The Bahamas
Staff Report for the 2011 Article IV Consultation

The Bahamian economy began a tepid recovery in 2010, following a sharp recession in 2008 and 2009 in the wake of the global financial crisis. Real GDP grew by about 1 percent. The rebound was driven by the trade, hospitality, transport, and government services sectors. Executive Directors welcomed the gradual recovery of the Bahamian economy. They also called for steadfast implementation of reforms to place public debt on a sustainable path, build fiscal buffers, and enhance medium-term growth prospects.

Abstract

The Bahamian economy began a tepid recovery in 2010, following a sharp recession in 2008 and 2009 in the wake of the global financial crisis. Real GDP grew by about 1 percent. The rebound was driven by the trade, hospitality, transport, and government services sectors. Executive Directors welcomed the gradual recovery of the Bahamian economy. They also called for steadfast implementation of reforms to place public debt on a sustainable path, build fiscal buffers, and enhance medium-term growth prospects.

BACKGROUND

1. The diversity of economic characteristics and the large number of islands that comprise The Bahamas presents unusual challenges for providing government services and for formulating development strategies. The archipelago has about 30 inhabited islands. The country’s economy has two main drivers, tourism and financial services, with the tourism product differentiated across the islands from large resorts to small boutique-type properties. Financial services span both offshore and onshore activity: activity in the offshore center is linked with onshore financial services;1 the onshore financial system has 276 banks and trust companies (eight commercial banks, with a strong presence of Canadian banks).

2. The Bahamas enjoys a stable democracy. Elections must be scheduled by May 2012. The Free National Movement (FNM), currently in power, and the Progressive Liberal Party (PLP) are expected to run campaigns, focused on the economy, jobs, and stopping crime. Doubt about the strength of the U.S. recovery will exacerbate political uncertainty in the run-up to the elections.

3. Despite slow growth since the beginning of the decade, the country was well positioned at the beginning of the crisis. With one of the highest per-capita income levels in the Caribbean and a relatively low public debt-to-GDP ratio for the region,2 the Bahamas has had a strong sovereign credit rating, reaffirmed in May 2011 by Standard and Poor’s as BBB+ with a stable outlook.3

4. The Bahamas was strongly hit by the crisis. Tourism collapsed following the recession in the United States (the main source of tourists). As a result, GDP shrank by about 1½ percent in 2008 and 5½ percent in 2009. To mitigate the impact of the contraction, the authorities strengthened the social safety net with temporary unemployment programs and increased public investment. At the same time, the Trinidad and Tobago-based CL Financial Group failed in January 2009, and the conglomerate’s local insurance company, CLICO-Bahamas, was put under judicial management. Difficulties in liquidating CLICO’s assets hindered a resolution, leading the authorities to issue government guarantees to facilitate the sale of the traditional life-insurance policies.

5. In concluding the 2010 Article IV Consultation, Executive Directors commended the Bahamian authorities for their commitment to medium-term fiscal adjustment. Directors welcomed the revenue and spending measures in the budget for FY 2010/11 (July to June), but noted that broader reforms to the tax system and public finance management were needed over the medium term to improve the fiscal position. They also encouraged the authorities to build up foreign reserves to support the longstanding exchange peg to the U.S. dollar and commended the authorities for their efforts to strengthen the financial system.

RECENT ECONOMIC DEVELOPMENTS

6. After having been severely impacted by the global financial crisis, the Bahamian economy began a tepid recovery in 2010.

