IMF Ends 2023 Article IV Review with Bahamas

Washington, DC: On January 19, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with The Bahamas and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

The Bahamas' economy continues to rebound vigorously, driven by large tourism inflows. Real GDP growth is estimated to have reached 4.3 percent in 2023 (from 14.4 percent in 2022), while the unemployment rate fell below 9 percent. Inflation has been on a downward path since mid-2022. Backed by a strong recovery of tourism, the current account deficit is projected to have narrowed to 6.2 percent of GDP in 2023 (from 8.2 percent in 2022).

A strong cyclical recovery in revenues and a wind down of pandemic-related spending improved the fiscal balance. The fiscal deficit narrowed to 3.9 percent of GDP in 2022/23, while central government debt fell to 84 percent of GDP. Under current policies, staff projects a deficit of 2.6 percent of GDP in 2023/24 with debt falling to 78 percent of GDP by 2027/28. The financial sector remains robust, with abundant liquidity and declining NPLs. Private credit growth is muted and underperforming relative to output growth.

The economic outlook is favorable, albeit with downside risks. Tourist arrivals and real average spending, which surpassed pre-pandemic levels in 2023, should continue to rise in the near-term, boosting real GDP and helping to narrow external and fiscal imbalances. Risks to the outlook include an economic slowdown in tourism source markets and the potential for costly natural disasters. Building fiscal buffers and investing in renewable energy infrastructure will help address downside risks stemming from natural disasters, global economic uncertainty, and climate change. Raising potential growth beyond 1.5 percent is conditional on addressing bottlenecks in the energy sector and labor markets.

Executive Board Assessment[2]

The Bahamas near-term growth prospects are favorable, but policy adjustments will be needed to strengthen potential growth and ease downside risks. The economy is in the midst of a solid expansion, with signs of continuing strength across sectors. A strong recovery of tourism has helped regain the ground that was lost after hurricane Dorian and the Covid crisis. Unemployment is at its lowest level since 2008 while inflation has been on a downward path and is lower than in regional peers. The more favorable economic environment provides space for the authorities to reorient their policy framework toward the pursuit of greater fiscal sustainability, social equity, and climate resilience.

The fiscal stance would benefit from a faster reduction in debt-to-GDP. The implementation of the OECD global minimum corporate income tax provides an opportunity to introduce a well-designed corporate income tax and a personal income tax on highest earners. There is scope to revise existing tax preferences and exemptions, aiming for a more progressive and efficient tax system. Moreover, rationalizing SOEs' spending would alleviate current expenditure pressures. Efficiency gains in spending and improvements in the financial management of SOEs would not only support debt reduction, but also free up resources to invest on social outcomes and infrastructure.

Enhancing debt management and improving fiscal transparency and accountability would soften investors' concerns about high rollover needs and potentially reduce the reliance on international markets for fiscal financing. Particularly, the authorities should consider extending competitive auctions to domestic government securities across maturities, increasing the predictability of sovereign issuance plans, and lowering the limit on central bank advances to the government. The publication of beneficial ownership information for providers that obtain public contracts, as well as publication of audited financial statements of SOEs, and an independent process to select members of the fiscal council are best practices that would be beneficial for The Bahamas. Finally, any deviations from the targets mandated in the PFM Act should be time-bound and underpinned by clear guidance on the speed at which the authorities will revert to their goals.

Continued efforts to implement the 2019 FSAP recommendations and enhance the supervision and regulation of crypto assets would help better identify and mitigate risks to the financial system. The Resolution Unit within the central bank and the Financial Stability Council should be adequately staffed and made operational, while deposit insurance coverage should be increased, and the Deposit Insurance Corporation's governance could be improved. Additionally, further amendments to the DARE Act could be considered to align the framework with global standards – accompanied by additional resources for onsite inspections. Lastly, the expansion of financial sector data collection would assist in identifying systemic risk and designing macroprudential policies.

To mitigate climate related risks, the authorities should take advantage of climate financing opportunities and consider reforms to the property insurance market. To fully exploit new avenues for climate finance, the authorities should build effective measurement, reporting and verification frameworks for climate-related projects, develop projects that have co-benefits across other SDG, and partner with established institutions in climate finance. Regarding the insurance sector, a public mandate to carry a minimum level of property insurance could be considered in combination with an expansion of partial public funding of micro-insurance products, land-planning, and incentives for resilient infrastructure investments.

Accelerating the transition to renewable energy would improve electricity affordability and reliance in The Bahamas, consequently supporting private sector growth and reducing the country's vulnerability to terms of trade shocks. Hastening solar projects and improving the national electricity company's governance structure could help lower costs, increase the reliability of energy supply, and raise the share of renewables toward the authorities' goal of 30 percent by 2030. A higher base rate for electricity would help cover the cost of needed investments in renewable energy, while private-public partnerships could be expanded and private investments in renewables incentivized through direct subsidies or tax credits.

Rising potential growth beyond 1.5 percent and improving social outcomes entail a reorientation of spending towards education, healthcare, targeted social transfers and infrastructure. Bottlenecks related to the reliability of energy transmission and shortages of skilled labor need to be addressed. Closing remaining gaps in digitalization of public services and data gathering can help reduce frictions that dis-incentivize private investment as well as improve the targeting of social assistance programs. By failing to target social assistance, public spending is regressive, contributing to poor outcomes in health, education, and energy provision.