The Bahamas: 2020 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Bahamas

2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Bahamas


2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for The Bahamas

Pre-Covid-19: The Aftermath of Hurricane Dorian

1. The Bahamas entered 2020 still reeling from Hurricane Dorian, the strongest storm in its recent history. On September 2–3, 2019, Dorian made landfall in two islands, Grand Bahama and Abaco, causing substantial loss of life and severe damage, exceeding 25 percent of GDP. Cleanup and reconstruction were proceeding only slowly amid coordination difficulties and labor shortages.

The Economic Impact of Hurricane Dorian

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: UNECLAC and IDB (2019); and IMF staff estimates.

2. The hurricane required directing significant resources to recovery and reconstruction, leaving the country with limited fiscal space as it confronted the pandemic. The various tax exemptions, including on construction-related materials and services, and additional outlays on social protection and infrastructure amounted to about 6 percent of GDP over four years. As a result, the government activated the escape clause under the Fiscal Responsibility Act (FRA) and postponed the achievement of its targets—a fiscal deficit of 0.5 percent of GDP and public debt-to-GDP ratio of 50 percent—by four years, to fiscal years (FY, July 1-June 30) 2024/25 and 2028/29, respectively.

3. Over the past years, the authorities have undertaken important institutional reforms, but implementation has slowed following Dorian. The government established a rules-based fiscal policy framework and a fiscal council. Progress was also made regarding strategic deficiencies in the country’s regime to counter money laundering and terrorist financing. However, while several of the 2019 Financial Sector Stability Assessment Program (FSAP) recommendations were legislated, progress on various structural and fiscal reforms, including a review of the tax system and tax expenditures, has been slow (Annexes I and II).

The Covid-19 Shock: Impact and Policy Response

4. The pandemic has exacted a tragic human, economic, and social toll on The Bahamas. As of December 30, 2020, over 7,800 Bahamians have been infected and 170 have died due to COVID-19 (Annex VI). Tourist arrivals declined by 70.5 percent year-on-year in the first ten months of 2020 (Figure 1). The collapse in tourism, accounting for about 50 percent of GDP and 70 percent of employment, is estimated to have large-scale socio-economic effects, especially coupled with domestic containment measures. The National Insurance Board (NIB) accepted more than 47,000 unemployment benefit applications between April and September (about 20 percent of the workforce), and over 7,000 self-employed received government assistance.

Figure 1.
Figure 1.

The Bahamas: Real Sector Developments

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB, Google COVID-19 Mobility Reports, National Insurance Board, and IMF staff calculations.

New COVID Cases per 100,000 People

(7-day moving average)

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: Johns Hopkins University, Ministry of Health, and IMF staff calculations.

Socio-Economic Survey Results

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Source: Inter-American Development Bank Survey.

5. The current account fell back into deficit, following a small surplus in 2019. Net travel receipts were negative for the first time in the second quarter of 2020 (Figure 2). Exports contracted more than imports (35 percent vs. 17 percent) in the first three quarters relative to 2019, but the remainder of Hurricane Dorian related re-insurance receipts—about $400 million compared to $900 million in 2019—helped limit the current account deterioration. External foreign reserves reached an all-time high of $2.3 billion at the end of October, mostly thanks to government external borrowing.

Figure 2.
Figure 2.

The Bahamas: External Sector Developments

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB, IMF International Financial Statistics, and IMF staff calculations.

6. Fiscal policies appropriately shifted toward providing relief to the unemployed, vulnerable groups, small businesses, and the health sector. The government doubled the duration of existing unemployment benefits (UEB) to 26 weeks and provided income to the self-employed. It also allowed companies to defer tax payments if they retained at least 80 percent of their employees. The health sector received additional resources of $15 million. These measures were estimated at 1.2 percent of GDP for FY2019/20, but execution fell short given limited demand for some programs and implementation delays.

Text Table The Bahamas: Key Fiscal Policy Measures in Response to COVID-19

(In percent of GDP)

article image
Sources: Ministry of Finance and IMF staff calculations.