  • Real GDP grew by about one percent. The rebound was led by the trade, hospitality, transport, and governments services sectors, while the construction and offshore financial services sectors continued to contract.
  • Inflation remained subdued at 1½ percent (y-o-y). Food prices declined by over 1 percent In contrast, fuel and transportation prices rose by about 2½ percent, but had a lower impact on inflation than in other Caribbean countries, because of their relatively lower share in the CPI basket.
  • The external current account deficit remained broadly stable at 11½ percent of GDP. Exports rebounded, and growth of non-oil imports remained subdued by weak economic activity. However, rising FDI and other private capital inflows boosted reserves to US$860 million at end-2010 (about 2½ months of next year’s imports of goods and services).
  • Staff estimates that the deficit of the central government deteriorated in FY 2010/11. Total revenues increased owing to sizeable one-off transactions, related to stamp taxes on the signing of the Baha Mar project (a $3.5 billion resort complex) and the transfer of ownership of the Bahamas Oil Refining Company (1½ percent of GDP). Excluding the large one-off transactions, revenues increased by about ½ percent of GDP. Trade and property taxes continued to underperform. Expenditure increased more than proportionately, including owing to higher spending on goods and services.4As a result, the central government deficit rose to 4.7 percent of GDP. The sale of 51 percent of the shares of the Bahamas Telecommunications Company (about 2½ percent of GDP) eased financing pressures.
  • Public debt continued to rise. At end 2010, central government debt was 48 percent of GDP, up from about 34 percent of GDP two years earlier, while total public debt reached almost 62 percent of GDP.5 Domestic debt accounts for more than 80 percent of public debt The debt is mostly in variable rate instruments and held mainly by commercial banks, public corporations, and pension funds, which (given capital controls) are mandated to invest primarily in domestic securities.
  • High NPLs are a source of concern. Banks have maintained high overall capital-adequacy ratios (well above the minimum requirement of 17 percent) (Figure 5). Banks’ loan portfolio, however, continued to show signs of weakness, as the severe economic downturn pushed up the non-performing loans-to-total loans ratio over 10 percent - above regional peers. In addition, the level of provisioning to NPLs appears to be below peers.
Figure 1.
Figure 1.

The Bahamas: Recent Developments

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: Bahamian authorities; WEO; and Fund staff estimates and projections.
Figure 2.
Figure 2.

The Bahamas: Fiscal Developments and Outlook 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: The Bahamian authorities; and Fund staff estimates.1/ Central government fiscal year ending June 30.2/ Calendar year basis.
Figure 3.
Figure 3.

The Bahamas: Exchange Rate Assessment

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: IMF, Information Notice System; and Fund staff calculations.1/ The equilibrium value is computed using the equilibrium real exchange rate approach as in Vitek (2010).2/ The current account (CA) norm is computed using the estimated parameters from the panel regression in Vitek (2010), and staff medium-term projections for the conditioning variables. In particular, the CA norm depends positively on the country’s oil trade balance, the level of net foreign assets, relative fiscal balance, and negatively on relative income growth.
Figure 4.
Figure 4.

The Bahamas: Tax Revenue Regional Comparison 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: National authorities; and Fund staff estimates.1/ Regional comparators include Barbados, Jamaica, St. Kitts and Nevis, and Trinidad and Tobago.
Figure 5.
Figure 5.

The Bahamas: Financial Developments 1/

(Regional Comparison)

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: International Financial Statistics; National authorities; and Fund staff estimates.1/ Regional comparators include Barbados, Jamaica, and Trinidad and Tobago.

OUTLOOK

The Bahamas: Medium-Term Macroeconomic Framework (Current Policies)—Staff Projections

(In percent of GDP, unless otherwise indicated)

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Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; and Fund staff projections.

Central government only. Fiscal year data (to June).

Includes SDR allocation of US$178.9 million in September 2009.

