The International Monetary Fund (IMF) has released its Executive Board report on the Article IV consultation with The Bahamas, concluded late last year.
It says the Bahamas enjoys the third highest per capita GDP among Western Hemisphere countries and social development indicators that compare favorably with other countries in the region. Tourism and related activities account for roughly one-third of Bahamian GDP, and the financial sector, including a dynamic offshore center, account for over 20 percent of GDP.
Executive Directors commended the authorities’ solid track record of prudent macroeconomic management, and that despite a recent decline in tourist arrivals, macroeconomic performance continues to be favorable, with strong growth, low inflation, and a relatively small fiscal deficit and public debt. At the same time, Directors observed that the external environment poses several challenges and risks going forward, including the relatively slow economic growth projected for the United States next year, a highly competitive regional tourism market, high oil prices, and the country’s vulnerability to natural disasters. In this context, they welcomed the authorities’ strong commitment to maintaining macroeconomic stability, which is backed by the supportive macroeconomic policy framework in place.
Directors also noted that the business climate remains very attractive, and that there is substantial ongoing and planned investment in the tourism sector. In light of this, Directors generally considered that overall The Bahamas’ medium-term economic prospects remain favorable. Directors reiterated, however, that diversification of both the tourism product and the overall economy will be crucial for strong and sustained economic growth.
To ensure the achievement of targets to balance the budget and reducing debt, Directors welcomed the authorities’ commitment to control current spending, tighten budget constraints on public entities, and improve tax administration; and they commended the authorities’ intention to privatize the telecommunications and electricity companies. Directors welcomed the authorities’ plans to streamline import duty and tax concessions, and encouraged the authorities to consider the progressive introduction of a value added tax or a domestic consumption tax to replace trade taxes.
Directors were of the view that the fixed exchange rate has served The Bahamas well, particularly by enhancing the investment climate and keeping inflation low. They welcomed the indications that competitiveness is adequate, and noted the strong national consensus in favor of safeguarding the peg. With regard to plans to gradually remove exchange controls, Directors emphasized that this process will need to be supported by an appropriate macroeconomic policy framework, an adequate level of international reserves, and a strong financial regulatory and prudential framework. In this regard, Directors welcomed the central bank’s actions to curb credit growth, both to allow a build-up of international reserves and to reduce the economy’s vulnerability to shocks. Directors encouraged the use of market-based monetary policy instruments to improve the effectiveness of monetary policy, make credit allocation more efficient, and help develop the domestic capital market. They supported continued technical assistance from the IMF and the Caribbean Regional Technical Assistance Center to improve the central bank’s operational framework.
Directors observed that The Bahamas’ financial system remains sound and well regulated. They commended the authorities’ efforts to further strengthen the regulatory and supervisory framework to maintain international standards, including the ongoing modernizing of the regime to combat money laundering and terrorism financing and the introduction of a risk-based approach to supervision.