Context. Economic activity strengthened somewhat in 2014 while the external current account deficit worsened primarily as a result of Baha Mar construction-related imports. The authorities continue to make substantial progress on fiscal consolidation with successful VAT implementation in January 2015 setting the stage for continued improvements in the fiscal position. Lower oil prices helped keep inflation anchored in 2014. Still, notwithstanding the capital flow management (CFM) regime, international reserves remain low. Key policy advice: Despite the U.S. recovery and the imminent opening of the Baha Mar resort, the growth outlook remains well below pre-global crisis levels, and strong and timely measures should be implemented to strengthen competitiveness and raise potential growth. In addition, rebuilding fiscal and external buffers will be essential for sustaining macroeconomic stability: • Reigniting strong and inclusive medium-term growth. Structural reforms are needed to address longstanding competiveness issues including labor market impediments to growth. Energy sector reforms could substantially lower energy costs, boost productivity and facilitate economic diversification in the medium term. A diversification strategy should explore the potential for increasing value added in the tourism sector, including through deepening linkages with agriculture. • Rebuilding fiscal and external buffers. Notwithstanding the CFM regime, the fixed exchange rate peg constrains monetary policy, leaving fiscal policy as the main instrument for macroeconomic stabilization. Steadfast implementation of the VAT and expenditure rationalization in the context of a medium-term budgetary framework, together with public enterprise reforms, would help rebuild fiscal buffers and support international reserves. • Preserving financial sector stability. The pre-crisis credit boom has left the banking system with an overhang of non-performing loans, which will likely continue to generate headwinds for the economy. Despite this, the banking system remains very well capitalized and liquid. Measures should be put in place to resolve the debt overhang while further strengthening the regulatory and supervisory framework.

Abstract

Context. Economic activity strengthened somewhat in 2014 while the external current account deficit worsened primarily as a result of Baha Mar construction-related imports. The authorities continue to make substantial progress on fiscal consolidation with successful VAT implementation in January 2015 setting the stage for continued improvements in the fiscal position. Lower oil prices helped keep inflation anchored in 2014. Still, notwithstanding the capital flow management (CFM) regime, international reserves remain low. Key policy advice: Despite the U.S. recovery and the imminent opening of the Baha Mar resort, the growth outlook remains well below pre-global crisis levels, and strong and timely measures should be implemented to strengthen competitiveness and raise potential growth. In addition, rebuilding fiscal and external buffers will be essential for sustaining macroeconomic stability: • Reigniting strong and inclusive medium-term growth. Structural reforms are needed to address longstanding competiveness issues including labor market impediments to growth. Energy sector reforms could substantially lower energy costs, boost productivity and facilitate economic diversification in the medium term. A diversification strategy should explore the potential for increasing value added in the tourism sector, including through deepening linkages with agriculture. • Rebuilding fiscal and external buffers. Notwithstanding the CFM regime, the fixed exchange rate peg constrains monetary policy, leaving fiscal policy as the main instrument for macroeconomic stabilization. Steadfast implementation of the VAT and expenditure rationalization in the context of a medium-term budgetary framework, together with public enterprise reforms, would help rebuild fiscal buffers and support international reserves. • Preserving financial sector stability. The pre-crisis credit boom has left the banking system with an overhang of non-performing loans, which will likely continue to generate headwinds for the economy. Despite this, the banking system remains very well capitalized and liquid. Measures should be put in place to resolve the debt overhang while further strengthening the regulatory and supervisory framework.

Fund Relations

(As of March 31, 2015)

Membership Status:

Joined August 21, 1973; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans: None

Latest Financial Arrangements: None

Projected Payments to the Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Exchange Rate Arrangement:

The Bahamas has a conventional fixed peg arrangement, with the Bahamian dollar pegged to the U.S. dollar at B$1 per US$1. The Bahamas has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. There have been no changes in exchange restrictions since the last Article IV consultation.

Assessment of Data Adequacy for Surveillance:

Data provision is broadly adequate for surveillance. In particular, all critical macroeconomic data, including comprehensive central government finance statistics, are regularly published in the Central Bank of the Bahamas’ “Monthly Economic and Financial Developments” and “Quarterly Statistical Digest”. However, the authorities have yet to develop the institutional capacity for the compilation of international investment position (IIP) statistics and general government accounts data. Also, The Bahamas has still not started compiling balance of payments statistics consistent with the Balance of Payments Manual 6. The authorities have expressed interest in technical assistance in the latter two areas, and Fund is ready to provide assistance upon their formal request.

Last Article IV Consultation:

The Bahamas is on a 12-month consultation cycle. The last Article IV consultation was concluded by the Executive Board on January 17, 2014 on a lapse-of-time basis (IMF Country Report No. 14/75).

