies should be given high priority.
The introduction of a fiscal rule would enhance the predictability and credibility of budget policies. This would notably help ensure that the authorities’ public finance reforms are implemented within a well articulated and durable medium-term fiscal framework. The reform’s details and implementation timeframe authorities should be fleshed out; and the Fund stands ready to provide technical assistance.
The exchange rate peg has served The Bahamas well, and should be further supported by efforts to restore budget and external viability and rebuild depleting policy buffers. The authorities are encouraged to closely adhere to prudent fiscal policies and structural reforms aimed at preserving strong economic fundamentals.
The steady implementation of key Financial Sector Assessment Program recommendations and enhanced monitoring of developments in the financial system are commendable. The establishment of a Systemic Risk Surveillance Committee, creation of a credit bureau, and strengthening of the deposit insurance system should further strengthen the resilience of the financial system and improve its already generally favorable standing. A financial crisis management and resolution plan is also under preparation with Fund technical assistance. The high level of non-performing loans, however, calls for intensifying the monitoring of financial institutions.
The authorities’ efforts to craft a comprehensive national development plan (NDP) in 2014 to guide development efforts over the long run and insulate policies from the political cycle are welcome. It would be important to ensure that the plan is completed in a timely fashion and backed by a broad cross section of society to maximize its probability of success. Sustained efforts will be needed to enhance structural competitiveness by strengthening the business environment, improving educational standards to foster human capital development, and identifying clear strategies for the development of islands and key sectors such as tourism, agriculture, financial services, and port activities. Government initiatives in these areas should be informed by the NDP’s pertinent guidance and recommendations.