7. The near-term outlook is for stronger growth, but a weaker fiscal and debt position.

  • Real GDP is projected to grow at about 2 percent in 2011, driven by a rebound in tourism and construction activity. Tourist arrivals in general, and cruise ship arrivals in particular, are increasing, with stopover arrivals projected to approach the level of 2008 by year-end, although yielding lower average revenues. In addition to double-digit growth in the cruise sector, there has been a strong rebound in the key market of advance group reservations. Inflation is projected to rise to about 2½ percent, in line with higher global food and fuel prices, while the external current account deficit is expected to widen, driven by higher oil imports and a pick-up in FDI-financed construction. The overall balance of payments, however, is projected to record a surplus of about US$94 million owing to strong FDI and private capital inflows.
  • The fiscal accounts will remain under pressure. The budget for FY 2011/12 contemplates measures aimed at strengthening revenue performance, including an effort to centralize the collection of taxes (on business, property, stamp, hotel occupancy, and casino). However, the budget increases spending on new government initiatives (e.g., the introduction of e-government), extends tax holidays, and lifts the freeze on public wages that was imposed in last year’s budget. Staff estimates that these plans would increase the central government deficit to about 5 percent of GDP by end-June 2012 and raise central government debt to about 50 percent of GDP. Additional risks to the fiscal outlook stem from the continued weak performance of non-financial public corporations—and the need for more transparency in this area—and contingent liabilities from the failed insurance company CLICO.
  • The scope for supportive monetary policy will remain limited. In June 2011, against a background of subdued price pressures and a stronger reserves position, the central bank lowered the discount rate to 4½ percent (from 5¼ percent). Although this action, the first rate change in six years, was aimed at supporting the incipient recovery its effects on credit demand and activity are likely to be weak.
  • The increase in non-performing loans is expected to abate due to stronger activity. Stress tests conducted by the authorities suggest resiliency of the banking system.

8. The medium-term outlook is mixed. Output growth is expected to rise to 2½-3 percent in 2012–13, driven by tourism and new FDI projects. Of these projects, the most important is Baha Mar, which is likely to have a significant impact on the economy, particularly during the peak of construction (2012–13).6 Growth would remain in that range thereafter, with upside potential if key projects under study materialize. Strengthened tourism receipts would help narrow the external current account deficit to about 13 percent of GDP by end-2016, while higher fiscal revenues would help lower the primary deficit. The central government deficits, however, would remain at almost 4½ percent of GDP per year during the period, raising the central government debt-to-GDP ratio to close to 56 percent, and overall public debt to about 69 percent by 2016.

9. The outlook is subject to downside risks. While a faster rebound in tourism activity or the start of large-scale hotel investments would improve the outlook, risks appear at this stage tilted to the downside. A slower-than-expected recovery of output and employment in the United States could dampen the pickup in economic activity and weaken the fiscal and external positions. External accounts are also highly sensitive to increases in the international prices of food and fuel. Given the exposure to the real estate sector, some commercial banks could see excess collateral diminish and vulnerability increase if the recovery stalls. Finally, vulnerability to hurricanes (Hurricane Irene hit The Bahamas in August, although the impact appears to have been relatively small) highlights the potential fiscal costs of natural disasters.

10. Delays in implementing reforms (in particular revenue reforms, to curb the debt) could jeopardize a sustained recovery. The large borrowing necessary to improve the physical and social infrastructure constitutes a source of vulnerability. A delay in reversing the rising debt trajectory could raise financing costs.

Expanding Tourism Potential in The Bahamas: Challenges and Strategy

The Bahamas is an island archipelago of 700 islands and about 2000 cays, with a total land mass of about 14,000 square km scattered over almost 260,000 square km of territorial waters. Starting at just 80 km off Florida’s eastern coast, The Bahamas has leveraged its proximity to the United States and natural beauty in its marketing strategies. With 70 percent of its population of 350,000 people living in New Providence, the scope for expansion of a variety of tourism products to the sparsely populated Family Islands is vast.

Forms of Tourism

The main industries of The Bahamas are tourism, financial services, light manufacturing, and transshipment operations, the latter located mainly on Grand Bahama. New Providence accounts for 55–60 percent of the country’s tourist activity, and follows the large seaside resorts model (the most prominent of which is the Atlantis Resort). In the Family Islands, the preferred model is small boutique hotels and luxurious private villas, catering to wealthy tourists and second-home owners from the United States and Canada.

Market Diversification

Given the seasonality of the tourism industry, capacity utilization on the islands ranges from near 100 percent during the peak winter season to less than 30 percent during late summer. Promotion campaigns strive to attract tourists during the low season. The authorities, in partnership with large private hotel owners, have embarked on a strategic plan to diversify and increase tourist arrivals from Latin America, especially Brazil and Argentina. As part of this strategy, the authorities have succeeded in attracting daily flights from Panama City, which acts as a hub for a Latin American air carrier. With demand during the winter season in the Southern Hemisphere coinciding with the period of low utilization of hotel capacity in The Bahamas, increasing the arrivals of South American tourists could mitigate the cyclical pattern of tourism revenue.

