WASHINGTON, DC – The International Monetary Fund (IMF) says he Bahamian economy has staged a remarkable recovery following Hurricane Dorian in 2019 and the coronavirus (COVID-19).
It said activity and employment have recovered to their pre-pandemic levels and inflation has fallen back below pre-pandemic levels. Public finances are improving and borrowing costs have declined.
The Washington-based financial institution said that over the medium-term, growth is expected to slow to its long-run potential of 1.5 per cennt as capacity constraints in tourism become more binding. It said barring global commodity price shocks, headline inflation is expected to converge to around two per cent.
But the IMF said nonetheless, long-standing challenges remain. Income per capita continues to diverge from that in the United States and at the same time, expensive electricity, a shortage of skilled labour, and obstacles to business formation and expansion continue to weigh on growth.
It said as in many other countries, government debt to gross domestic product (GDP) jumped during the pandemic and borrowing costs remain uncomfortably high.
“The archipelago is also highly susceptible to natural disasters and rising sea levels, both of which argue for increased investments in resilience and building fiscal buffers so as to better respond to climate-related shocks.”
The IMF said that risks to the outlook for activity are balanced. Upside risks include the execution of announced infrastructure and hotel construction projects and a higher-than-expected boost from an expansion of short-term rentals. The main downsides stem from large public debt rollover needs and the ever-present risk of natural disasters.
The IMF said that the fiscal deficit was 1.3 per cent of GDP in the current financial year, around 2.5 percentage points of GDP lower than the 2023 financial year.
It said that the adjustment was driven by both revenue increases, better tax compliance, a cyclical rebound, and policy measures, and expenditure containment lower transfers to public corporations and some under-execution of capital spending.
Central government debt fell to 78.8 percent of GDP in the financial year 2024 but there has been an upswing in the reliance on central bank advances, estimated now at two per cent of GDP.
The IMF said global factors have pushed down sovereign spreads on foreign currency debt, but domestic financing has increasingly relied on issuance at short maturities, raising the near-term gross financing needs.
It said the authorities’ debt target of 50 per cent of GDP by financial year 2031 provides a useful anchor for policy.
“The financial year 2025 budget targets an overall fiscal balance of –0.5 per cent of GDP and 2.8 per cent of GDP in financial year 2026. Improved tax administration and lower interest payments will get the fiscal position part of the way to the government’s targets.
“However, in the absence of additional policy measures, revenues are likely to underperform and the fiscal balance will be smaller than assumed in the authorities’ forecast especially in financial year 2026, putting the debt target out of reach for financial year 2031.”
The IMF said the introduction of the 15 per cent qualified domestic minimum top-up tax (QDMTT) on large multinational corporations that are resident in The Bahamas is expected to generate one per cent of GDP in new revenues.
“The bill has been passed by the House of Assembly and the Senate. Additional legislation will be needed to lessen disincentives to invest in tangible depreciable assets through accelerated depreciation or refundable tax credits and to bring offshore indirect transfers of Bahamian property into the tax net.”
But the IMF said further revenue measures are needed to support the targeted fiscal adjustment.
It said the budgeted 3.5 percentage points of GDP increase in the primary balance between financial year 2024 and financial year 2026 was achieved only once in the 18 years prior to the pandemic and that was as a result of an increase in the VAT rate and a sharp reduction in expenditure two years after recovery efforts following Hurricane Matthew.
However, the adjustment could be spread out over a moderately longer horizon, raising the primary balance to 5.2 per cent of GDP by financial year 2026 and to seven per cent of GDP by financial year 2029.
“This would still bring debt to 50 per cent of GDP by financial year 2031 and would allow the private sector a longer horizon to adjust to the withdrawal of fiscal resources.”
The IF said such an adjustment could be achieved through some combination of replacing the business license fee with a 15 per cent profits tax on large domestic firms, introducing a personal income tax for the top earners, eliminating the ceiling on the property tax; reducing tax expenditures, increasing the VAT rate and raising water rates for heavy users and ensuring the collection of patient fees at the Public Hospital Authority.
“These measures, along with the supply side reforms described below, would ensure the debt target is met and help build fiscal credibility while still generating resources to increase investments in education, targeted social transfers, and climate resilient infrastructure,” the IMF added.