7. The 2019/20 fiscal deficit was more than 5 percentage points higher than planned. 2020Q2 year-on-year revenues halved, with value-added, custom, and departure taxes accounting for most of the shortfall (Figure 3). Overall, revenues were 20 percent lower than originally budgeted. COVID-19 also led to significant spending pressures, especially on subsidies and grants. However, the government cut spending on salaries and goods and services, maintaining total expenditure to GDP only 2½ percentage points higher than originally planned. With an overall deficit of about 6½ percent of GDP, public debt increased by 10 percentage points to 68.6 percent of GDP in FY2019/20.

Figure 3.
Figure 3.

The Bahamas: Fiscal Developments

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB, Ministry of Finance, and IMF staff calculations.

8. Faced with large financing needs, the authorities requested IMF emergency assistance. On June 1, the IMF Executive Board approved access of 100 percent of quota (SDR 182.4 million or about $250 million) under the Rapid Financing Instrument (RFI), accounting for about 40 percent of the additional financing needs for FY2019/20. The remainder was filled by other international financial institutions (IFIs), notably the IDB and Caribbean Development Bank (CDB), and domestic sources. The greater reliance on IFI financing came against the background of sovereign rating downgrades by Standard and Poor’s (in April and November) and Moody’s (June).

Public Debt and Ratings 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB, Moody’s and S&P.1/ General government debt and LT foreign currency sovereign rating.2/ Average of Moody’s and S&P.

9. The Central Bank of the Bahamas (CBOB) focused on protecting the one-to-one peg to the U.S. dollar, while maintaining the policy rate at a historically low level of 4 percent. Measures to ensure adequate liquidity in the foreign exchange market—designed for residents and not covering offshore banking sector transactions—included (i) suspending exchange control approvals for commercial banks’ dividends 1, (ii) providing more latitude to commercial banks to supply foreign exchange to the public before approaching the central bank to replenish such funds, (iii) suspending access to foreign exchange for international capital market and real estate investments; and (iv) requesting the NIB to repatriate some of its external assets (about $60 million).

10. The CBOB also asked domestic banks and credit unions to put in place loan moratoria. Starting in March 2020, the arrangement provided for a mandatory 3-month deferral against repayments on credit facilities negatively impacted by the pandemic and required the resumption of payments, with accrued interest, when borrowers’ financial circumstances improve. Some financial institutions announced credit support extending well beyond the 3-month period. The CBOB provided guidance that loans in good standing before the pandemic will not be reclassified because of the deferral. However, if at the end of the forbearance period loans are not performing, banks must reclassify them as needed. Banks have to report monthly on their loan portfolio. As of October, about 15 percent of loans were on deferral (compared to 37 percent in April).

11. The pandemic is starting to have an adverse impact on banks. Bank liquidity further improved during the third quarter, owing to accumulated net proceeds from the public sector’s external borrowing and the cautious lending posture of commercial banks (Figure 4). The average ratio of capital to risk-weighted assets also remained well above the regulatory minimum of 17 percent. 2 But credit quality indicators are starting to deteriorate, as some banks are phasing out loan deferral schemes, and overall profitability contracted due to the increase in loan loss provisioning.

Figure 4.
Figure 4.

The Bahamas: Financial Sector Developments

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB, S&P Global Market Intelligence, and IMF staff calculations.

Banks’ Income Statements

(Percent of average assets)

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Source: CBOB.

Outlook and Risks

12. Staff projects real GDP to fall by 16.2 percent in 2020. The contraction is mostly driven by the sharp drop in tourism, while the further downward revision to 2020 growth—from -12.5 percent in the June RFI request—reflects the impact of domestic containment measures (see Annex VI) on domestic demand. Tourist arrivals are expected to remain depressed in 2021 given the surge in COVID-19 cases in the main trading partners, including the U.S., as the country heads into its peak winter tourism season. As a result, real GDP is projected to grow only modestly by 2 percent in 2021, partly supported by a rebound in domestic construction activity. Consumer price inflation is expected to decline to 0.8 percent by end-2020 and pick up to 2.2 percent in 2021, in line with the global recovery.