Developing the Family Islands

The main challenge to developing tourism in the Family Islands of The Bahamas is the high per capita cost of providing basic infrastructure, utilities, and social services, including health facilities. Overcoming these challenges will require creative and cost-effective solutions. In health infrastructure, for example, one solution proposed is the setting up of satellite health units on strategic locations, combined with efficient emergency travel systems. Another challenge is the cost of providing adequate airlift to the remote islands, given the relatively small scale of operations. An envisaged model is for one or two large “magnet” resorts, capable of attracting jet services from target markets, combined with a ‘hubbing’ concept (possibly using smaller aircraft) to feed tourists to the smaller boutique-hotels in nearby islands. These large resorts can also be focal points for economies of scale in setting up desalination or power generation plants, as well as for encouraging the development of small enclave industries for the provision of ancillary goods and services.

Diversification Efforts

Although labor and utility costs are quite high in The Bahamas, some large outer islands, such as Andros, have large water and land resources ideal for developing agriculture. For such activities to develop, however, it will be important to act rapidly in reducing costs to doing business in The Bahamas.

POLICY DISCUSSIONS

The Bahamas’ key policy challenge is to ensure sustainability of public finance and raise real GDP growth on a sustained basis. The authorities noted their commitment to fiscal consolidation, in particular through revenue mobilization. They also viewed improving the business environment and strengthening the soundness of the financial system as important for private-sector-led growth.

A. Consolidation Strategy

11. The authorities reiterated their commitment to strengthen fiscal performance and place the public debt on a sustainable path. Their strategy comprises both revenue and expenditure measures, and an improved debt management.

  • New revenue measures mainly hinge on improvement in the tax administration. The authorities explained initiatives underway to improve tax administration, including strengthening customs; consolidating the collection of several taxes in one institution; and introducing a new procedure to reduce smuggling of tobacco products. They also noted the introduction of a revamped business license tax.7
  • Narrowing the scope of tax expenditures and transfers is another element. The authorities are introducing time limits and transition arrangements for fiscal incentives provided under the Industries Encouragement Act. In addition, they are seeking to reduce transfers to public corporations, including by encouraging private-public-partnership arrangements.
  • Improving debt management. The authorities are giving priority to greater coordination of debt management at the Ministry of Finance and the Central Bank.

12. Staff welcomed the authorities’ medium-term strategy, but noted this would not be sufficient. In particular, staff welcomed the consolidation of tax collection in one unit, and the plan to stabilize incentives.

13. Staff urged the authorities to adopt more comprehensive policies geared at placing the government debt-to-GDP ratio on a declining path over the medium term. A stronger fiscal effort was needed to create buffers for future shocks, improve physical and social infrastructure, and keep borrowing cost low. Staff also noted that delaying action on fiscal consolidation, particularly with regard to revenue reform, might result in additional external risks and fiscal pressures.

14. Staff suggested giving priority to revenue mobilization. It noted that the most dynamic sectors of the economy generate a small share of revenue, and that their spells of growth did not translate proportionately to higher fiscal revenues. Reforms aimed at broadening the tax base, for example through the adoption of a domestic consumption tax, should therefore be a key priority. Further, staff noted that the time limits currently applied to the Industries Encouragement Act could be extended to the other fiscal incentive regimes.

15. The authorities agreed that revenue reform was a key priority. They concurred that the current revenue structure is inefficient and inequitable, and noted that they had sought technical assistance from the IDB to reform the tax system. They noted, however, that actions in this area were unlikely under this legislature.

16. Expenditure restraint is also needed. Government expenditure is projected to remain at about 20 percent of GDP over the medium term. The government’s wage bill accounts for over 40 percent of revenues, and is projected to rise following the lifting of the wage freeze adopted in FY 2010/11; transfers to public enterprises are high, and interest costs are rising. Staff highlighted the need to gradually return the wage bill, as a share of GDP, to the pre-crisis level, and keep transfers and other current expenditures under control.

