BAHAMAS-IMF says the Bahamas continues to show socioeconomic growth

NASSAU, Bahamas, CMC – The International Monetary Fund (IMF) says the macro outlook for the Bahamas economy continued to rebound vigorously last year, with actual gross domestic product (GDP) growth reaching 14.4 percent and unemployment fell to 8.8 percent with a broad-based expansion that was especially strong for tourism.

However, the Washington-based financial institution, which sent a mission to the country, said labor force participation, particularly among men, remained below pre-pandemic levels.

The staff report, which will be presented to the IMF executive board for discussion and decision, noted that in 2023, international flight and cruise arrivals rose well above their pre-pandemic levels, leading to a projected 4.3 percent expansion in the year, bringing the economy back to estimates of potential output.

The report notes that after peaking at 7.1 percent in July 2022, inflation has fallen steadily to 2.3 percent in July 2023, primarily driven by the fall in global energy prices.

It said risks to the outlook are skewed to the downside, indicating that a fall in tourism demand due to an economic slowdown in source markets could weigh negatively on the growth outlook.

“Furthermore, renewed pressures on global food and oil prices could burden lower-income households and pressure the balance of payments. Any associated fiscal measures to dampen the pass-through of global prices to the domestic economy would have to be well-targeted to mitigate further strain on the budgetary position.

“Finally, The Bahamas is highly exposed to risks emanating from climate change and natural disasters. If risks are realized, domestic financing challenges could increase,” the report said.

The report said that a robust cyclical revenue recovery and a wind-down of pandemic-related spending had reduced the fiscal deficit to 4.1 percent of GDP in 2022-23, bringing the central government debt down to 84 percent at the end of June 2023.

It said the authorities intend to reduce the deficit to 0.9 percent of GDP in 2023/24, reaching an overall surplus of 2.1 percent by the financial year 2026/27.

“The bulk of this adjustment would come from a 3½ percent of GDP increase in revenue collections, largely from improvements in administration. In addition, ½ percent of GDP in additional capital spending is expected to be funded from lower current spending. The authorities expect This fiscal path to bring public debt to 68 percent of GDP by FY2026/27.”

The report notes that while the objectives of the authorities’ medium-term fiscal plan are laudable, staff assesses that more policy measures will be needed to achieve this targeted adjustment.

“In particular, based on current policies, the fiscal deficit is expected to be 2.6 percent of GDP in 2023/24, considerably more significant than that expected in the budget. Over the medium term, debt would fall to 78 percent of GDP by 2027/28, but gross financing needs would remain high for the next several years (at around 20 percent of GDP).

“Even though, under this path, debt is judged to be sustainable, a faster debt reduction would be valuable in lessening the risk of sovereign stress and, in so doing, would be rewarded through a lower interest burden for the public debt.”

The report said beyond reducing the fiscal deficit, a set of comprehensive tax reforms would be valuable in both raising revenues and improving progressivity.

In particular, implementing the Organisation for Economic Co-operation and Development (OECD) global minimum corporate tax by trading partners allows The Bahamas to introduce a well-designed corporate income tax accompanied by a personal income tax on the highest earners. There is also scope to significantly rationalize existing preferences, loopholes, and exemptions in the tax system.

The report said efficiency gains in spending programs and improvements in the financial management of state-owned enterprises would be needed to offset some of the budgetary pressures arising from an aging population.

It said to improve longer-run growth and strengthen social inclusion, there will be a need to reorient spending priorities toward education, healthcare, targeted social transfers, and infrastructure, particularly those that will increase resilience to the effects of climate change.

The report said better debt management would help reduce the vulnerabilities created by the country’s high debt rollover needs.

Regarding efforts to strengthen the financial system, the report notes that the exchange rate peg protection requires sustained preservation of international reserves.

It said the recovery in tourism, external public sector borrowing, and longstanding capital flow management measures have supported international reserve accumulation even as domestic short-term interest rates remain well below those in the United States.

“However, capital flows can be sensitive to interest rate differentials, especially during periods of uncertainty or volatility. Liquidity management operations, as well as allowing interest rates to rise as needed by market conditions, could be useful for mitigating these risks, reducing banks’ carrying cost of reserves and, in turn, narrowing the spreads between deposit rates and rates on loans to private borrowers,” the report noted.

It said that usage of the Sand Dollar, the Central Bank’s digital currency, remains limited. “Despite the large diffusion of electronic wallets, the Sand Dollar still represents a small, albeit growing, percentage of money in circulation,” the report said, adding that the Central Bank is continuing its outreach efforts to the public and has formalized the governance framework surrounding the Sand Dollar.

It said the bank’s multipronged approach to increasing Sand Dollar adoption has the potential to increase financial inclusion and the payment system’s resilience.

“Continued efforts to identify and manage cybersecurity risks and improve the security infrastructure will also bolster confidence in the Sand Dollar and strengthen prospects for a larger circulation.”

The report also notes that more profound efforts are recommended to analyze, monitor, and mitigate financial stability risks from crypto assets. The regulatory framework for crypto assets has been updated, and the authorities have legislated an amendment to the Digital Assets and Registered Exchanges (DARE) Act to strengthen the regulation and supervision of crypto assets.

“Critically, this should be accompanied by providing more resources for onsite inspections to help identify and rectify operational deficiencies and reduce reputational risks. “Further amendments to the legislation to fully align The Bahamas’ framework for crypto assets with global standards like the Financial Stability Board’s high-level recommendations on crypto assets and the Basel Committee standards on the prudential treatment of crypto exposures are advised. Vigilance in this nascent but rapidly evolving area of regulatory oversight will be of the essence.”

The staff report said the progress made by the authorities in implementing the 2019 FSAP recommendations is welcome, but some areas remain to be addressed. It notes that while a separate Resolution Unit within the central bank has been established, it will require adequate staffing to become fully operational.

“Plans are underway to establish The Bahamas Financial Stability Council (BFSC) to improve interagency coordination and information exchange among financial stability regulators. Efforts should be furthered to increase deposit insurance coverage for domestic banks by increasing premiums levied on banks for all deposit liabilities while improving the Deposit Insurance Corporation’s governance and operational structure.

“The collection of loan-level data by supervisors would assist in identifying systemic risks and, if needed, in designing macroprudential policies,” the report said, adding that new avenues for climate finance can bolster fiscal and environmental sustainability.

“Building credible measurement, reporting, and verification frameworks for climate-related projects, developing projects that have co-benefits across other Sustainable Development Goals, and partnering with established institutions in climate finance will help set high standards in assessing projects through an environmental lens.

“Creating a credible domestic framework for climate-related investments can help catalyze investor interest in green and blue debt instruments and the sale of carbon credits. “Similarly, developing a domestic framework for Environmental, Social, and Corporate Governance bonds, including introducing reporting standards for sustainability disclosures by companies, would help support new avenues for climate financing to Bahamian public and private sector entities,” the report noted.