13. It could take years for the economy to return to pre-pandemic levels. Empirical evidence confirms that even less contagious infectious diseases tend to have long-lasting adverse effects on tourism. 3 Furthermore, even assuming a steady recovery, potential scarring effects in the labor market and among businesses could keep potential output low for a prolonged period. Staff assumes that tourism will pick up significantly in 2022—consistent with the January 2021 World Economic Outlook Update assumption of broad vaccine availability in advanced countries by the summer of 2021—and then gradually returns to 2019 levels by 2024. Real GDP will accelerate to above 8 percent in 2022 and converge to the medium-term growth rate of 1.5 percent by 2026.

14. External imbalances will gradually decline over the medium-term. The current account deficit is projected at 17.4 percent in 2020, indicating an external position that is moderately weaker than suggested by fundamentals and desirable macroeconomic policies. Driven by a reduction in oil and tourism related imports, the improvement in the goods balance is partially offset by trade activity to support hurricane and tourism-related construction. In line with the rebound in tourism, the current account deficit is expected to gradually decline. Staff assesses the real effective exchange rate (REER) as moderately overvalued in the range of 6–9 percent (Annex III). Foreign reserves are projected to end 2020 above 2019 levels due to external borrowing, but face a net drawdown in 2021, owing to construction-related imports and the slow recovery of tourism receipts. Numerous FDI projects over the medium term should help reserves remain above three months of imports.

15. Risks around this baseline are large and skewed to the downside. The recent reopening to international tourism could lead to a resurgence of domestic COVID-19 cases, necessitating further lockdowns (Annex IV). Despite recent breakthroughs on vaccines, there may be delays in reaching widespread immunization, further postponing the tourism recovery. In such a scenario, growth, the current account, and fiscal position would all deteriorate, with implications for debt sustainability (Annex V). On the upside, faster distribution of vaccines or further breakthroughs on treatments could lessen the impact significantly. Finally, given climate change, the vulnerability to hurricanes is increasing, while the central bank digital currency poses potential cybersecurity risks. Managing these risks will require political consensus and vigilant policymaking ahead of the next general elections due by May 2022.

Authorities’ Views

16. The authorities broadly agreed with staff’s assessment of the outlook, but see upside risks to the forecasts. They have a lower growth projection for 2020 (-19 percent), but a higher forecast for 2021 (3 percent). The authorities agree that the recovery will likely be gradual, with real GDP back at pre-pandemic levels by 2024. Confident about the Bahamian tourism sector’s attractiveness given the close proximity to the U.S., they see risks as tilted to the upside and are hopeful that the recent reopening could result in a significant pickup in tourist arrivals over the next few months. The CBOB expects deflationary pressures to dissipate towards the end of 2020 and inflation to converge back to about 2.5 percent in 2021.

Text Figure The Bahamas: IMF Staff Baseline Projections

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: Central Bank of the Bahamas, IMF October 2020 WEO (for U.S.), and IMF staff projections.

Policy Discussions

17. Following two unprecedented shocks, The Bahamas faces the challenge of preserving lives and livelihoods, while laying the basis for a resilient recovery. The key near-term challenge is to deploy adequate resources to save lives, preserve livelihoods and mitigate scarring effects. Over the medium-term, fiscal and financial stability need to be preserved. Ideally, these plans would dovetail with addressing the long-standing challenges of low potential growth and vulnerability to natural disasters.