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Resident Representative: None

Financial Relations with the Inter-American Development Bank

Country Strategy with The Bahamas 2013–2017

Given the negative impact of the international economic crisis on economic growth, productivity and social cohesion in The Bahamas, the strategic intent of the current CS is to support Government of The Bahamas (GoBH) efforts to ensure macroeconomic sustainability, social stability and employment; and to increase resilience to the negative impacts of natural disasters and climate change. The Bank is supporting: (i) the implementation of fiscal and debt sustainability reforms in public sector finances and management; (ii) assisting with fostering social cohesion, with an emphasis on preventing crime and violence and strengthening the criminal justice system; (iii) assisting with modernizing the electricity subsector and diversify the energy matrix; (iv) facilitating diversification of both the economy and its trading partners by enhancing areas of comparative advantage and removing constraints to private sector activity; and (v) building resilience to natural disasters through improved coastal zone management, incorporating disaster risk reduction and climate change adaptation measures in development planning, control and monitoring. The Bank support focuses on the following priority areas: (1) Public Finances and Management; (2) Citizen Security and Justice; (3) Energy; (4) Private Sector Development; and (5) Coastal Risk Management and Climate Change Adaptation. Interventions in these areas will contribute to stemming the erosion of per capita incomes by protecting public investment space and promoting growth. Efforts are being made to generate non-sovereign guaranteed (NSG) lending that is closely aligned to the development and diversification of the private sector, as well as direct financing in alternative energy and energy efficiency. This is taking place in addition to seeking opportunistic interventions in sectors where IDB participation provides financial and non-financial additionality.

Other areas for future dialogue: In addition to the priority areas identified above, the Bank is supporting diagnostic and analytical activities in the following dialogue areas: (a) Education: The provision of quality education services: (i) via strengthening capacity at the secondary education level to improve transition from school to work, including potential areas for PPPs, and (ii) for special needs children and youth throughout all levels of the educational system also with an emphasis on the transition from school to work; (b) Food Security: The country depends almost entirely on imports for food. An analysis will be undertaken of the options for increasing the production and consumption of local food; (c) Transport: An analysis of (i) the potential impacts and opportunities that the completion of the Panama Canal will have for The Bahamas, (ii) how inter-island mobility could be made more efficient across the 28 inhabited islands; (iii) enhancing trade links with the rest of the Caribbean and Latin America; and (d) Informal Immigration: There are significant pockets of poverty that are often associated with the phenomenon of informal immigration. The profiles and needs of such areas will be assessed.

Active Loans as of April 30, 2015

(In millions of U.S. dollars)

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Net Flow of IADB Convertible Currencies

(In millions of U.S. dollars)

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Statistical Issues

Statistical data are broadly adequate for surveillance purposes, but some weaknesses remain in both coverage and timeliness, partly reflecting capacity constraints. The central bank produces annual, quarterly, and monthly reports on macroeconomic developments, and monetary and fiscal data, and is the main source of economic information. The operations of public corporations are not compiled into a consolidated set of public sector accounts, although their debt is included in the public debt data. Thus, a presentation of the general government accounts, including revenue, expenditure, and overall balance is not available.

In March 2015, the Department of Statistics (DoS) updated the CPI methodology with technical assistance from CARTAC. Using the results of the 2013 Household Expenditure Survey, it revised the CPI weights to 2013 from 2006 and changed the base period to November 2014 from February 2010. The coverage was expanded to include new local and foreign items reflecting current expenditures by households. New sample outlets were also introduced to reflect those that are frequently visited by Households.

The DoS continues to develop the Export-Import Price Indices (XMPIs) to meet international standards. CARTAC missions have assisted in compiling the XMPIs, including Tourism Services Price Index (TSPI) on quarterly basis. New XMPIs for goods and major services have been developed, while procedures for systematic re-sampling and re-weighting were modified in order to keep the market basket representative of what is being measured. The DoS is also receiving technical assistance from CARTAC to produce quarterly GDP estimates. A July 2014 mission assessed the quarterly volume estimates and noted that further work is needed for a few industries. It assisted in identifying suitable indicators for deriving quarterly current price estimates using the production approach.

The Bahamas does not prepare data covering the economy-wide external debt position, nor an international investment position (IIP), although they have stated their intention to do so. In August 2014, a CARTAC mission advised the authorities on the requirements for transitioning to Balance of Payments Manual 6 (BMP6) and disseminating statistics on the IIP. The mission noted that most of the conversion from BPM5 to BPM6 is straightforward and some of the data required, such as reserve assets and public sector debt, are already available. However, the authorities will need to collect new data on the nonbank private sector. The authorities are considering publishing BPM6 statistics in June 2015 and IIP statistics in September 2015.

The Inter-American Development Bank (IDB), with the technical support of the United States Census Bureau (USCB), has promoted the development of a methodology called “Tool for Assessing Statistical Capacity” (TASC). This is a self-assessment instrument, the general purpose of which is measuring and evaluating the statistical capacity of a country’s National Statistical System (NSS), and more specifically, the operational capacity of its National Statistical Office (NSO), to produce and disseminate basic statistics drawn from censuses, surveys and administrative records. There was a mission to The Bahamas to meet with the Department of Statistics and other agencies that produce statistics to apply the TASC in late November, 2013. As part of the statistical component of the IDB’s Public Financial Management reform program (PFM) with the government, the TASC assessment will be applied again to assess how things have evolved since 2013. This assessment is likely to be conducted in a few years once several of the key project activities under the PFM have been undertaken.

The Bahamas began participating in the General Data Dissemination System (GDDS) in 2003. Its metadata were posted on the Fund’s Dissemination Standards Bulletin Board on February 14, 2003.

The Bahamas: Table of Common Indicators Required for Surveillance

(As of April 30, 2015)

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).