The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) last night cut The Bahamas' projected real GDP growth for 2019 to 1.8 percent, and warned that external risks facing this country "have increased".

The fund's executive board, in concluding its annual Article IV consultation with this nation, shaved 30 basis points off the 2.1 percent economic expansion it had forecast for The Bahamas as recently as April 15 following the completion of its team's visit.

It warned that global economic developments had increased the downside risks facing the Bahamian economy, which is especially vulnerable to external shocks give its openness, reliance on the performance of other nations and vulnerability to hurricanes and other forms of natural disasters.

"Growth is projected to reach 1.8 percent in 2019 before converging to its potential of 1.5 percent in the medium term," the IMF executive board said in its statement on The Bahamas. "Risks to global growth, particularly in key trading partners, have increased.

"Slowing external demand or a tightening of financial conditions in key advanced economies could adversely affect growth prospects. Vulnerability to hurricanes and climate change remains high.

"Domestically, reform momentum could stall delaying fiscal consolidation and the implementation of competitiveness-enhancing reforms. In the international sector, reputational risks could intensify despite the recent strengthening of regulatory and transparency standards, possibly challenging existing business models."

The IMF's reference to "key trading partners" likely alludes to the US and China, and their ongoing "tariff war" over the Trump administration's allegations that Beijing is "cheating" through intellectual property theft, forcing American companies into ventures with Chinese companies to obtain their technology, and other unfair terms of trade.

Given that The Bahamas imports virtually all that it consumes, tariff-induced price hikes on Chinese-manufactured components of finished US goods will inevitably be passed on to Bahamian businesses and consumers still adjusting to the inflationary/cost of living impact from the increase to 12 percent VAT.

And, besides the threats that The Bahamas cannot control, the IMF executive board's statement also expresses concern over whether there is sufficient will - both in the government and the private sector - to see the necessary fiscal and "ease of doing business" reforms through to completion.

The reference to "reputational risks" seems to concern The Bahamas' efforts to escape the Financial Action Task Force's (FATF) monitoring list for nations identified as having deficiencies in their anti-financial crime regimes. This nation's continued presence on the list leaves it exposed to inclusion on the European Union's (EU) revised "high risk" list.

And the IMF also warned The Bahamas to guard against "potential spillovers into the domestic financial system" from the removal of the walls that previously separated it from the international financial services industry. The "unification" of the two segments was designed to bring The Bahamas into compliance with the EU's demand for an end to such so-called "ring fencing".

"Caution" was then urged over the Central Bank's plans to create a digital Bahamian dollar to boost financial inclusion, especially in the Family Islands, with the IMF saying it had to be aware f the potential risks to "financial stability".

The IMF's growth revision is likely to have been prompted, at least in part, by the Department of Statistics' release of The Bahamas' annual GDP data in May, which found that real growth in 2018 had come in at 1.6 percent.

Although those findings, which were released after the Fund's April statement, represented the first substantial economic expansion for five years they were still well short of the 2.3 percent real growth that had been projected for 2018 by both the IMF and the Government.

The IMF has thus acted to bring its own forecasts in line with the Department of Statistics, given that Bahamian real GDP growth last year undershot expectations. Based on a $10.8bn economy, the Fund's revised projection effectively slashes The Bahamas' 2019 expansion by some $32m.

Yet, on the positive side, 1.8 percent real GDP growth - if is achieved - still represents an improvement - albeit modest - on 2018's performance. However, it remains well short of the sustained 5 percent growth that the IMF itself says is necessary if this nation is to both absorb all new school leaver entrants into the workforce and reduce the existing 10.7 percent jobless rate by 50 percent.

Elsewhere, the IMF executive board's assessment of The Bahamas' economic prospects was little different from that given by its Article IV mission team in April. It repeated calls for the Government to "operationalise" the five-person Fiscal Council and conduct "a comprehensive tax review" to make the current system more efficient and progressive.

"Directors .....particularly welcomed the enactment of the Fiscal Responsibility Act, noting that its effective implementation would bolster policy credibility and ensure durable gains from fiscal consolidation," the IMF statement said.

"Directors encouraged steps to further strengthen public financial management systems, tighten expenditure control, and operationalise the Fiscal Council as planned. They also saw value in a comprehensive review of the tax regime to enhance its efficiency and progressivity, including by reducing distortions and other preferential treatment."

The IMF statement made no mention of either an income or corporate income tax, although many observers are likely to interpret the term "progressivity" as referring to just that. The Fund also reiterated the need to lower energy costs, improve access to credit and eliminate labour market skills mismatches to improve economic competitiveness before The Bahamas joins the WTO.

"Directors stressed the importance of advancing structural reforms to boost competitiveness and unlock the economy's potential for high and inclusive growth," the IMF added. "Lowering the cost of doing business would help attract needed foreign direct investment."

Following the reforms to bring The Bahamas into compliance with the EU's anti-tax evasion drive, the Fund continued: "Directors looked forward to the swift implementation of the new framework for the international sector aimed at enhancing its transparency and monitoring.

"They encouraged the authorities to remain vigilant against potential spillovers into the domestic financial system from the unification of banking license regimes. Directors also welcomed the authorities' initiatives to advance financial inclusion while emphasising the need to proceed with caution on the issuance of a Central Bank digital currency, mindful of possible risks to financial stability."