WASHINGTON, USA – On January 13, the executive board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Bahamas.
The Bahamian economy has staged a remarkable recovery since the pandemic, fueled by a strong rebound in tourism. With economic activity back to pre-hurricane Dorian levels, growth is slowing – expanding by 1.8 percent in H1 2024 – constrained in part by limited hotel capacity. Inflation is now modestly negative, but the cost of living remains high.
The fiscal position improved in FY24, driven by strong revenue performance and expenditure cuts. The fiscal deficit narrowed to 1.3 percent of GDP from 3.8 percent of GDP in FY23, while government debt fell to 78.8 percent of GDP. Financing costs have declined, driven by global factors, but gross financing needs remain high.
Growth is expected to converge to its long-run potential of 1½ percent over the medium-term and risks to the outlook are balanced. Capacity constraints in the tourism sector are expected to become more binding, but there are upside risks from potential new hotel construction or a faster-than-anticipated expansion in the short-term rental market. Fiscal vulnerabilities, particularly due to high gross fiscal financing needs, and the ever-present risk from natural disasters remain constant threats.
Executive board assessment
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the remarkable recovery in tourism and economic activity following hurricane Dorian in 2019 and the Covid-19 pandemic. However, directors observed that elevated public debt, structural bottlenecks to growth, and high exposure to natural disasters continue to pose significant challenges and called for sustained efforts to address these challenges.
Directors welcomed the authorities’ commitment to reduce government debt to 50 percent of GDP by FY31 and recent steps to increase revenues. However, they concurred that more measures will be needed to achieve that target, including by introducing taxes on corporate and personal income. These measures would also create space for priority spending on infrastructure, education, and targeted social programs. In addition, pension and SOE reforms would be important to contain expenditure pressures.
Directors welcomed efforts to improve fiscal accountability and the transparency and effectiveness of debt management operations. They recommended that the reconstituted Fiscal Responsibility Council and the Public Sector Audit Committee should be independently selected.
Directors emphasized the need to limit central bank financing to the government to help reduce systemic liquidity and strengthen the credibility of the currency peg. They concurred that the financial sector is resilient with large liquidity and capital buffers and welcomed the progress with the implementation of the 2019 FSAP recommendations. Directors encouraged continued efforts to strengthen the AML/CFT framework, as well as further steps to expand financial access such as improving data availability, investing in financial literacy, and fostering financial technology innovation.
Directors emphasized that efforts to boost long term growth should center on structural reforms to improve human capital, close digitalization and data gaps, relieve capacity constraints in tourism, reduce labor market informality, and fight crime. They encouraged intensified efforts to strengthen climate resilience, which would substantially decrease output losses from sea level rises and natural disasters.
Directors welcomed the planned reforms to the electricity sector given the expected positive medium-term effects on growth and other macroeconomic indicators. However, they stressed that a clear delineation of risk sharing between the private and public sectors is necessary to support these efforts.
IMF Communications Department
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