IMF Concludes Article IV Consultation With The Bahamas

by Mike Godfrey, Tax-News.com, Washington

24 June 2009

The IMF has concluded an Article IV consultation with The Bahamas. The global economic downturn has put significant stress on the Bahamian economy because of its strong ties to the US economy; downside risks to the outlook remain, according to the IMF. However the IMF considered that the Bahamas’ low debt ratios provide scope to deal with the current difficult economic environment.

Since mid to late 2008, tourism began declining and a number of foreign direct investment projects were postponed or cancelled due to the downturn or financing difficulties. Real GDP contracted by 1.7% after having grown 2.5% per year in 2006–07, and rising unemployment was fuelled by layoffs in the hotel and construction sectors. Inflation for the twelve months ending in March stood at 4.9%. The external current account balance improved in 2008, mainly reflecting lower construction-related imports and higher retained earnings. Although private sector financing flows dropped substantially, government borrowing in foreign currency to finance capital expenditures helped bolster international reserves, which stood at USD563m at end-2008, about 87% of base money. The IMF acknowledge that the fixed exchange rate regime has served the Bahamas well by contributing to a stable investment climate. Despite the recent appreciation of the currency, tourism indicators do not suggest a loss of competitiveness, states the IMF.

The 2008/09 overall fiscal deficit is expected to increase to about 5% of GDP, reflecting shortfalls in revenues associated with the downturn. The IMF is supportive of efforts to strike a reasonable balance between countercyclical fiscal policy and fiscal adjustment to contain the adverse impact of the shock on medium-term sustainability and also support plans to maintain priority spending and expand targeted social benefits, despite dwindling fiscal revenues. This meant shifting spending to provide transitory means-tested unemployment benefits. Non-essential spending is to be streamlined; the IMF approved plans to introduce administrative and legal reforms to enhance revenue collection, and efforts to reduce the burden of the public enterprise sector on the public finances. The fiscal deficit is being financed by new external and domestic borrowing, increasing central government debt to around 40% by the end of Financial Year 2008/09, still low relative to the regional average. However the future attainment of budgetary objectives would depend importantly on privatization proceeds and increased revenue, both of which are uncertain in terms of magnitude and timing, according to the IMF. The IMF cautioned that if receipts fell short, additional adjustment measures might be needed.

Banks have restructured pro-actively troubled consumer and mortgage loans, and remain well capitalized in the opinion of the IMF. There are plans to strengthen supervision of banks, credit unions and the insurance sector, and the IMF encourages further regional coordination of bank supervision. Negative spillovers from the offshore financial sector to the domestic financial sector appear limited so far, due to exchange controls and restrictions on net open foreign exchange positions of domestic banks, reports the IMF. The linkages to the domestic economy are limited to employment and consumption of services by the sector. A large insurance company, CLICO Bahamas, was placed into liquidation in February 2009 after it became insolvent due to real estate investments in the United States, but its demise has not had systemic implications for the domestic financial system, the IMF believe. In May, the authorities tabled amendments to put into effect a law to align insurance supervision with international standards.

The IMF Directors made the following recommendations:

The IMF wants to see the government retain its commitment to adhere to international standards for offshore financial regulation, strengthen the framework for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT), and adopt Organization for Economic Cooperation and Development (OECD) standards on tax information exchange.

Plans to shift from credit controls to more market-based monetary policy instruments should be implemented, in the view of the IMF, including the introduction of an auction mechanism for government securities to allocate credit more efficiently and to provide a vehicle for liquidity management. The gradual relaxation of exchange controls, under a well-sequenced implementation plan, once the global environment becomes more supportive, would help deepen domestic capital markets, the IMF opined.

The IMF wishes to see structural reforms to promote economic diversification and private-sector growth over the medium term. In particular, the IMF believes that there is a need to diversify tourism exports, and to broaden the domestic tax base in order to help finance priority spending, reduce distortions, and increase the resilience of revenues to shocks.

Strengthened administrative capacity could facilitate the eventual introduction of a goods and services tax, which in turn would help achieve the authorities’ objective of reducing the debt to 30–35% of GDP over the medium term, concluded the IMF.

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