A. Fiscal Policy

Near-Term Policies

18. The FY2020/21 budget proposes a mix of spending and revenue measures to mitigate the impact of the pandemic. Revenue is projected to decline to 14.2 percent of GDP given the contraction, continuation of the tax deferral and credit programs, and VAT exemptions—for building supplies, personal protective equipment, and agricultural products. The COVID-19 spending measures have been extended, at least until end-2020, and the authorities plan several capital projects. Arrears clearance is proceeding, albeit with some delays. The government has so far settled about $240 million of the $360 million it committed to clear in a three-year period. Savings will come from a reduction in subventions to state owned enterprises (SOEs) of about 0.8 percent of GDP over the next four years and delayed salary increases until 2021. Nonetheless, expenditures are projected to increase to 26.7 percent of GDP, raising the deficit to 12.4 percent of GDP, and pushing up the debt-to-GDP ratio to almost 90 percent.

COVID-19 Budget Allocations and Estimates

(Percent of GDP, FY19/20–20/21)

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Source: Ministry of Finance.

19. The deficit will be financed by external and domestic debt issuance, as well as support from IFIs. Gross financing needs this fiscal year are estimated at about $2 billion (17.6 percent of GDP). In October and December, a total of US$825 million was issued externally, at an annual interest rate of 8.95 percent, and an average maturity of 11 years. The authorities also received US$225 million from the IDB and US$40 million from the CDB. They expect to borrow an additional US$150 million from the IDB, US$100 million from the World Bank Development Policy Operation, and up to US$75 million from international commercial banks under the World Bank Multilateral Investment Guarantee Agency (MIGA) framework by June 2021. The remaining financing needs of about US$600 million will be filled from domestic sources.

External Bond Yields 1/


Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Source: Bloomberg.1/ Year indicates date of maturity.

Text Table The Bahamas: FY2018/19–2019/20 Outturn and IMF Projection for 2020/21

(In percent of GDP)

article image
Sources: The Bahamian authorities; and IMF staff calculations.Note: Tax measures shown for COVID include deferrals, which are due at the end of the 2020 calendar year.

20. Staff welcomed the continued support to the domestic economy and the public health system. Providing income support and extended unemployment benefits to the affected population is critical. The government also secured resources for essential capital projects, including hospital and clinics, roads, and infrastructure rehabilitations, which will help support aggregate demand. These projects should be put through rigorous appraisal and selection processes. Staff cautioned against VAT exemptions, which erode the tax base and could create a competitive disadvantage (tax cascading) for local suppliers, and recommended that they are repealed at the first legislative opportunity and replaced with more direct and targeted measures to support the vulnerable.

21. Given limited fiscal space, the authorities should develop a detailed contingency plan. The Ministry of Finance has conducted a scenario analysis and identified potential measures, such as a sin tax on alcohol and tobacco, further recurrent spending cuts and delaying non-essential road and maintenance works. In line with staff advice to prioritize spending contingent on sufficient revenues, it has since tasked agencies to scale back recurrent and capital expenditures by $200 million for the remainder of the fiscal year. Clear communication between the Ministry of Finance, line ministries and agencies is critical to avoid accidental unfunded commitments.

22. There is scope to further enhance the effectiveness of social spending. Most social assistance programs are application based, and validation is difficult given limited digitization (Annex VII). As the country moves from the containment to the recovery phase, strengthening identification and monitoring of the vulnerable population should be prioritized, while systematic communication among relevant stakeholders needs to be established. In this regard, staff welcomed the planned pilot in New Providence of a means-tested social program starting in 2021. To minimize long-term scarring effects and raise human capital, the government could also temporarily expand existing vocational training programs for the young to the wider population. The Bahamas Technical and Vocational Institute (BTVI), an autonomous public entity, could be a platform for such programs.

23. Transparency and accountability of the emergency expenditure measures are key to facilitate verification and audit. The authorities are committed to publishing procurement contracts of COVID-19 related spending with beneficial ownership information on their website in the coming months and have started collecting the necessary information from the line ministries. The Auditor General (AG) will audit the FY2019/20 COVID-19 related expenses and revenue losses by March 2021. The AG will report on any irregularities and abuse and can recommend legal proceedings. Such efforts strengthen the public’s confidence in the government and ensure that spending is of high quality.

