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In the News: Fiscal tightening needed to help Bahamanian economy reach growth potential

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2005
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After two years of low growth stemming from a drop off in tourism, the Bahamian economy rebounded in 2003-04. According to the IMF’s economic review, Bahamas’ balance of payments strengthened markedly in 2004, and net international reserves rose substantially. A widening of the trade deficit, owing mainly to a higher oil import bill, was offset by an expansion of tourism receipts and reinsurance-related inflows following two hurricanes. The recovery also led to a decline in the unemployment rate in 2004, to just over 10 percent.

Low inflation, a sound banking system, and generally prudent fiscal policies have set the stage for private-sector-led growth, supporting a broadly favorable medium-term outlook. Nevertheless, challenges remain. The government deficit rose sharply during the economic slowdown of 2001-02 and remained above 3 percent of GDP through fiscal year 2003/04 and above the authorities’ 2½percent of GDP target for 2003/04. Although current outlays on nonwage goods and services and capital expenditures were compressed, tax revenues remained depressed, and public sector wages continued to rise. The government deficit in 2004/05 is estimated to have declined to 2½ percent of GDP, but the debt-to-GDP ratio continued to rise, to about 37 percent.

Prel.Proj.
The Bahamas20012002200320042005
(12-month percent change)
Real GDP0.81.41.93.03.5
Consumer price index (annual average)2.02.23.00.91.8
(percent of GDP at market prices, unless otherwise indicated)
Central government overall balance1-0.4-3.2-3.4-3.2-2.6
Central government debt (end-June)30.832.434.436.037.0
Net international reserves312373484668642

Corresponds to the fiscal year ending June 30.

Data: The Central Bank of The Bahamas; The Bahamas Department of Statistics; Ministry of Tourism; Ministry of Finance; and IMF staff estimates and projections.

Corresponds to the fiscal year ending June 30.

Data: The Central Bank of The Bahamas; The Bahamas Department of Statistics; Ministry of Tourism; Ministry of Finance; and IMF staff estimates and projections.

The IMF’s Executive Board noted the need for a stronger fiscal stance to place the debt-to-GDP ratio on a downward path. Directors welcomed the authorities’ intention to lower the government debt-to-GDP ratio to 30 percent over the medium term. To this end, a comprehensive tax reform—entailing the introduction of a value-added-tax or sales tax and a lowering of import tariffs—would help sustain revenues and reduce vulnerability to external shocks, while also facilitating the possible accession to the World Trade Organization. On the expenditure side, the Board emphasized the importance of containing public sector wages increases to maintain international competitiveness, especially in the tourism industry. Fiscal strengthening, it added, should also be supported by structural policies and private infrastructure investment, which in turn would help diversify the economy.

For more information, refer to IMF Public Information Notices

No. 05/81 (Belarus), No. 05/72 (Egypt), No. 05/86 (The Bahamas), and

No. 05/80 (Samoa) on the IMF’s website (www.imf.org).

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