Staff concluding statement of the 2020 Article IV Mission
WASHINGTON, USA – The Bahamas has been hit hard by COVID-19. The pandemic will lead to a deep recession this year and it could take years for employment and incomes to return to pre-crisis levels. The overarching policy priorities are to save lives, preserve livelihoods and mitigate scarring effects, while setting the stage for a robust recovery. This will require a package of near-term fiscal support, credible plans to secure fiscal and financial sustainability over the medium term, and structural reforms to enhance potential growth and resilience.
Two unprecedented shocks
- The pandemic has exacted a significant human, social, and economic toll on The Bahamas. The archipelago was just starting to recover from the severe damage caused by Hurricane Dorian in the fall of 2019, when the global outbreak of COVID-19 devastated its tourism-dependent economy. It has since become one of the hardest-hit countries in the Caribbean, with over 7,500 infections and more than 160 deaths due to COVID-19.
- The authorities mounted a rapid emergency response to support the economy. They took timely measures to sustain public health, protect the most vulnerable and cushion the impact of the pandemic on employment, including providing food assistance, doubling the duration of unemployment benefits, deferring tax payments for companies that retained at least 80 percent of their workforce and extending loans to small and medium-sized enterprises. These measures came on top of the recovery measures following Hurricane Dorian. As a result, and amid significant revenue shortfalls, the 2019/20 fiscal deficit increased to 6½ percent of GDP—about 5½ percentage points higher than budgeted—and public debt increased to 69 percent of GDP. The central bank meanwhile focused on ensuring adequate reserves and asked banks to extend loan moratoria to provide some relief to borrowers.
- Faced with large financing needs, the authorities requested IMF emergency assistance. On June 1, 2020, the IMF Executive Board approved access of 100 percent of quota (SDR 182.4 million or about $250 million) under the Rapid Financing Instrument (RFI) ( Press release no. 20/231 ). The RFI provides financial assistance to countries whose public debt is assessed as sustainable, without the need to have a full-fledged program with conditionality in place. In response to the fallout from the pandemic, the IMF has extended emergency financing to more than 75 countries, including many countries in the Caribbean region.
A deep contraction followed by a gradual recovery
- The pandemic is expected to lead to a deep recession in 2020, driven by the sharp drop in tourism and necessary disease containment measures . Real GDP is projected to decline by 16.2 percent in 2020, followed by a modest rebound of 2 percent in 2021, and to converge back to its pre-pandemic level only by 2024. The current account balance is projected at a deficit of 17.4 percent of GDP in 2020 and will improve only gradually, consistent with the projected pick up in tourism in 2022. Foreign reserves reached a record level of $2.3 billion in October and should remain well above the minimum suggested threshold of three months of imports over the medium-term. Risks around the baseline are high, reflecting the uncertain evolution of the COVID-19 pandemic, and vulnerability to weather-related natural disasters.
Providing near-term fiscal support, preserving sustainability and ensuring a resilient recovery
- The key near-term challenge is to save lives, preserve livelihoods and mitigate scarring effects. The continuation of the various COVID-19 related measures to support the vulnerable, employment and the health sector in the 2020/21 budget is appropriate. The planned capital projects—hospitals, roads, and infrastructure rehabilitations—should be put through rigorous appraisal and selection processes. The authorities are encouraged to phase out the broad set of hurricane and pandemic-related tax waivers at the first legislative opportunity as there are more effective and targeted measures to support the vulnerable. Given the substantial uncertainty about the outlook, a detailed and explicit contingency plan should be developed.
- Achieving the Fiscal Responsibility Act targets over the medium term will require additional fiscal effort. The withdrawal of fiscal support is expected to start next fiscal year as the various pandemic and hurricane-related measures phase-out. Given the significant increase in public debt, postponing the achievement of the debt target by another two years in response to the pandemic would be appropriate. However, achieving the debt target of 50 percent of GDP by the beginning of the next decade will require significant additional fiscal effort compared to what is planned in the medium-term budget framework. It is advisable to start preparing measures now and communicate a timetable to implement them as soon as the pandemic-related uncertainty subsides.