Policies for a Resilient Recovery

24. The fiscal targets under the FRA serve as an anchor, but credible and decisive fiscal measures will be needed to achieve them. Staff projects the various pandemic and hurricane-related measures to gradually phase out in FY2021/22 along with the recovery. 4 Staff supports the authorities’ intention—announced in the Fiscal Strategy Report in December—to postpone the achievement of the debt target by another two years to allow more gradual adjustment following the pandemic. To achieve the debt target by FY2030/31, staff recommended additional fiscal effort of about 3 percent of GDP over four years starting in FY2022/23, and a constant primary surplus of about 5 percent of GDP thereafter. To preserve credibility, the authorities should start preparing measures and communicate a timetable to implement them once the pandemic-related uncertainty subsides.

Text Figure The Bahamas: IMF Staff Fiscal Projections

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: Ministry of Finance and IMF staff calculations.

25. Tax policy reforms are essential to a robust and equitable fiscal consolidation. Without income taxation, The Bahamas relies on VAT, stamp duties, business license fees, and, to a lesser extent, property taxation. While there is scope to enhance revenues within the existing tax policy regime, staff also recommended building comprehensive real estate price indices to provide a basis for market-value-based property taxation and consider strengthening the progressive features of the current system by increasing the rate on higher value residences. Over the medium-term, income taxation can help achieve a more equitable income distribution. The government should also review its tax expenditures.

Text Figure The Bahamas: Government Revenues in The Bahamas and Region

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: Ministry of Finance and IMF staff calculations.1/ “Caribbean tourism countries” refers to the simple average of Antigua and Barbuda, Aruba, The Bahamas, Barbados, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.2/ Real property tax: Kelly, et al, 2011, “Conditions for Improving Property Tax in The Bahamas”, Inter-American Development Bank. Corporate tax: Deloitte, 2018, “Tax Strategy for The Bahamas as an International Financial Center”. The value refers to the average of Hong Kong, Singapore, Qatar, Panama, and Malta. Tax concessions: IMF Country Report No. 14/17,

26. Tax policy reforms need to be complemented by improvements in revenue administration. In tax administration, the government should (i) prioritize the review of the Department of Inland Revenue’s (DIR) organizational structure, completing the DIR bill and appropriate amendments to existing tax laws to support the integration of the departments, (ii) develop strategic and operational plans, focusing on results-based management, and (iii) modernize core administration functions. For customs, priorities include establishing an effective exemption monitoring and verification unit, strengthening risk management functions, and developing capacity in post-clearance audit (PCA), while establishing a trusted trader program (TTP) that gives defined benefits to program members.

27. Staff also recommended reallocating resources to enhance potential growth and strengthen resilience. Savings could be achieved through containing administrative costs, the share of which has nearly doubled in the last decade and reducing subsidies to state-owned enterprises (SOEs)—representing almost 16 percent of current expenditure last year—by increasing their operational efficiency. The planned comprehensive spending review, in consultation with the IDB, provides an opportunity to identify other areas for savings, and to develop a guiding framework to rank outlays by their medium-term growth effects and potential to enhance social cohesion and disaster resilience.

Real Government Expenditures

(Index, 2010 = 100; label is 19/20 FY in percent of GDP)

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB and IMF staff calculations.

28. Key structural fiscal reforms should be passed expeditiously to support debt sustainability.

  • Public Financial Management (PFM) reforms should continue to enhance fiscal discipline. Tabling the Public Procurement Bill in Parliament in June 2020 was an important first step. Modernization of procurement processes will eventually result in savings through more competition and transparency. The draft PFM Bill and Public Debt Management Bill will be submitted to Parliament in the next few months, and should be enacted as soon as possible. The Fiscal Responsibility Council should be fully operationalized without further delay.

