On January 13, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with The Bahamas. This annual review assesses the economic developments and policies of member countries.
The Bahamian economy has shown a strong recovery since the pandemic, primarily due to a resurgence in tourism. Economic activity has returned to levels seen before Hurricane Dorian, although growth is slowing, with a 1.8 percent expansion in the first half of 2024. This slowdown is partly attributed to limited hotel capacity. Inflation has turned modestly negative, yet the cost of living remains high.
The fiscal situation improved in FY24, supported by strong revenue performance and expenditure reductions. The fiscal deficit decreased from 3.8 percent of GDP in FY23 to 1.3 percent in FY24, while government debt fell to 78.8 percent of GDP. Although financing costs have declined due to global factors, gross financing needs remain significant.
Growth is projected to align with its long-term potential of 1½ percent over the medium term, with balanced risks to this outlook. While capacity constraints in tourism are expected to become more pronounced, there are potential upsides from new hotel construction or an accelerated expansion in short-term rentals. However, fiscal vulnerabilities and risks from natural disasters persist as constant threats.
Executive Directors at the IMF acknowledged the substantial recovery in tourism and economic activity following Hurricane Dorian and the Covid-19 pandemic but noted ongoing challenges such as elevated public debt and structural growth bottlenecks.
"Directors welcomed the authorities’ commitment to reduce government debt to 50 percent of GDP by FY31," while also agreeing that further measures are necessary for achieving this target. These include introducing taxes on corporate and personal income to allow for priority spending on infrastructure, education, and social programs.
Efforts were also praised regarding fiscal accountability improvements and enhancing transparency and effectiveness in debt management operations. Recommendations included independent selection for both the reconstituted Fiscal Responsibility Council and Public Sector Audit Committee.
The need was emphasized "to limit central bank financing to the government" as a means of reducing systemic liquidity and bolstering currency peg credibility. The financial sector was deemed resilient due to large liquidity and capital buffers, with progress noted on implementing FSAP recommendations from 2019.
Directors encouraged ongoing efforts "to strengthen the AML/CFT framework" alongside steps aimed at expanding financial access through data availability improvements, investments in financial literacy, and fostering financial technology innovation.
Long-term growth strategies should focus on structural reforms targeting human capital improvement, digitalization gaps closure, tourism capacity reliefs, labor market informality reduction, and crime combatting efforts. Strengthening climate resilience was also highlighted as crucial for mitigating output losses due to sea level rises and natural disasters.
Finally, planned electricity sector reforms were welcomed for their anticipated positive effects on medium-term growth but required clear risk-sharing delineation between private and public sectors for support effectiveness.