An International Monetary Fund (IMF) team visited The Bahamas during August 30-September 10 to conduct the 2010 Article IV consultation and assess ongoing macroeconomic and structural policies and the medium term outlook for the economy. The team met with senior government officials and representatives of the private sector.

At the conclusion of the visit, Mr. Gene Leon, Head of the IMF Mission to The Bahamas, spoke to the profound impact the global crisis of 2008-2009 had on the Bahamian economy. There was a sharp contraction in domestic activity due to the declines in tourist arrivals and foreign direct investment; and a large rise in unemployment; he said, however, lower import prices helped narrow the external current account deficit to about 12.5 percent of GDP. This together with external borrowing and the one-off allocation of Special Drawing Rights helped raise gross international reserves to about 2.5 months of imports, boosting support for the exchange rate peg. Mr. Leon pointed out that output contraction deteriorated the fiscal position and weakened the banking system. The fiscal deficit widened to 5.3 percent of GDP in Fiscal Year (FY) 2009/10 on account of sharply lower revenues even though the authorities maintained spending broadly in line with the budget. At the same time, credit to the private sector stalled and the non-performing loans ratio increased to over 10 percent at end-June 2010. However, capital adequacy ratios remain high, and stress tests conducted by the authorities suggest that the banking system has adequate buffers.

For 2010, real GDP is projected to grow modestly, with tourist arrivals benefiting from increased marketing efforts, while inflation is projected to pick up slightly from current low levels owing to higher oil prices. In FY 2010/11, the central government deficit is projected to improve somewhat, but central government debt would nonetheless rise to about 50 percent of GDP. Gross international reserves are projected to increase despite the higher oil prices owing to strong private capital inflows, including from Foreign Direct Investment.

The IMF Mission Head also noted that going forward, the authorities have indicated a commitment to maintain prudent macroeconomic policies, including fiscal measures to reduce the rising debt-to-GDP ratio and a monetary policy geared to supporting price stability and the US dollar peg. *“They also plan to continue with reforms to improve tax administration, increase fiscal responsibility, and transparency. Although the outlook is fraught with uncertainties and risks, the mission is confident that the resolute adherence to fiscal consolidation and an enabling investment climate will foster a stable macroeconomic environment and support sustained economic growth.”*