The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) last night called for a further “reduction in the limit” on how much funding the Central Bank can provide to the Government as it signalled the present bar is too high.

The Fund, in its statement on the annual Article IV consultation with The Bahamas, argued that present restrictions on the banking regulator’s lending to the Government should be tightened as they are less restrictive than those in other Caribbean countries that also have fixed exchange rate regimes.

“Additional steps should be taken to place more binding limits on Central Bank financing of the fiscal deficit,” the IMF urged. “The authorities have made amendments to the Central Bank Act prohibiting financing the Government via the primary bond market and have also imposed a lower limit on Central Bank advances.

“However, this limit is above that of regional peers with pegged regimes. A reduction in the limit on Central Bank financing should be accompanied by a well-defined ‘escape clause’ that would be triggered in exceptional circumstances - in the event of a large scale natural disaster. Repaying Central Bank advances, already at the ceiling, could also serve to strengthen the credibility of the exchange rate regime.”

The IMF also urged that The Bahamas enhance transparency and accountability surrounding the Public Finance Management (PFM) and Public Procurement Act by extending the requirement for the disclosure of beneficial ownership information to all public contract award winners - not just those whose work is financed by multilateral lenders such as the Inter-American Development Bank (IDB).

This has been resisted by the Government, but the Fund added: “Recent welcomed amendments to the new Public Finance Management (PFM) and Public Procurement Acts will usefully strengthen the governance framework of state-owned enterprises (SOEs) and improve the transparency of public procurement.

“The publication of beneficial ownership information is now mandatory for public contracts funded by an international funding agency but should be the applicable standard for all providers that obtain public contracts.

“Similarly, procurement documents and audited financial statements of SOEs should be published on a regular basis. An independent process should be put in place to select members of the Fiscal [Responsibility] Council. Finally, any deviations from the targets mandated in the PFM Act should be time-bound and underpinned by clear guidance on the speed at which the authorities will revert back to their goals.”

The IMF is forecasting that The Bahamas will gradually return to historical long-term GDP growth rates. It is predicting that this nation’s economic output will expand by 2.3 percent in 2024, following 4.3 percent growth this year as the economy completed its post-COVID reflation, before dropping to 1.8 percent in 2025.

The unemployment rate is projected to hover at just below 9 percent for both 2024 and 2025, with the IMF also voicing doubts that The Bahamas will achieve the Davis administration’s target of a $109m fiscal surplus in 2024-2025. Instead, it is forecasting a deficit equal to 2 percent of GDP for that fiscal year, which would be around $291m.

Inflation, though, is forecast to moderate to around 2.5 percent in 2025, but the IMF warned that economic risks facing The Bahamas are tilted towards the downside. And labour force participation, especially among men, remains below pre-COVID levels despite the improved jobless figures.

“The Bahamas’ economy continued to rebound vigorously in 2022. Real GDP growth reached 14.4 percent and unemployment fell to 8.8 percent with a broad-based expansion that was especially strong for tourism,” the IMF added.

“However, labour force participation, particularly among men, remained below pre-pandemic levels. In 2023, international flight and cruise arrivals rose well above their pre-pandemic levels leading to a projected 4.3 percent expansion in the year, bringing the economy back to estimates of potential output. After peaking at 7.1 percent in July 2022, inflation has fallen steadily to 2.3 percent in July 2023.”

However, the Fund further warned: “Risks to the outlook are skewed to the downside. A fall in tourism demand, due to an economic slowdown in source markets, could weigh negatively on the growth outlook. Furthermore, renewed pressures on global food and oil prices could impose a burden on lower income households and put pressure on the balance of payments.

“Any associated fiscal measures to dampen the pass-through of global prices to the domestic economy would have to be well-targeted to mitigate further strain the fiscal position. Finally, The Bahamas is highly exposed to risks emanating from climate change and natural disasters. In the event that risks are realised, domestic financing challenges could increase.”

The IMF also called on the Government to develop a solution for higher insurance costs that are increasingly pricing Bahamians out of being able to cover their homes and key assets against natural disasters. “Property insurance premiums have been steadily increasing due to the high costs of reinsurance,” it conceded. 

“This is leading to decreased insurance coverage which, in the event of an extreme weather event, can potentially lead to significant losses for the population and, ultimately, create large fiscal needs. Partial public funding of micro-insurance products could be expanded in combination with a public mandate to carry a minimum level of property insurance.

“Increased fiscal buffers will be needed to provide some relief to those that may be affected in a future disaster. Finally, the authorities could consider designing financial instruments that incentivise private self-insurance.”

To further enhance The Bahamas’ resilience and future growth prospects, the IMF said: “New avenues for climate finance have the potential to bolster fiscal and environmental sustainability.

“Building credible measurement, reporting and verification frameworks for climate-related projects, developing projects that have co-benefits across other sustainable development goals, and partnering with established institutions in climate finance will help set high standards in assessing projects through an environmental lens.

“Creating a credible domestic framework for climate-related investments can help catalyse investor interest in green and blue debt instruments as well as the sale of carbon credits,” it added. 

“Similarly, developing a domestic framework for Environmental, Social and Corporate Governance bonds (including introducing reporting standards for sustainability disclosures by companies) would help support new avenues for climate financing to Bahamian public and private sector entities.”

Focusing on renewable energy, the IMF said: “Accelerating the transition to renewable energy will help boost private sector growth and reduce the country’s exposure to global swings in commodity prices. High and volatile energy prices and supply reliability issues are a disincentive to private investment.

“Accelerating solar projects and improving the national electricity company’s (BPL) governance structure could help lower costs, increase the continuity of energy supply and raise the share of renewables toward the authorities’ goal of 30 percent by 2030.

“Other investments in renewables - particularly roof-top solar - should be incentivised through either subsidies or tax preferences, and private-public partnerships (PPPs) should be encouraged, especially on remote islands.”