  • Tax transparency efforts are showing first results, but there is scope to expand accountability initiatives to the wider public sector. The EU removed The Bahamas from its list of Non-Cooperative Jurisdictions for Tax Purposes in February 2020, highlighting efforts to improve information exchange and tackling harmful tax practices. Staff cautioned against potential abuse of the country’s economic permanent residency program, including opportunities for tax evasion, and welcomed the launch of a tax residency certificate by end-2020, which will provide access to financial accounts and income records according to OECD common reporting standards. Other parts of the public sector would benefit from similar efforts. For example, the National Insurance Board’s (NIB) annual report should be published in a timely manner. Publishing annual audits of public enterprises within a prescribed time-period would allow for a consolidated view of the public sector.

Authorities’ Views

29. The authorities broadly concurred with the fiscal challenges ahead. They remain committed to reaching the budgeted deficit target this fiscal year despite significant revenue shortfalls in the first quarter (a decline of about 45 percent compared to the same period last year). They are confident that, if needed, the various contingency measures could result in additional revenues and savings of up to $300 million. The Ministry of Finance has begun hosting quarterly meetings with line ministries to prevent unfunded commitments. The authorities view the various tax exemptions, including for construction-related materials on islands impacted by Hurricane Dorian, as essential to encourage reconstruction activity.

30. The authorities reiterated their commitment to fiscal discipline once the crisis subsides. Most of the COVID-19 measures have time limits and thus the fiscal balance should swiftly improve once the recovery sets in. They have also started discussing property and income tax policy reforms, and are seeking technical assistance from the international community, but acknowledge that implementation will take years. The findings of the expenditure review are expected by March 2021 and will feed into next year’s budget. The government hired an international accounting firm to review six SOEs as pilots. The initial report has been completed with recommendations on how to improve their corporate governance. Further restructuring/rationalization recommendations will be provided in 2021.

B. Monetary and Exchange Rate Policies

31. Monetary policy should continue focusing on reserve adequacy. Significant slack and limited inflation pressures suggest that there is some room to lower interest rates. However, the benefits of doing so have to be weighed against the potential erosion of international reserves (given the high import content of domestic consumption and potential implications for private capital flows) as well as structural bottlenecks in monetary transmission. On balance, staff recommended keeping interest rates on hold for now.

32. The pandemic-related foreign exchange measures are appropriate for now but should be phased out when the pandemic recedes. Some of the measures taken in spring are considered capital flow management measures (CFMs) under the IMF’s Institutional View (IV). The decision to provide more latitude to commercial banks to supply foreign exchange to the public is an easing of an inflow CFM, while the suspension of access to foreign exchange for investments and the NIB’s asset repatriation are assessed as a tightening of CFMs on outflows. A temporary tightening of CFMs under crisis conditions is appropriate, but they need to be closely monitored and removed as the pandemic recedes. The authorities should eventually resume advancing exchange control liberalization, especially in a small open economy with a large international financial center.

33. The transmission of policy rates to lending rates is limited. Credit bottlenecks associated with information asymmetry can be addressed by establishing an asset registry and real estate price index. Staff welcomed the ratification of the new central bank law, which, among others, limits lending to the government, and the listing of government debt on the Bahamas International Stock Exchange in July 2020, while stressing the need to further develop domestic debt markets, including by operationalizing the new debt management office within the Ministry of Finance.

Interest Rates


Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB and IMF staff calculations.

C. Financial Sector Policies

34. Staff recommended supporting economic activity while safeguarding financial stability. Loan moratoria, where considered useful for households and firms to weather liquidity shocks, should be targeted to those borrowers affected by the pandemic and phased out as the pandemic recedes, to promote transparency and sound risk management, and prevent moral hazard. The CBOB should provide guidance so banks’ estimates of expected credit losses are robust and timely, and ask for regular loan portfolio reviews and risk assessments by banks.

35. While the system overall remains well capitalized, there is some heterogeneity among banks. The commercial onshore banks can overall withstand a stress scenario in which the ratio of NPLs to gross loans increases by 15 percentage points, although some banks (representing about ¼ of system wide assets) could experience modest capital shortfalls. Some of the credit unions, which represent about 3 percent of total banking system assets, are heavily exposed to the tourism sector and may need to be resolved. Staff urged the CBOB to intensify oversight and ensure timely intervention. Once the crisis recedes, the CBOB should engage with banks to facilitate the effective work-out of NPLs so that they do not drag down credit growth.