- Tax policy and administration measures are essential to a robust consolidation. Comprehensive real estate price indices would facilitate market-value-based property taxation, while the progressive features of the current system could be strengthened by increasing the rate on higher value residences. Income taxation can help achieve a more equitable income distribution. In tax administration, the review and modernization of the Department of Inland Revenue’s organizational structure should be prioritized. For customs, priorities include establishing an effective exemption monitoring and verification unit, strengthening risk management, and developing post-audit clearance capacity.
- A reprioritization of public spending would promote inclusive and resilient medium-term growth. Savings could be achieved through containing administrative costs and improving the operational efficiency of state-owned enterprises to facilitate a reduction in state-owned enterprises’ (SOE) subsidies. The planned comprehensive spending review should be used to identify areas offering scope for savings, and to develop a guiding framework to rank outlays by their medium-term effects on growth and resilience.
- The Bahamas would benefit from a robust financing strategy. Central government debt is projected to increase to over 85 percent of GDP this fiscal year. Financing needs will decline only gradually over the medium-term, resulting in elevated risks of debt distress. A robust, multi-year government financing strategy should also aim to support the overall foreign exchange position. The new debt management office within the Ministry of Finance should be fully operationalized without delay.
Ensuring financial stability
- Monetary policy should continue focusing on reserve adequacy. The COVID-19 related capital flow measures are appropriate for now but should be monitored closely and phased out when the pandemic recedes. The new central bank law, which, among others, limits lending to the government, and the listing of government debt on the Bahamas International Stock Exchange in July 2020, will help strengthen domestic debt markets. Establishing an asset registry and real estate price index would reduce information asymmetries and support monetary policy transmission.
- The banking sector remains vulnerable to pandemic-induced risks. Although direct exposures to tourism are limited, lower incomes and higher unemployment will eventually weigh on asset quality as loan moratoria expire. The central bank should provide guidance to banks to ensure their estimates of expected credit losses are robust and ask for regular loan portfolio reviews and risk assessments. The recent legislative reforms of crisis management, resolution, and safety nets are timely, but their effective implementation, including by ensuring adequate staffing at the central bank, remains key.
- The authorities are encouraged to further enhance systemic risk oversight. The collection of loan-level data would assist in market monitoring and future implementation of loan-to-value and debt-to-income-based lending standards. Interagency coordination on systemic matters could be enhanced, and the central bank should have the authority to recommend regulatory policy for non-bank financial institutions. The central bank is encouraged to further strengthen its data collection and capacity for assessing solvency and liquidity risks.
- The “Sand Dollar” digital currency (CBDC), which was rolled out to all residents in October, can help foster more financial inclusion. It will allow previously unbanked parts of the population to participate in digital payments and enhance payment infrastructure resilience to natural disasters.However, there are risks to financial intermediation, integrity, and cybersecurity that require careful consideration and monitoring. The operationalization of the credit bureau would also improve financial inclusion.
Adopting international standards and best practices
- Ensuring effective implementation of the strengthened anti-money laundering/combating the financing of terrorism (AML/CFT) framework will be key. Good progress in implementing action items agreed with the Financial Action Task Force (FATF) has been noted. In February 2020, the FATF made an initial determination that The Bahamas had largely completed its action plan. An on-site assessment to verify complete implementation took place in November, with results expected to be published by early 2021.
- Tax transparency efforts are showing first results, but there is scope to expand accountability initiatives to the wider public sector. The EU removed The Bahamas from its list of Non-Cooperative Jurisdictions for Tax Purposes in February 2020, highlighting recent efforts to improve information exchange and tackling harmful tax practices. All public sector entities, from small to large public enterprises, can benefit from similar efforts, at a minimum by timely publishing financial information.
Boosting potential growth and enhancing resilience against natural disasters
- The Bahamas faces long-standing structural impediments, and COVID-19 brought them to the fore. Reform priorities, many of which are listed in the recent report by the Economic Recovery Committee, include modernizing administrative services and rationalizing regulatory requirements for starting a business;enhancing the operational efficiencies of utility SOEs; and reducing frictions in the job matching process.
- The prospect of more frequent natural disasters makes it paramount to further enhance resilience. The disaster relief fund, which was exhausted following Hurricane Dorian should be gradually rebuilt. A proactive data exchange among relevant agencies can increase agility of social programs, while better targeting could broaden the reach of services. A mandatory insurance for all private properties, not just for those financed by mortgages, can help increase private sector resilience. To ease the socioeconomic burden, a means-tested subsidy for insurance premiums could be considered.