Press Release No. 16/274

Press Release: IMF Executive Board Concludes 2016 Article IV Consultation with The Bahamas

June 10, 2016

On June 8, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with The Bahamas.

Economic growth is estimated to have stalled in 2015, as a modest increase in air tourism arrivals was not sufficient to offset a contraction in domestic demand and weak exports of goods. Private consumption and investment were weighed down by headwinds from fiscal consolidation, as well as an end to construction and uncertainty over the opening of the Baha Mar megaresort. Inflation was moderate at 1.9 percent on average in 2015, despite a temporary increase owing to Value Added Tax (VAT) introduction in January 2015. Unemployment, after a brief dip earlier in the year, rose to 14.8 percent in November, as workers hired for the planned Baha Mar opening were later dismissed. Double-digit unemployment and the elevated share of nonperforming loans continue to constrain private credit (which fell by 1 percent year-on-year in December 2015).

Smooth VAT introduction has contributed to fiscal consolidation. VAT revenue over the first 12 months, at $536 million (about 6 percent of GDP), has exceeded expectations. As a result, the FY2014/15 (ending in June 2015) deficit is estimated to have declined to 4.4 percent of GDP (down from revised 5.6 percent in FY2013/14). Available data for the first seven months of FY2015/16 suggest a further decline in the deficit, by about 1 percentage point, compared to the same period a year ago. The central government debt-to-GDP-ratio nevertheless reached 66.5 percent in December 2015, pointing to limited fiscal space. The current account deficit declined significantly, to 15.3 percent of GDP in 2015 (compared to 22 percent a year earlier), driven primarily by lower imports owing to the decline in oil prices and halt to Baha Mar construction. International reserves, supported in part by government external borrowing, increased to $981 million at end–March 2016, equivalent to about 2.4 months of next years’ projected imports of goods and services.

Prospects are tempered by Baha Mar related uncertainties and low potential growth. Growth is expected to strengthen to about 0.5 percent this year, supported by continued growth in air tourist arrivals and moderating headwinds to private consumption and investment. Looking forward, while Baha Mar opening is expected to provide a temporary boost to growth, helping to close the still sizeable output gap, structural impediments continue to constrain potential growth. Staff estimates point to potential growth between 1 and 1.5 percent over the medium term, down from close to 3 percent at the start of the century. This outlook is subject to mainly downside risks, calling for continued fiscal consolidation to rebuild fiscal and external policy buffers and boosting investor confidence, as well as a decisive shift towards implementation of structural reforms to improve competitiveness, reduce unemployment and raise potential growth.

Executive Board Assessment²

Executive Directors noted that economic activity stalled in 2015, weighed down by weak domestic demand and goods exports. The current account deficit declined significantly but remains sizable. Going forward, the outlook remains challenging, especially with high youth unemployment and low productivity growth. Against this backdrop, Directors emphasized the importance of continued fiscal consolidation to rebuild fiscal and external buffers and structural reforms to improve competitiveness, reduce unemployment and raise potential growth. They also underscored the need to address financial sector challenges.

Directors commended the authorities for a successful VAT introduction which has contributed to fiscal consolidation. They encouraged the authorities to resist pressures to introduce exemptions and to ensure continued strong implementation. Directors called for continued consolidation to reduce the public debt to GDP ratio and ensure sustainability. On expenditures, Directors emphasized the need to contain increases in the public wage bill and to orient the budget towards growth-enhancing infrastructure spending. As regards fiscal reforms, Directors advocated moving towards a fully-fledged central revenue agency, improvements in tax administration, and a review of the efficiency of tax exemptions and concessions, including to the tourism sector. They supported the on-going reforms to modernize the public financial management system and called for extending state owned enterprise reform beyond the energy sector. Directors also emphasized the need for timely pension system reforms.

To address impediments to growth, Directors called for decisive implementation of structural reforms, including in the context of the National Development Plan. These reforms should aim at strengthening the business environment, raising human capital, reducing skill mismatches, and lowering high labor and energy costs. Directors also highlighted potential gains from efficient investment in information and communication technology, transportation, public utilities, economic diversification, and enhanced resilience to natural disasters.

Directors welcomed recent progress in financial sector reforms, including in addressing gaps in the AML/CFT regulation and implementation of the new Basel II/III regime. They encouraged the authorities to enhance their crisis management framework. Directors called for greater emphasis on risk-based financial sector supervision and regulation, given global “de-risking” trends, and strong efforts to ensure compliance and close communication across stakeholders. Directors called for renewed efforts to resolve the overhang of non-performing loans to spur credit growth.