17. The financial position of public enterprises must be improved. The financial position of several public enterprises (including Bahamas Air, and the electricity and water and sewerage companies) appears to be weak, and the lack of timely information on the contribution of public enterprises to the overall fiscal stance is a vulnerability that needs to be addressed. Several public enterprises are inefficient and require recurrent government transfers to operate. A strategy to lower the drag of these enterprises on public finances (including through divestments) is urgently needed.

18. Staff also encouraged the authorities to continue improving fiscal transparency. It stressed the need for more timely and accurate accounts for public enterprises, and improving the data on intra-public sector financing, in particular from the national pension fund. While welcoming the authorities’ interest in receiving Fund technical assistance on these areas, staff encouraged a focus on:

  • Improving revenue forecasting;
  • Preparing consolidated accounts for the public sector; and
  • Making public all tax incentives (including costs, main terms and conditions, and beneficiaries).

B. Growth Strategy

19. The government’s strategy to improve growth performance was discussed. Near-term growth was likely to increase owing to the recovery of tourism and the start-up of large projects.8 The government strategy comprises:

  • Growth-enhancing measures. These include: (i) measures to increase airlift and expand coverage to the Family Islands, and boost cruise arrivals;9 (ii) an aggressive program to increase FDI from Canada, the U.S., Latin America, and China; and (iii) fostering the development of small- and medium-size enterprises.
  • Improving the business environment. Measures to reduce red tape and streamline administrative procedures (including by launching the e-government system) are being adopted.10 At the same time, a job-readiness program aims to improve productivity.
  • Combating crime. The authorities are providing greater resources to law enforcement, expanding the courts system, and strengthening the prosecutorial process.

20. Staff welcomed the authorities’ broad-based growth strategy. It noted that the emphasis on measures different from fiscal incentives for boosting growth was a positive development, since the country’s growth performance over the last decade suggests that the fiscal incentives model had not been effective in promoting sustained growth. Staff also suggested improving economic diversification and employment through innovation in high value-added downstream tourism products. Staff noted the need for investment in public utilities to improve efficiency and provide adequate infrastructure to support the growth strategy.

C. External Stability and Exchange Rate Policy

21. There was agreement that the fixed exchange rate system has served The Bahamas well. The authorities restated their commitment to support the peg and continue building reserves. They explained that their recent decision to lower the policy rate had been taken in the context of adequate reserves (about US$1,075 million or close to three months of imports) and low inflationary pressures.

22. Staff and the authorities agreed that the exchange rate level remains broadly in line with medium-term fundamentals (Figure 3) Estimates from the macrobalance approach suggest that the projected medium-term current account deficit for The Bahamas is close to the estimated current account “norm”, while regressions suggest that the current level of the real exchange is broadly in line with fundamentals.11 These results, however, are subject to potentially severe estimation shortcomings and are sensitive to the assumptions used. In this connection, the authorities noted that the higher FDI expected in the coming years would raise the country’s growth and export potential over the medium to long term. Given the uncertainties from a weak global environment, staff noted the importance of investing in basic infrastructure and ensuring the efficient delivery of basic utilities to attract revenue-producing FDI and enhance the country’s competitiveness.

D. Financial Sector

23. Capital adequacy ratios are high, but the weak loan portfolio highlights the need for intensified supervision. Stress tests conducted by the authorities suggest that the system could withstand a further deterioration in the banks’ loan portfolio without endangering compliance with capital requirements. Capital adequacy ratios (CARs) at end-May 2011 (26 percent, on average), were well above the regulatory threshold, while excess liquidity was about 20 percent. Banks’ loan portfolios, however, which have been weakened by the slowdown in activity, represent a vulnerability.

24. Reliance on macro-prudential policies also has increased. A CAR trigger of 14 percent on banks has been in place since the onset of the global crisis. In addition, since November 2009, banks have been required to seek central bank approval to distribute dividends. The central bank has continued to require a debt service-to-income limit of 45 percent, and a loan-to-value ratio cap of 85 percent on personal loans—measures that exist since 2004. The establishment of a credit bureau, projected to start operating in early 2013, should help to further mitigate credit risk, by collecting information on individuals’ borrowing and bill payment records, thus helping lenders assess credit worthiness.

