The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) says the Bahamas’ economic growth potential has fallen by 50 per cent since the turn of the century, with no sign of any immediate rebound.

The Fund painted an extremely bleak picture of the Bahamas’ medium term economic prospects in its latest assessment, finding that the only way this nation can go is likely further down - not up.

The assessment, published on Friday, suggested the Bahamas’ ‘new norm’ is a low-growth economy, plagued by “double digit” unemployment and structural impediments to improved competitiveness.

The only ‘positive’ coming from the IMF was its continued praise for the relatively successful Value-Added Tax (VAT) implementation, which it acknowledged had contributed to the Bahamian economy’s contraction.

The latest assessment, which concludes the Fund’s 2016 Article IV consultation with the Bahamas, brought its economic growth expectations into line with those given by the Department of Statistics and the Government in the recent 2016-2017 Budget.

The IMF could only identify “downside risks” facing the Bahamas, and referred to a “sizeable output gap” to emphasise how this nation continues to perform below its economic growth potential.

“Staff estimates point to potential growth between 1 and 1.5 per cent over the medium-term, down from close to 3 per cent at the start of the century,” the Fund’s executive board said.

“This outlook is subject to mainly downside risks, calling for continued fiscal consolidation to rebuild fiscal and external policy buffers and boosting investor confidence, as well as a decisive shift towards implementation of structural reforms to improve competitiveness, reduce unemployment and raise potential growth.”

The 50 per cent reduction, in percentage terms, in the Bahamas’ economic growth potential over the past 16 years shows how this country is now paying the price for its failure to implement much-needed structural reforms.

While the IMF’s message has changed little from recent assessments, its latest missive emphasises just how much work the Bahamas has to do in multiple areas to revive its economy.

“Economic growth is estimated to have stalled in 2015, as a modest increase in air tourism arrivals was not sufficient to offset a contraction in domestic demand and weak exports of goods,” the IMF said.

“Private consumption and investment were weighed down by headwinds from fiscal consolidation, as well as an end to construction and uncertainty over the opening of the Baha Mar mega resort.”

The Fund’s GDP growth estimates have now been brought into line with the Government’s own, and reflect the 1.7 per cent contraction in 2015, as well as the 0.5 per cent and 1 per cent estimates for modest expansion in 2016 and 2017.

The reference to “headwinds from fiscal consolidation” refers to the impact of VAT, which sucked more than half a billion dollars from consumers and the private sector in 2015 as part of a ‘wealth transfer’ to the Government to help alleviate its fiscal woes.

VAT implementation was the about the only area to draw a ‘positive response’ from the IMF, which said the $536 million in gross revenues collected for the 2015 calendar year had “exceeded expectations”.

“As a result, the 2014-2015 deficit is estimated to have declined to 4.4 per cent of GDP (down from revised 5.6 per cent in FY2013-2014),” the Fund added.

“Available data for the first seven months of 2015-2016 suggest a further decline in the deficit, by about 1 percentage point, compared to the same period a year ago. The central government debt-to-GDP-ratio nevertheless reached 66.5 per cent in December 2015, pointing to limited fiscal space.”

Yet the revised 4.4 per cent GFS deficit for 2014-2015 is much higher than the Government’s own initial projections, Prime Minister Perry Christie having stated in May 2015 that this figure was equivalent to just 2.3 per cent of GDP (see other article on Page 1B).

All this indicates that fiscal consolidation is not proceeding as rapidly as the Government would like and, coupled with “low growth potential” and the uncertainty surrounding the $3.5 billion Baha Mar development, the IMF appears to be saying the Bahamas is in a jam.

While a slight uptick in air arrivals and and “moderating headwinds to private consumption and investment” set to push the Bahamas back into positive growth territory in 2016, the IMF reiterated that a Baha Mar resolution would not be a panacea to this nation’s economic problems.

“While the Baha Mar opening is expected to provide a temporary boost to growth, helping to close the still sizeable output gap, structural impediments continue to constrain potential growth,” the IMF warned.

“Going forward, the outlook remains challenging, especially with high youth unemployment and low productivity growth.

“Against this backdrop, [IMF] directors emphasised the importance of continued fiscal consolidation to rebuild fiscal and external buffers, and structural reforms to improve competitiveness, reduce unemployment and raise potential growth. They also underscored the need to address financial sector challenges.”

The Christie administration was urged to “resist pressures to introduce exemptions” from 7.5 per cent VAT, and to maintain the ethos of a broad-based, low rate tax.

The Government largely acceded to this request in its 2016-2017 Budget presentation, announcing only that ancillary fees attached to tuition payments were now to be exempted.

Urging the Government to stay the course, and further reduce the debt-to-GDP ratio, the IMF also called on it to “contain increases” in the public sector wage bill and focus on “growth-enhancing infrastructure spending”.

Significantly, it also told the Christie administration to tackle its unfunded public sector pension liability, which stands at $1.5 billion and growing.

And the Fund also urged it to go beyond the energy sector in reforming state-owned agencies, such as the Water & Sewerage Corporation and Bahamasair, which continue to bleed Bahamian taxpayers of a collective $50 million annually.

“To address impediments to growth, [IMF] directors called for decisive implementation of structural reforms, including in the context of the National Development Plan,” the Fund’s assessment said.

“These reforms should aim at strengthening the business environment, raising human capital, reducing skill mismatches, and lowering high labour and energy costs.

“Directors also highlighted potential gains from efficient investment in information and communications technology, transportation, public utilities, economic diversification, and enhanced resilience to natural disasters.”

The IMF did acknowledge the Bahamas’ progress in the financial sector, specifically moves to implement the Basle II and III capital requirements, and to “address gaps” in its anti-money laundering regime.

With private sector credit declining by 1 per cent year-over-year in 2015, it also called on the Bahamas to tackle its $1.2 billion pile of ‘non-performing loans’.

“International reserves, supported in part by government external borrowing, increased to $981 million at end–March 2016, equivalent to about 2.4 months of next years’ projected imports of goods and services,” the IMF said.

“The current account deficit declined significantly, to 15.3 per cent of GDP in 2015 (compared to 22 per cent a year earlier), driven primarily by lower imports owing to the decline in oil prices and halt to Baha Mar construction.

“The current account deficit declined significantly but remains sizable.”