The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday urged The Bahamas to slash crime, reform its labour market and build more hotel rooms to prevent economic growth “slowing” to its 1.5 percent historical average.

The Washington D.C-based Fund, in a statement on its recent Article IV mission to this nation, praised its “remarkable recovery” from Hurricane Dorian and COVID-19 but warned that “long-standing challenges remain” with a return to consistent pre-pandemic growth rates the likely fate unless structural impediments to higher gross domestic product (GDP) are eliminated.

Asserting that increased investment in technology and digitisation will be critical, the Fund acknowledged that The Bahamas has regained all the output and jobs that were lost as a result of the COVID-19 pandemic’s lockdowns and other health-related restrictions.

“The Bahamian economy has staged a remarkable recovery following Hurricane Dorian in 2019 and the COVID-19 pandemic,” the IMF said. “Activity and employment have recovered to their pre-pandemic levels and inflation has fallen back below pre-pandemic levels...

“Over the medium-term, growth is expected to slow to its long-run potential of 1.5 percent as capacity constraints in tourism become more binding. Barring global commodity price shocks, headline inflation is expected to converge to around 2 percent.

“Nonetheless, long-standing challenges remain. Income per capita continues to diverge from that in the US. At the same time, expensive electricity, a shortage of skilled labour and obstacles to business formation and expansion continue to weigh on growth,” the Fund added.

“As in many other countries, government debt-GDP jumped during the pandemic and borrowing costs remain uncomfortably high. The archipelago is also highly susceptible to natural disasters and rising sea levels, both of which argue for increased investments in resilience and building fiscal buffers so as to better respond to climate-related shocks.”

The IMF reaffirmed recent projections that show the pace of annual economic expansion gradually declining over the next two years, with GDP growth dropping from the forecast 1.9 percent this year to 1.7 percent in 2025 and 1.6 percent in 2026. The unemployment rate, though, is forecast to also slightly decline to 9.8 percent in 2025 and 9.7 percent the following year.

Inflation, though, is projected to remain below 2 percent for both 2025 and 2026, which will boost the Government in its efforts to combat the cost of living crisis impacting Bahamian lower income and middle class families.

However, the IMF is forecasting a much slower fiscal correction than the Davis administration, projecting a balanced Budget for 2025-2026 which, while eliminating the annual fiscal deficit, is far short of the Government’s projected $448m surplus. And it believes The Bahamas’ debt-to-GDP ratio may also fall more slowly than forecast, sliding from 78.8 percent at end-June 2024 to 75.3 percent at the 2025-2026 close.

To address the slowdown, the IMF urged: “Long-term growth needs to be lifted by investing in human capital, closing digitisation gaps, relieving capacity constraints in tourism, reducing labour market informality and fighting crime. Incentivising private sector investments in hotel capacity, particularly outside of New Providence, would expand potential growth in the tourism sector.

“Expanding vocational and apprenticeship programmes, improving skill databases and job placement services, would build skills, support job matching and reduce youth unemployment. Reducing crime will require investments in crime mitigation strategies, a larger police force, better leveraging data analytics to target intervention and continuing recent efforts to enhance the effectiveness of the criminal justice system.”

The Government will likely argue it is aware of much, if not all, of these issues and has already begun to take steps to address it including the National Apprenticeship Programme which has yet to be enacted despite the enabling legislation being passed.

And Chester Cooper, deputy prime minister, has already called for The Bahamas to double its hotel room inventory to around 30,000 within the next 10 years to overcome capacity constraints and accommodation shortages.

The IMF, meanwhile, did not neglect governance reforms and the financial services industry, adding: “To enhance fiscal transparency, beneficial ownership information should be published for all companies that are awarded public contracts. The audited financial statements and procurement information for public corporations should also be published.”

And it revealed that plans to create a Bahamas Financial Stability Council are expected to be completed by year-end 2024. “Plans to establish the Bahamas Financial Stability Council, which are expected to be finalised by end-2024, should help provide a more co-ordinated approach to macro-prudential policy,” the IMF said.

“Deposit insurance premiums have been increased and the bank resolution framework has been improved. The creation of a real estate price index is also advancing. Supervisory oversight would be further aided by the collection of loan-level data from bank and non-bank lenders.

“The Central Bank is seeking to improve access to financial services. The expansion of digital banking and the introduction of the moveable collateral register could help with the cost of, and access to, credit. Encouraging new financial technologies may require improvements in data availability, expanding geographic internet connectivity, investing in financial literacy and potentially establishing regulatory sandboxes and/or innovation hubs.”

Turning to digital assets regulation, the IMF praised the improvements introduced by the upgraded Digital Assets and Registered Exchanges (DARE) Act but called for increased on-site inspections of licensees as well as ensuring there are sufficient resources for proper regulatory oversight.

“The new Act widens the coverage of oversight and strengthens anti-money laundering and combatting the financing of terrorism (AML/CFT) requirements. The priorities are now to ensure sufficient resources for effective oversight, increase on-site inspections and address data gaps,” the Fund asserted.

“Additional steps could include introducing a requirement to collect, hold and share originator and beneficiary information, and ensuring that registrable activities do not include anonymity-enhancing services such as mixers, tumblers and other high-anonymity technologies. The scope of the Act could be expanded to include other decentralised finance products and services.”

As for the risk-based approach to anti-money laundering and combating terror financing, the IMF added: “The authorities are finalising a national risk assessment (NRA) for money laundering and will then turn to completing the NRA for terrorism financing. The findings of these risk assessments should then feed into the update of the national AML/CFT strategy.

“Efforts to align the beneficial ownership regime with evolving international standards should continue - ensuring that registered agents are collecting and updating adequate information on their customers, requiring domestic companies to retain beneficial ownership information of their own shareholders.”

Turning to the financial system itself, the IMF suggested: “The credit gap remains negative after several years of credit contraction, and household and corporate leverage are both at modest levels. Banks are well capitalised and hold a fifth of their domestic assets in cash or reserves. However, banks’ high exposure to public sector debt represents an important vulnerability.

“Improving liquidity forecasting and introducing tools such as inter-bank repos (repurchases) or 30-day Treasury Bills could better manage systemic liquidity over the long-term. Reducing the statutory limit on Central Bank advances to the Government, and repaying the outstanding stock of advances, would help absorb liquidity and strengthen the credibility of the fixed exchange rate regime.

“A well-defined ‘escape clause’ could be introduced to allow a temporary increase in the limit on Central Bank advances in exceptional, emergency circumstances.”