Bahamas: Staff Concluding Statement of the 2023 Article IV Mission

A Concluding Statement on the Bahamas’ Economy

Introduction

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC:

The Macro Outlook

The Bahamas’ economy continued to rebound vigorously in 2022. Real GDP growth reached 14.4 percent and unemployment fell to 8.8 percent with a broad-based expansion that was especially strong for tourism. However, labor force participation, particularly among men, remained below pre-pandemic levels. 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.

After peaking at 7.1 percent in July 2022, inflation has fallen steadily to 2.3 percent in July 2023, largely driven by the fall in global energy prices.

Risks to the Outlook

Risks to the outlook are skewed to the downside. 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 impose a burden on lower income households and put pressure on 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 the fiscal position. Finally, The Bahamas is highly exposed to risks emanating from climate change and natural disasters. In the event that risks are realized, domestic financing challenges could increase.

Creating A More Efficient and Progressive Fiscal Framework

A strong cyclical recovery in revenues and a wind down of pandemic-related spending have reduced the fiscal deficit to 4.1 percent of GDP in FY2022/23, bringing the central government debt down to 84 percent of GDP at end-June 2023.The authorities intend to reduce the deficit to 0.9 percent of GDP in 2023/24, reaching an overall surplus of 2.1 percent of GDP by FY2026/27. 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 are expected to be funded from lower current spending. This fiscal path is expected by the authorities to bring public debt to 68 percent of GDP by FY2026/27.

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 larger 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 reduction in debt 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.

Beyond reducing the fiscal deficit, a set of comprehensive tax reforms would be valuable in both raising revenues and improving progressivity. In particular, the implementation of the OECD global minimum corporate tax by trading partners provides an opportunity for 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.

Efficiency gains in spending programs and improvements in the financial management of state-owned enterprises will be needed to offset some of the budgetary pressures arising from an aging population. 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 which will increase resilience to the effects of climate change).

Better debt management would help reduce the vulnerabilities created by The Bahamas’ high debt rollover needs. Recent reforms to strengthen the primary and secondary debt markets should help increase the liquidity of government bonds and incentivize an increase in domestic holdings of longer duration securities. In particular, the central bank continues to facilitate the issuance of T-bills by competitive auction and intends to extend this across domestic government security maturities. Further reforms to bolster these efforts can include improving investor relations and increasing the transparency and predictability of sovereign issuance plans.

Additional steps should be taken to place more binding limits on central bank financing of the fiscal deficit. The authorities have made amendments to the Central Bank Act prohibiting financing the government via the primary bond market and have also imposed a lower limit on central bank advances; however, this limit is above that of regional peers with pegged regimes. A reduction in the limit on central bank financing should be accompanied by a well-defined “escape clause” that would be triggered in exceptional circumstances (e.g., in the event of a large scale natural disaster). Repaying central bank advances, already at the ceiling, could also serve to strengthen the credibility of the exchange rate regime.

Recent welcomed amendments to the new Public Finance Management (PFM) and Public Procurement Acts will usefully strengthen the governance framework of SOEs and improve the transparency of public procurement. The publication of beneficial ownership information is now mandatory for public contracts funded by an international funding agency but should be the applicable standard for all providers that obtain public contracts. Similarly, procurement documents and audited financial statements of SOEs should be published on a regular basis. An independent process should be put in place to select members of the fiscal council. 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 back to their goals.

Strengthening the Financial System

Protection of the exchange rate peg requires sustained preservation of international reserves. The recovery in tourism, external public

SDGs, Targets, and Indicators in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 1: No Poverty
• SDG 3: Good Health and Well-being
• SDG 4: Quality Education
• SDG 7: Affordable and Clean Energy
• SDG 8: Decent Work and Economic Growth
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 10: Reduced Inequalities
• SDG 11: Sustainable Cities and Communities
• SDG 13: Climate Action
• SDG 16: Peace, Justice, and Strong Institutions

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property.
• SDG 3.8: Achieve universal health coverage, including financial risk protection, access to quality essential health-care services, and access to safe, effective, quality, and affordable essential medicines and vaccines for all.
• SDG 4.1: By 2030, ensure that all girls and boys complete free, equitable, and quality primary and secondary education leading to relevant and effective learning outcomes.
• SDG 7.2: By 2030, increase substantially the share of renewable energy in the global energy mix.
• SDG 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value.
• SDG 9.1: Develop quality, reliable, sustainable, and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all.
• SDG 10.4: Adopt policies, especially fiscal, wage, and social protection policies, and progressively achieve greater equality.
• SDG 11.5: By 2030, significantly reduce the number of deaths and the number of people affected and substantially decrease the direct economic losses relative to global gross domestic product caused by disasters, including water-related disasters, with a focus on protecting the poor and people in vulnerable situations.
• SDG 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries.
• SDG 16.6: Develop effective, accountable, and transparent institutions at all levels.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Unemployment rate
• Inflation rate
• GDP growth rate
• Current account balance
• Fiscal overall balance
• Government debt as a percentage of GDP
• Renewable energy share in the energy mix
• Access to quality education
• Access to healthcare services
• Reduction in deaths and economic losses caused by disasters
• Resilience to climate-related hazards and natural disasters
• Equality in economic resources and access to basic services
• Employment rates and equal pay for work of equal value
• Quality, reliable, sustainable, and resilient infrastructure
• Reduction in inequalities
• Effective, accountable, and transparent institutions

Table: SDGs, Targets, and Indicators

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