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Financial Crisis Hits The Bahamas

by Phillip Morton, Investors

09 December 2010

The International Monetary Fund (IMF) has published its Article IV consultation with the Bahamas, noting that the territory’s public finances have suffered significant exposure to the financial crisis, particularly as a result of a fall in tourism receipts.

“The global crisis had a profound impact on the Bahamian economy. During 2009, tourist arrivals declined by 10% and foreign direct investment fell by over 30%, leading to a sharp contraction in domestic activity and an increase in unemployment,” the IMF report states.

“The downturn deteriorated the fiscal position. Revenues declined, while the authorities maintained spending broadly in line with the budget (strengthening the social safety net and accelerating investment spending) to mitigate the demand shock. As a result, the central government deficit rose by 0.5% to 5.3% of gross domestic product (GDP) in the fiscal year 2009/10.” This deficit was financed by way of an IMF loan, under a one-off Special Drawing Rights allocation of USD179m, which more than covered the current account deficit. The IMF added that: “Prudent macroeconomic policies have now laid the foundations of a recovery, but the outlook remains exposed to downside risks.”

Presenting its recommendations, the IMF urged that lawmakers bolster efforts to rein in the deficit, continuing the fiscal plan adopted in the latest budget; to continue supporting economic growth, which will support the recovery of government revenues; and to begin a review of public sector expenditure. The IMF in particular welcomed the territory’s budget – passed in June, which included several tax increases, but warned that contingency measures might be needed to achieve the desired reduction in the fiscal deficit. The IMF Executive Board said that “broader reforms to the tax system and public finance management would be needed over the medium-term to sustain improvements in the fiscal position.”

In terms of the Bahamas’ financial services industry, the Board noted that a sharp contraction in domestic activity amidst the global downturn had also weakened banks’ balance sheets, although it did note that the banking sector remains "well capitalized... with ample liquidity."

The Board commended the authorities’ efforts to strengthen the financial system and their close cooperation with supervisors in other jurisdictions. It welcomed recent enhancements in the oversight of the financial sector and in the legal framework for security markets. Finally, the IMF warned that rising non-performing loans at banks remain a concern, and that close monitoring is warranted.

Concluding, the IMF Executive Board agreed that far-reaching structural reforms are necessary to lift medium-term growth prospects. However, the Board welcomed the authorities’ plans to improve business conditions, including for small and medium-sized enterprises, and to strengthen public infrastructure in a manner consistent with the fiscal consolidation strategy.

TAGS: tax | investment | business | Bahamas | fiscal policy | law | banking | financial services | budget | unemployment | services

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