The International Monetary Fund (IMF) today issued a Public Information Notice (PIN) on its latest Article IV Consultation with The Bahamas, concluded by the Executive Board in October, 2010.

Noting the profound impact of the global crisis on the Bahamian economy, and the deterioration in the fiscal position, the IMF nonetheless reported favourably on a number of issues, including the banking system which it said remains well capitalized, with ample liquidity. Reportedly, stress tests conducted by the authorities suggest that the banking system has adequate buffers to withstand a further deterioration, while continuing to comply with capital requirements.

While near-term growth prospects remain weak, the medium-term outlook is somewhat more favorable. Real GDP is projected to grow modestly in 2010, as tourist arrivals rebound, with a return to the trend growth rate of about 2.5 percent likely by 2012 if global conditions improve.

The fiscal outlook was reported to be of concern, with the ratio of central government debt to GDP projected to continue rising over the medium term, notwithstanding that prudent macroeconomic policies have now laid the foundations of a recovery; the outlook remains exposed to downside risks.

In order to boost economic prospects, IMF Board Directors encouraged the authorities to build adequate buffers against external shocks and address vulnerabilities in the fiscal domain and in the financial sector.

Also of note, Directors:

* commended the authorities for their commitment to medium-term fiscal adjustment and their strategy to reverse the recent rise in the public debt-to-GDP ratio.

* welcomed the revenue and spending measures adopted in the budget, but considered that contingency measures might be needed to achieve the desired reduction in the fiscal deficit.

* noted that broader reforms to the tax system and public finance management would also be needed over the medium term to sustain improvements in the fiscal position.

* considered that the longstanding peg to the U.S. dollar has provided an appropriate nominal anchor and served the country well. They took note of the staff’s assessment that the current level of the exchange rate is broadly in line with long-term fundamentals. To ensure that the peg remains adequately supported, Directors encouraged the authorities to build up foreign exchange reserves over time as needed.

* commended the authorities’ efforts to strengthen the financial system and their close cooperation with supervisors in other jurisdictions.

* welcomed recent enhancements in the oversight of the financial sector and in the legal framework for security markets.

* considered that rising non-performing loans at banks remain a concern, and that close monitoring is warranted. They also encouraged the authorities to continue strengthening the prudential framework of nonbank institutions.

Overall, Directors agreed that far-reaching structural reforms are necessary to lift medium-term growth prospects. They 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.

*Note: Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.*