Credit to the Private Sector

(Left axis, percent of GDP; right axis, percent))

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB and IMF staff calculations.

The Potential Impact of Macroeconomic Shocks on NPLs and Capital

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: CBOB and IMF staff calculations.Notes: Based on bank-level data for the 7 onshore commercial banks. The distribution and confidence intervals were generated using one million repetitions. They are based on an econometric model that simulates the statistical joint distribution of possible paths for real GDP growth, real interest rates and the real effective exchange rate based on historical shocks. See also IMF (2012), Bolivia Article IV. Scenarios 1 and 2 assume a 50 and 100 percent coverage ratio. NPLs are assumed to increase in the scenarios by 15 percentage points in line with the 95 percentile in the left chart.

36. The recent reforms of the crisis management framework are timely given that systemic risk will increase as a result of the pandemic. The 2020 Central Bank and Banks and Trust Companies (Amendment) Acts establish the CBOB as the sole resolution authority, require banks to prepare recovery plans, and provide additional resolution tools. The 2020 Protection of Depositors (Amendment) Act 2020 enhances the Deposit Insurance Fund’s (DIF) governance, reduces the time within which it must make payouts and provides access to credit unions. Effective implementation of these reforms will require adequate staffing at the CBOB and the DIF. While annual DIF premiums doubled to 0.1 percent of insured deposits, it will still take years to reach the 2019 FSAP recommended target ratio of 2 percent of insured deposits (about $125 million), given that the Fund only contained about $60 million in 2020. The FSAP had cautioned against expanding coverage to credit unions before the sector was adequately capitalized.

37. Strengthening systemic risk oversight would help maintain financial stability and improve financial inclusion. A macroprudential bank capital buffer will eventually be introduced as part of the Basel III reforms, the implementation of which has been delayed to 2022 as a result of COVID-19. The operationalization of the credit bureau within a year should improve financial inclusion and reduce the cost of borrowing. The collection of loan-level data would assist in market monitoring and future implementation of loan-to-value (LTV) and debt-to-income (DTI)-based lending standards. Interagency coordination on systemic matters should be improved, and the CBOB should have the authority to recommend regulatory policy for non-bank financial institutions. The CBOB should also improve data collection and its analytical capacity for assessing solvency and liquidity risks.

38. After strengthening the AML/CFT framework, the authorities now need to ensure its effective implementation. Good progress was made in completing action items agreed with the Financial Action Task Force (FATF) as a jurisdiction with strategic AML/CFT deficiencies, including enhancing international cooperation, initiating risk-based supervision of non-bank institutions, implementing the Beneficial Ownership Law and strengthening enforcement. In February 2020, the FATF made an initial determination that The Bahamas had largely completed its action plan, warranting a follow-up on-site assessment to support the country’s removal from the FATF’s Compliance Document (Grey List). However, as the visit was delayed due to COVID-19, The Bahamas was placed on the European Union’s ‘AML Blacklist’ in October 2020. The FATF completed its inspection in November and removed the Bahamas from its Grey List in December.

39. The CBOB officially launched the “Sand Dollar” digital currency (CBDC) to all residents on October 20. The Sand Dollar will allow previously unbanked parts of the population to participate in digital payments and enhance the payment system’s efficiency and resilience considering The Bahamas’ vulnerability to natural disasters (Annex VIII). While offering a promising route to boost financial inclusion, there are significant risks to financial intermediation, integrity, and cybersecurity associated with the Sand Dollar that require careful monitoring.

