International Monetary Fund
Friday, March 27, 2015
Friday, March 27, 2015
An International Monetary Fund (IMF) team led by Wendell Samuel (pictured) visited The Bahamas from March 9–20 to conduct discussions for the 2015 Article IV consultations.
Following the consultations, Samuel issued the following statement:
Economic activity strengthened slowly in 2014. Real GDP growth is estimated at 1.3 percent, higher than the 0.7 percent achieved in 2013, but well below pre-global crisis levels. Supported, in part, by rising US economic activity, air travel arrivals grew by almost 5 percent in 2014. Unemployment however remains high, and stood at 15.7 percent in November 2014. Inflation rose to 2.2 percent in January 2015 (1.2 percent in December 2014), as the imposition of the value added tax (VAT) offset the effects of declining oil prices.
GDP growth is expected to pick up over 2015-16 as the US economy strengthens, tourist arrivals rebound, and Baha Mar and other smaller projects open, reaching 2.8 percent in 2016 before moderating to around 1.5 percent by 2020.
The Bahamas faces several challenges in boosting its growth potential. First, it needs to attract sufficient tourist demand to fill the large impending increase in capacity. Second, evidence of significant structural unemployment suggests the existence of impediments to job creation and proper functioning of the labor market. Third, small- and medium-sized enterprises (SMEs) face significant impediments to the growth. Fourth, as noted by the 2015 World Bank Doing Business Indicators, general constraints to investment persist.
In this context the mission urges the authorities to finalize and implement the National Development Plan (NDP), with assistance from the IDB. The NDP would assess the country’s macroeconomic performance, institutions and governance, and propose strategies to accelerate economic, institutional, and social development over the medium term and long run. Pending finalization of the NDP, steadfast and more coordinated implementation of ongoing reforms to enhance the structural competitiveness of the economy will be needed. Especially important are initiatives to strengthen the business environment, address high electricity costs, enhance the efficiency of labor market regulations and institutions, and to improve educational standards and foster human capital development. The IMF stands ready to assist, as needed, in areas of its core expertise and mandate.
Commendably, the authorities continue to be on track in implementing their strong fiscal consolidation programme to rebuild fiscal buffers eroded in the aftermath of the global crisis and reverse recent significant increases in public debt. The fiscal deficit in FY 2013/14 (July to June) is estimated to have narrowed to 3.3 percent of GDP (from 5.4 percent). The mission commends the authorities for the introduction of a broad-based VAT on January 1, 2015.
This reaffirms their commitment to medium-term fiscal consolidation, and represents a significant step towards boosting credibility and bolstering market confidence. Early indications of VAT performance are encouraging, and the authorities seem on course to achieving the initial revenue targets. The authorities should also advance other revenue measures, including modernization of customs and property tax administration, and establishment of a central revenue agency. Provided that these measures are implemented, together with stronger restraint on current expenditure in the context of a medium-term budgetary framework, the trajectory of central government debt would be reversed and fall below 60 percent of GDP by fiscal year 2019/20.
Advancing far reaching reforms at the state-owned enterprises is needed to stem their drag on public finances. The mission urges the authorities to intensify the reform momentum at key public enterprises including Bahamasair, Bahamas Electricity Corporation and the Water and Sewerage Corporation, which will also help to relieve infrastructure bottlenecks in the provision of these essential services, and would thereby improve The Bahamas’ external competitiveness.
The mission stressed that The Bahamas needs to rebuild its foreign exchange reserve buffers. Although reduced imports and significantly increased tourism exports from 2015 onward are expected to contribute to a substantial decline in the current account deficit, the current account deficit is still expected to be sizeable over the medium term, given continued expected challenges to external competitiveness. This underscores the need for close adherence to launched fiscal adjustment and to measures in train aimed at further diversifying tourism and the economy more generally, and strengthening structural competitiveness.
The Bahamian financial sector remains well capitalized and liquid, and the authorities continue to improve its regulatory framework. Banks are profitable, though nonperforming loans remain elevated in the aftermath of the global crisis and credit growth is weak. The mission welcomes the progress made towards introducing the credit bureau. It concurs with the authorities that the knowledge of the true level of household indebtedness could suppress credit at its inception but stresses that greater transparency will improve financial intermediation and growth in the long run. The authorities are pressing ahead with efforts to facilitate the exchange of financial sector information for tax purposes. Efforts to strengthen crisis management procedures, anti-money laundering (AML) and combating the financing of terrorism (CFT) practices are ongoing.
The mission also concurs with the authorities’ view that the current monetary policy stance remains appropriate. Given the fixed exchange rate, modest reserves, relatively slow growth and contained “core” inflation (excluding the effects of VAT and energy prices), neither loosening or tightening would be appropriate in the current circumstances.
The team met with Perry Christie, Prime Minister and Minister of Finance; Obediah Wilchombe, Minister of Tourism; Kenred Dorsett, Minister of the Environment and Housing; Michael Halkitis, Minister of State for Finance; Wendy Craigg, Governor of The Central Bank of The Bahamas; and senior government officials, representatives of the opposition, private sector and civil society.
The mission appreciates the high-quality discussions and wishes to thank the authorities for their hospitality and the open and constructive dialogue.