The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has avoided the worst-case scenario of its economy shrinking by 26 percent in 2020 thanks to the global oil price slump and government's policy response, a report has concluded.

The Inter-American Development Bank's (IDB) Caribbean Quarterly Bulletin for the three months to end-December said the contraction in The Bahamas' economic output was "not as dire" as first anticipated as it now forecast a 14.8 percent decline in gross domestic product (GDP).

"The worst-case scenarios of the simulations from March 2020..... showed that the impact on the economy of The Bahamas, for example, could be as bad as 26 percentage points’ lower growth than if there had been no tourism shock," the report said.

"However, the simulations considered neither the mitigating effects of fiscal and monetary policy responses by governments, nor the mitigating effect of lower oil prices. As a result, the estimated growth rates for these countries are not as dire as those originally simulated. The government policy responses have been effective in that regard. That said, social and employment impacts have been severe."

The IDB's projection, which is close to the International Monetary Fund's (IMF) estimate of a 16.2 percent contraction for the Bahamian economy in 2020, still slashes between $1.5bn and $2bn off real GDP and makes this nation the hardest-hit by COVID-19 bar Guyana among the nations assessed by the IDB.

Still, The Bahamas' external reserves were some 18 percent above pre-COVID levels at end-October as the IDB called for fiscal and monetary policy reforms to help put the country back on a sustainable footing post-COVID and Hurricane Dorian.

Noting the National Insurance Board's (NIB) administrative costs, it said: "Overall, The Bahamas has a relatively low public pension expenditure of 3.21 percent of GDP, but it has the highest administrative expenses as a share of contribution income (17.6 percent), which suggests there is an opportunity to improve the operational and administrative efficiency of these programmes.

"Going forward, projected higher costs could pose a significant burden on the state, so these costs need to be closely monitored. Policymakers should also review the design of the multi-pillar systems of these programmes on a regular basis and assess what parametric and non-parametric changes in the pension schemes are required to achieve adequate benefits, expanded coverage and financial sustainability of the system."

Turning to the banking sector, the IDB added: "Although The Bahamas’ banking sector is exposed to greater levels of external competition owing to its status as an offshore financial services sector, its banks are less profitable than global and regional averages, with sector returns on equity of 3.6 percent.

"Moreover, while the country has saving rates in line with the regional average, access by firms to basic lending services can be a challenge. Financial sector development is further hindered by several factors. First, enforcing contracts takes about 345 days, which has implications for the cost of these processes, and registering property is mostly a paper-based process.

"Second, regulatory and judicial systems could stand to provide both creditors and debtors with greater confidence in terms of property rights and contract enforcement, as well as case management and court automatisation (though existing alternative dispute resolution frameworks can mitigate this last point)," the IDB added.

"Finally, the lack of credit institutions poses information asymmetries that can often result in higher collateral requirements and hinder financial access and inclusion. Measures such as the development of a centralised credit registry and bureau, digitisation of services, and other mechanisms for the gathering and sharing of information on risk would support improved counter-party credit risk assessment and management."

Elsewhere, the IDB called for the Department of Inland Revenue (DIR) to be reformed. "Tax administration could be enhanced through greater documentation, as most of the core processes are not documented or standardised, posing a risk for business continuity," it said.

"The Bahamas should also consider establishing a special organisational unit devoted to preparing economic studies that can analyse tax collection trends, monitor the hidden economy, examine revenue yields from audits, understand taxpayer behaviour, and provide input to government budgeting processes.

"The Government has also been working on enhancing the organisation of the DIR in order to strengthen its performance. The DIR is part of the Ministry of Finance, which gives it less flexibility than semi-autonomous revenue agencies in other countries of the region. This can limit the scope of organisational reforms."