25. Additional steps to strengthen financial sector supervision are ongoing. The central bank has implemented an enhanced risk-based supervision framework, adopted the use of special focus examinations (e.g., credit risk delinquency management), and is pursuing a number of initiatives.12 These include (i) the enhanced supervision of all large financial institutions; (ii) bringing credit unions under the purview of the central bank; (iii) drafting legislation to facilitate consolidated supervision across different financial sectors (including securities and insurance); and (iv) participating in regional supervision efforts and coordinating with Canadian regulators.13

26. The authorities have also made progress in enhancing the AML/CFT framework. Various guidelines on regulation have been amended to address (i) enhanced customer due diligence requirements; (ii) strengthening internal controls, and compliance and audit procedures; (iii) improved record keeping for high-risk countries; and (iv) establishing conditions for third party introducers. Given that control processes for activity originating in the offshore sector may take place in locations outside the jurisdiction of The Bahamas, the central bank has also focused on ensuring the integrity of local governance and risk oversight arrangements in institutions under its purview.14

27. Progress was reported on the resolution of CLICO-Bahamas. Settlement of the failed insurance company is now more likely, following the favorable ruling regarding the Wellington Preserve in Florida. Staff welcomed the positive developments and urged for a prompt resolution that minimizes fiscal contingent liabilities.

STAFF APPRAISAL

28. The Bahamas economy has started to recover from the global financial crisis, but unemployment remains high. Real GDP in 2011 is projected at 2 percent, driven by the rebound of tourism and the launch of large investment projects. The medium-term growth outlook has improved, compared to the 2010 Article IV staff report, but downside risks are high. On the domestic front, risks arise from delays in implementing fiscal and economic reforms necessary to reverse the rising trend in debt, build buffers, including for damage from natural disasters, and improve efficiency and competitiveness. These could have adverse effects on private investment and financing costs. On the external front, the main downside risk is a weaker-than-expected recovery in the United States, which would cap the rebound of tourism and delay the large FDI tourism projects.

29. Fiscal consolidation should be the main policy priority. A strong fiscal consolidation strategy is essential to place the public debt-to-GDP ratio on a sustainable path and to build buffers, including reserves, that could be used to mitigate the impact of natural disasters and external shocks. Revenue mobilization can be strengthened through improvements in tax administration and lower tax expenditures. In addition, early implementation of revenue reform (e.g., a consumption tax) is essential, since delays may result in additional risks and pressures. Expenditure restraint, especially on wages and transfers, strengthening the weak financial position of public enterprises, and enhancing fiscal transparency would also underpin the fiscal effort.

30. The authorities’ growth strategy is broadly appropriate. Measures aimed at reducing obstacles to doing business are particularly promising. Staff welcomes the lower reliance on fiscal incentives, which has failed to deliver high growth rates. Further improving basic infrastructure, particularly regarding energy and water provision, and developing high value-added downstream tourism products will be key to achieving higher growth rates.

31. The fixed exchange rate system continues to serve the country well. Staff analysis suggests that the level of the exchange rate remains broadly in line with medium-term fundamentals. The authorities are committed to maintaining the exchange rate peg and strengthening the external position by building reserves over the medium term.

32. Staff welcomes the recent measures to strengthen financial sector supervision, but highlights the importance of maintaining close monitoring of financial developments. Recent measures adopted to further strengthen the financial sector, including the adoption of macro-prudential policies, and steps to facilitate stronger supervision across sectors and at the regional level, should enhance the resilience of the financial system. The planned establishment of a credit bureau and bringing credit unions under the purview of the central bank are also welcome. The high level of non-performing loans, and limited provisioning, however, calls for further intensifying the monitoring of financial institutions.

33. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

The Bahamas: Selected Social and Economic Indicators

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Sources: Central Bank of The Bahamas; Department of Statistics; Ministry of Finance; UNDP Human Development Report; CIA World Factbook and Fund staff projections.

Revised national accounts data.

2009 figure based on October Interim survey.

In percent of exports of goods and services. The increase in 2009 reflects repayment of internal forex loan of US$ 185 million to domestic banks.

