BAHAMAS-IMF predicts “steady’ economic growth for Bahamas for 2019


The International Monetary Fund (IMF) Monday said the Bahamas delivered strong economic performance in 2018, supported by sound macroeconomic policies and progress on fiscal reforms.

It said with downside risks prevailing, maintaining this positive momentum requires broad-based reforms to strengthen institutions, improve competitiveness and external accounts, and bring public debt on a downward path.

An IMF team visited Nassau from April 1-12, to hold discussions for the 2019 Article IV consultation with representatives of the government, private sector and civil society.

The Washington-based financial institution said that the 2019 Financial Sector Assessment Programme (FSAP) found the financial system in the Caribbean Community (CARICOM) country to be resilient to current stability threats, but action is needed to safeguard against potential weaknesses and respond to future stress events.

According to the IMF, growth in 2018 was backed by buoyant tourism and construction activity. It said real gross domestic product (GDP) is estimated to have grown by 2.3 per cent in 2018, and growth is projected to steady at 2.1 per cent this year, underpinned by continued growth in the tourism sector. “Despite positive jobs growth, however, the unemployment rate remains high and is projected to decline only gradually. Inflation increased to an average of 2.2 per cent in 2018 but is projected to fall to 1.6 per cent in 2019 as the temporary effect of the value-added tax (VAT) rate increase fades.”

The IMF said that the medium-term outlook is positive, but risk factors could weigh on growth. Economic growth is projected to converge to its potential of 1.5 per cent in the medium term as tourism growth normalizes.

“A significant slowdown in the US and other advanced economies would, however, adversely affect the tourism-dependent Bahamian economy. Reputational risks in the offshore sector remain even as the government has strengthened regulatory and transparency standards, and existing business models could be challenged.

“Vulnerability to hurricanes and climate change is high. Against this backdrop, continued commitment to fiscal responsibility and sound macro-financial policies is welcome and indispensable,” the IMF added.

It said that the effective implementation of the Fiscal Responsibility Law (FRL) will bolster policy credibility and ensure durable gains from fiscal consolidation.

“The commitment to maintaining the pace of fiscal adjustment in line with FRL targets, which will bring public debt towards the anchor of 50 per cent of GDP, is welcome. While the budget deficit has narrowed, recognition of sizeable arrears highlights the need for stronger public financial management (PFM) systems to address weaknesses in expenditure control and budget preparation.”

The IMF said enacting the Public Financial Management, Public Debt Management, and Procurement Acts and operationalizing the Fiscal Council should be prioritized to ensure permanent advances in budgeting, transparency, and accountability.

“In the near term, however, there is need for expenditure restraint to deliver the fiscal year2018/19 target. Available data point to weaker-than-expected revenue performance, partly due to grace periods granted for the implementation of revenue measures and legal disputes.”

The IMF said that the fiscal deficit is therefore projected to narrow to 2.1 per cent of GDP, bringing the outturn close to the 1.8 perc ent target.

“This consolidation is broadly in line with the transition path towards the FRL targets established in the budget. To demonstrate steadfast commitment to the new policy framework and safeguard public investment, the government should further rein in current expenditures. Over the medium term, decisive measures are needed to reduce debt, including in the areas of public pensions and health, while carefully balancing priorities for inclusive growth and disaster preparedness.”

The IMF said that fiscal policy should play a greater medium-term role in achieving public policy objectives, including greater income equality.

“The Bahamas does not levy income or capital gains taxes, relying mostly on VAT, business license fees, and international trade taxes. Global tax trends and the prospective accession to the WTO (World Trade Organization) thus present an opportunity for a comprehensive review of the Bahamian tax regime with a view to achieving a more equitable and less distortionary tax system.

“To strengthen transparency and inform future policies, a quantitative review of existing tax and other investment incentives is recommended,’ it said.

The IMF said that the country had taken “important steps” to increase resilience to natural disasters and that the Hubert Minnis government has secured a contingent credit line with the Inter-American Development Bank IDB) and re-subscribed to disaster insurance through the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

“Speedy establishment of the Natural Disaster Fund will complement the financial tools currently available to effectively respond to disasters. Investing in physically resilient infrastructure, including through building code enforcement and coastal management, is equally critical.”

The IMF said that while the banking sector remains sound, credit growth is hampered by non-performing loans (NPLs) and lack of information about potential borrowers.

It said the 2019 FSAP found that the banking sector enjoys healthy profits and maintains high capital and liquidity ratios.

“Further progress in supervision of credit underwriting and timely resolution of NPLs remain key objectives. A local real estate price index should be introduced to increase visibility into the residential housing market and improve NPL valuations. The credit bureau, once operational, should strengthen the quality and pace of credit activity and improve assessment of lending standards.

“Strengthening the central bank’s recovery and resolution powers will enhance banking sector resilience. The recapitalizations of the Bank of The Bahamas highlight the need to complete planned legislative reform and enhance governance of public asset management companies. Governance arrangements for state-controlled financial institutions should be strengthened to ensure their continued effective and independent supervision.”

The Washington-based financial institution said that swift implementation of the new framework for the international sector will demonstrate commitment to ensuring a transparent and well-regulated industry. “The Bahamas is removing preferential tax treatment for non-resident entities by implementing a unified business licensing fee framework. Economic presence requirements for non-resident firms are being strengthened along with entity transparency regarding beneficial ownership.

“Potential spillovers into the domestic financial system from the unification of banking license regimes require careful monitoring,” it said, reminding the government that demonstrating effectiveness of the anti-money laundering and combating the financing of terrorism (AML/CFT) regime will strengthen financial integrity.

“The Financial Action Task Force (FATF) continues to identify The Bahamas as a country with strategic AML/CFT deficiencies. Progress in further improving technical compliance of the AML/CFT regime, including by revising laws and regulations and strengthening supervisory guidelines and codes of conduct, is welcome. Continuing to move the focus to implementation to demonstrate the effectiveness of the AML/CFT regime, including in line with the FATF Action Plan, is recommended.”

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