The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE BAHAMAS must overcome labour and energy “bottlenecks” to break out of the lower 1.5-1.8 percent economic growth rates it is forecast to enjoy from 2025 onwards, the IMF is warning.

The International Monetary Fund (IMF), in its just-released Article IV report on the Bahamian economy, said the Davis administration had admitted this nation needs to improve the supply and availability of skilled workers - and to further boost hotel room numbers - if this nation is to escape falling back into historical gross domestic product (GDP) growth rates.

“Raising potential growth beyond 1.5 percent is conditional on addressing bottlenecks in the energy sector and labour markets,” the Fund urged, as it praised The Bahamas’ better-than- expected recovery from the COVID-19 pandemic and the “favourable” economic outlook despite multiple “downside risks”.

“Strong growth momentum is expected to continue with growth projected at 2.3 percent in 2024. Capacity limits in tourism will mean that growth will slow over the medium-term to its long-run potential of 1.5 percent,” it added, with GDP expansion slowly tapering off to 1.8 percent in 2025 and 1.6 percent in 2026.

“The authorities remain optimistic about the medium-term outlook. With tourist arrivals back to pre-pandemic levels, the authorities acknowledge that boosting long-term growth beyond 1.5 percent will require investments in new hotel capacity, including in the Family Islands, where several projects are already underway.

“Improving the domes- tic supply of skilled workers is also acknowledged as a means to reduce labour shortages in construction and tourism and amplify the economic impact of projects in these sectors. The authorities also concur that a slowdown in US growth, amid monetary tightening and global uncertainty, as well as the ever-present risk of natural disasters pose downside risks to the outlook.”

The IMF is urging the Government to exploit the breathing room provided by tourism’s unexpectedly strong resurgence, which is ongoing, plus fiscal consolidation efforts to make the necessary policy adjustments and rebuild prior headroom that will be necessary to withstand future external shocks in the form of hurricane related catastrophes or global economic recessions.

The Article IV report revealed that “average real spending increased by 59 percent for cruise [passengers] and 18 percent for stayover visitors from 2019 to 2022”, signalling the return of spending power and yields amid a shortage of hotel room inventory.

“The Bahamas’ economy continues to rebound vigorously,” the IMF said. “Real GDP growth reached 14 percent in 2022, supported by a broad-based recovery, especially in tourism activity. The economy recovered to its pre-pandemic level in 2022.

The strong recovery led to a decline in the unemployment rate to 8.8 percent, the lowest level since 2008.

“However, this also reflects lower labour force participation at 76 percent, below the pre-pandemic level of 81 percent. International flights and cruise arrivals are well above their pre-pandemic levels, as is the average real. spending of cruise and stayover visitors. This reflects both pent-up demand in source markets and the Government’s efforts to attract new cruise companies and airlines.”

Elsewhere, the IMF renewed its call for the Government to introduce contributory pensions for civil servants and make good on plans to implement phased contribution rate increases to ensure the National Insurance Board’s (NIB) sustainability.

“Payroll contributions should be introduced for increased for the national pension system. The Bahamas operates a dual pension system – one for civil servants and one for all employees, NIB,” the Article “Defined pension benefits are paid by the NIB based on the length of time employees pay contributions and a reference wage. For the NIB, contribution rates equal 9.8 percent of insurable wages while civil servants’ pensions are paid from general tax revenues.

“Under current policies, the assets of the NIB will be depleted by 2028. Incrementally rate to NIB for both public and private sector employees over the next 20 years to 15 percent would add 0.1 percent of GDP in spending for the contributions for public workers, but would put the pension scheme on a sustainable footing.”

In response the Government, according to the IMF, said: “On expenditure, the authorities agree with the need to prioritise spending on education, healthcare and social transfers, but caution that increased transfers to SOEs (state-owned enterprises) could threaten their fiscal objectives.

“On pensions, the authorities have drafted legislation to introduce a contributory pension system for civil servants and are planning to increase the contribution rate for the NIB from 2024-2025. The authorities also agree that sustained fiscal consolidation would reduce both borrowing needs and costs but believe that spreads on their foreign currency debt are still too high given economic fundamentals....

“The authorities agree that having more defined fiscal rules would support the achievement of their budgetary objectives but believe that current legislation is sufficiently robust. The authorities have made progress with operationalising the new Public Procurement Act 2023 and started the publication of central government contracts, with plans to extend this to SOEs.”