IMF Executive Board Concludes 2019 Article IV Consultation with The Bahamas

July 1, 2019

On June 3, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Bahamas. 1 The discussion included the Financial System Stability Assessment (FSSA) of The Bahamas.

Real GDP expanded by 1.6 percent in 2018, up from 0.1 percent in 2017. Economic activity was supported by tourism, while foreign investment projects continued to provide the impetus for construction sector activity. 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. Unemployment remains high, at 10.7 percent in November 2018, as employment creation has lagged labor force growth. 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. 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.

The banking system is well capitalized, but credit to the private sector continued to contract in 2018, even if at a more moderate rate. Banks have improved their balance sheet quality and average non-performing loans (NPLs) declined from its peak of 15.4 percent in 2013 to 9.1 percent in 2018. The financial system is resilient to current stability threats.

Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1½ percent in the medium term. The increase in inflation is projected to have been temporary. Domestic bottlenecks and lagging economic diversification constrain medium-term growth, and unemployment is projected to decline only gradually. External accounts are expected to strengthen over the medium-term, backed by high tourism receipts, fiscal consolidation and lower oil prices, and the current account deficit is projected to converge to 5 percent of GDP.

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. Domestically, reform momentum could stall delaying fiscal consolidation and the implementation of competitiveness-enhancing reforms. In the international sector, reputational risks could intensify despite the recent strengthening of regulatory and transparency standards, possibly challenging existing business models.

Executive Board Assessment 2

Executive Directors welcomed the strengthening economic activity and the prospect of continued growth, underpinned by prudent policies and comprehensive structural reforms. At the same time, Directors noted the still high unemployment rate, 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.

Directors welcomed the decisive steps to consolidate the fiscal position and the authorities’ commitment to fiscal sustainability and macro-financial stability. They particularly welcomed the enactment of the Fiscal Responsibility Law, noting that its effective implementation would bolster policy credibility and ensure durable gains from fiscal consolidation. Directors encouraged steps to further strengthen public financial management systems, tighten expenditure control, and operationalize the fiscal council as planned. They also saw value in a comprehensive review of the tax regime to enhance its efficiency and progressivity, including by reducing distortions and other preferential treatment.

Directors stressed the importance of advancing structural reforms to boost competitiveness and unlock the economy’s potential for high and inclusive growth. In view of the planned accession to the WTO, they 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.

Directors noted that significant progress has been made in implementing the 2013 FSAP recommendations, and that the overall banking system remains resilient. They encouraged further efforts to revive credit growth, resolve nonperforming loans, and strengthen supervision of credit underwriting. To this end, they supported developing a real estate price index and operationalizing the credit bureau. Directors welcomed ongoing efforts to strengthen the central bank’s recovery and resolution powers, as well as its governance and independence. They highlighted the need to complete the legislative reform of the banking resolution framework, improve governance of public asset management companies

and state-controlled financial institutions, and address remaining deficiencies in the AML/CFT framework.

Directors looked forward to the swift implementation of the new framework for the international sector aimed at enhancing its transparency and monitoring. They encouraged the authorities to remain vigilant against potential spillovers into the domestic financial system from the unification of banking license regimes. Directors also welcomed the authorities’ initiatives to advance financial inclusion while emphasizing the need to proceed with caution on the issuance of a central bank digital currency, mindful of possible risks to financial stability.

Directors welcomed the recent subscription to the enhanced General Data Dissemination System. They looked forward to further progress in improving the availability and quality of economic data.


The Bahamas: Selected Social and Economic Indicators

I. Social Indicators

GDP (US$ millions), 2018

12,425

Poverty rate (percent), 2013

12.8

GDP per capita (US$), 2018

32,997

Unemployment rate (percent), Nov 2018

10.7

Population (thousands), 2018

377

Infant mortality rate (per 1,000 live births), 2016

9

Life expectancy at birth (years), 2018

75.7

Human development index (rank), 2018

54

Adult literacy rate, 15 & up (percent), 2007

95.6

II. Economic Indicators

Proj.

2015

2016

2017

2018

2019

2020

(Annual percentage change, unless otherwise indicated)

Real sector

Real GDP

0.6

0.4

0.1

1.6

1.8

1.7

Nominal GDP

7.7

1.6

1.8

2.3

2.4

3.6

Consumer price index (annual average)

1.9

-0.3

1.6

2.2

1.6

2.4

Consumer price index (end of period)

2.0

0.8

1.8

2.0

2.4

2.4

Unemployment rate (in percent)

13.4

12.2

10.1

10.7

9.0

9.0

Saving rate (percent of GDP)

14.1

20.5

13.4

7.5

10.9

12.5

Investment rate (percent of GDP)

26.2

26.4

26.3

23.9

23.0

22.9

Financial sector

Credit to the nonfinancial public sector

7.7

12.3

-3.8

6.6

5.3

2.5

Credit to the private sector

-1.1

-2.0

-3.0

-1.5

1.0

1.5

Liabilities to the private sector

-0.3

8.7

1.5

-0.8

2.4

3.6

External sector

Exports of goods and services

-8.7

18.9

-1.4

11.8

8.2

6.4

Of which: Travel receipts (gross)

3.0

29.3

-2.6

12.0

8.5

5.5

Imports of goods and services

-16.0

5.6

11.5

11.5

2.0

2.2

(In percent of GDP, unless otherwise indicated)

Central government 1/

Revenue and grants

15.0

16.3

17.2

16.6

19.4

19.7

Expenditure

18.8

18.9

22.7

20.0

21.7

21.1

Expense

16.3

17.3

19.4

17.7

19.6

19.0

Net acquisition of nonfinancial assets

2.4

1.6

3.3

2.3

2.1

2.2

Overall balance

-3.8

-2.6

-5.5

-3.4

-2.3

-1.5

Primary balance

-1.7

-0.3

-3.3

-0.8

0.4

1.1

Central government debt

49.7

50.4

54.4

63.3

63.1

61.9

External sector

Current account balance

-12.0

-6.0

-12.9

-16.4

-12.2

-10.3

Change in net international reserves (increase -)

-0.2

-0.8

-4.2

1.8

-0.4

-0.2

External public debt (end of period) 2/

18.5

19.9

26.6

25.5

27.9

27.6

Memorandum items:

Gross international reserves

(End of period; millions of U.S. dollars)

812

904

1,417

1,196

1,250

1,275

In months of next year's G&S imports

2.2

2.2

3.1

2.5

2.6

2.6

In months of next year's non-FDI related G&S imports

2.5

2.5

3.4

2.9

2.9

2.9

In percent of reserve money

83

70

98

96

97

96

External debt-service ratio (in percent of exports of G&S)

5.7

9.7

20.5

9.1

19.5

8.9

GDP (in millions of Bahamian dollars)

11,752

11,938

12,150

12,425

12,724

13,178

Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; UNDP Human Development Report; and IMF staff projections.

1/ The data refer to fiscal years ending on June 30.

2/ Central government and public corporate debt.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Deputy Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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