Table 2.

The Bahamas: Operations of the Central Government1/

(In millions of Bahamian dollars)

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Fiscal year ends June 30.

Includes statistical discrepancy.

Table 3.

The Bahamas: Operations of the Central Government1/

(In percent of GDP)

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Fiscal year ends June 30.

Includes statistical discrepancy.

Table 4.

The Bahamas: Public Debt

(In percent of GDP)

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Source: Central Bank of The Bahamas.

Government-guaranteed debt only.

Excludes holdings by public corporations.

Table 5.

The Bahamas: Balance of Payments

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Sources: Central Bank, Department of Statistics; and Fund staff estimates.

Includes SDR allocation in September 2009.

Table 6.

The Bahamas: Summary Accounts of the Central Bank and the Financial System

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Sources: Central Bank of The Bahamas; and Fund staff estimates and projections.
Table 7.

The Bahamas: Indicators of External and Financial Vulnerability

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Sources: Central Bank of The Bahamas; and Fund staff estimates and projections.

Includes errors and omissions.

Information Notice System.

Table 8.

The Bahamas: Central Government Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

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Gross debt of the central government.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 6.
Figure 6.

The Bahamas: Public Debt Sustain ability: Bound Tests 1/

(Central government debt, in percent of GDP)

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: International Monetary Fund, country desk data, and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Table 9.

The Bahamas: External Debt Sustainability Framework, 2006-2016

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate. e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 7.
Figure 7.

The Bahamas: External Debt Sustain ability: Bound Tests 1/

(External debt, in percent of GDP)

Citation: IMF Staff Country Reports 2011, 338; 10.5089/9781463927882.002.A001

Sources: International Monetary Fund, Country desk data, and Fund staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.
1

Offshore operations in The Bahamas are mostly conducted through International Business Corporations (IBCs)—non-financial legally established entities permitted to carry out business outside The Bahamas. These vehicles operate under the IBC Act, 2000. IBCs support employment in financial (banking and trust operations) and corporate service providers, the securities industry, and the legal and accounting professions; and contribute to government revenues through fees for incorporation and annual registrations.

2

As of end-2007, total public sector debt was about 40 percent of GDP, mostly domestic.

3

In August, Moody’s affirmed The Bahamas’ A3 bond rating, but revised the outlook from stable to negative.

4

Expenditure increases included an employment program and pension liabilities assumed by the government following its partial divestment from the telecommunications company.

5

Total public debt includes all debt from non-financial public corporations (guaranteed and non-guaranteed).

6

During the construction period, the project operators expect the work force will increase by up to 4,400 persons, and US$750-900 million could be injected into the economy, triggering additional second-round economic activity. Project documents also estimate the complex will attract 400,000 additional stay-over arrivals and generate direct tax revenues of about US$60 million (¾ percent of 2011 GDP) per year.

7

These initiatives and measures complement those adopted in the previous fiscal year, which included improved tax administration and higher tax rates on vehicles, air departure, and hotel rooms.

8

Large projects include the development of the Baha Mar resort, expansion of existing resorts, and continuing the construction of the airport and road improvements.

9

A recent agreement with a low-cost U.S. carrier will increase airlift from states along the East coast of the U.S. to Grand Bahama.

10

The Bahamas ranked 77 of 183 countries in the Doing Business 2011 Report, down from 68 in 2010. The decline in ranking reflected lower rankings in all categories with the exception of ‘Enforcing Contracts”.

11

Key variables used in the exchange rate equations include the oil balance, the fiscal balance, net foreign assets, and income growth.

12

The central bank exercises regulatory and supervisory oversight of banks, trust companies, money transmission businesses and private trust companies.

13

An update assessment of the Bahamian financial system under the Financial Sector Assessment Program is scheduled in 2012.

14

The Bahamas Compliance Commission, a part of the jurisdiction’s anti-money laundering efforts, is a supervisory body for groups of professionals (e.g., lawyers, accountants) that hold funds on behalf of clients. It works closely with the Inspector of Financial and Corporate Service Providers, who regulates persons providing corporate management services.