Authorities’ Views

40. The CBOB broadly agreed with staff’s assessment and pointed out a series of measures to ensure stability. It stressed that further monetary easing could deplete reserves, while reiterating its commitment to remove the foreign currency restrictions once the pandemic recedes. The CBOB recently announced that it will lift the suspension of exchange control approvals for bank dividends—introduced in consultation with the domestic commercial banks and directly impacting three of them—by March 2021. The impacted commercial banks are expected to resume accelerated repatriation over the medium-term. Depending on the state of the economy, the CBOB plans to require banks to increase loan loss provisioning gradually at an increasing scale. The CBOB agreed that DIF resources need to be stepped up but cautioned about moving too quickly given the negative implications for banks’ capital.

41. The CBOB highlighted the progress made on AML/CFT legislation and regulation. While the international sector will always be a potential risk, the CBOB believes that it has increasingly sound controls in place with continuous supervision and cross agency collaboration on AML/CFT matters. The authorities also reiterated that tremendous efforts had been made to address all concerns of the FATF—legislative, regulatory and enforcement landscapes have been thoroughly reviewed and strengthened.

42. The central bank emphasized the gradual approach of introducing the CBDC. It remains actively engaged with stakeholders to ensure that the legal framework develops in tandem with payments system needs. The CBOB stressed that the Sand Dollar is only for local use and will not affect the capital controls. Any cross-border foreign exchange payments will continue to be channeled through the commercial banks, the only authorized dealers for conversions in and out of B$ instruments.

D. Structural Challenges and Resilience-Building


43. The economy faces long-standing structural impediments, and COVID-19 brought many of these to the fore. Staff projects medium-term potential growth at just 1.5 percent, also considering the future impact of climate change. The recent report by the Economic Recovery Committee (ERC) outlines reform options to make the economy more resilient, inclusive, and sustainable, many of which are in line with longstanding staff advice.

  • Addressing key weaknesses in the business environment. Reforms should focus on modernizing administrative services and rationalizing regulatory requirements for starting a business. Establishing the Department of Transformation and Digitization (DTD) in November 2019 was an important first step, that will make major government services accessible on online platforms. The development of a National Digital Marketplace as an e-commerce platform could provide opportunities for small businesses. Reform of the corporate insolvency regime should also be treated as a priority. While the laws allow for liquidation, they do not provide a rehabilitative component towards the financial rescue and recovery of a company.

  • Improving competitiveness by reducing utility costs. Reforms to reduce costs should focus on reducing operational inefficiencies of SOEs, fostering an enabling regulatory environment and investing in cost-effective renewable energy solutions.

  • Reducing frictions in the job matching process. Policies should aim at expanding technical and vocational training programs and improving the quality of general education. Improving skill databases and job placement services could facilitate better job matching.

  • Promoting sustainable tourism. To protect The Bahamas’ natural beauty and curb carbon emissions related to mass-tourism, a greater focus on sustainable tourism is recommended.

  • Accelerating the agenda on Caribbean integration. As a member of the Caribbean Community (CARICOM), The Bahamas would benefit from greater economies of scale, under a firm commitment by all CARICOM members to improve channels of integration.

Unemployment Rate

(Percent of Labor Force)

Citation: IMF Staff Country Reports 2021, 024; 10.5089/9781513567839.002.A002

Sources: Department of Statistics and WDI.


44. High private sector losses from hurricanes point to the need to improve physical, financial, and social resilience against natural disasters. Accelerating adaptation will require improving public investment management and reprioritizing expenditure based on a multi-year macro-fiscal framework. Continued investment in climate-resilient infrastructure can also buffer the macro-fiscal impact of natural disasters. Mandatory property insurance would be a beneficial addition to the multidimensional resilience strategy (Annex IX).

45. Timely and reliable data form the basis for effective policymaking, especially when responding to exogenous shocks like natural disasters and global pandemics. Staff called for providing necessary resources to the Department of Statistics, and accelerating data management initiatives currently underway. Announcing and adhering to an advance release calendar would improve predictability. Other areas for improvement include the production of timely quarterly national accounts, a household survey, and more frequent labor market statistics. Staff acknowledged steps taken to improve external sector statistics through adherence to relevant BPM6 guidelines and develop international investment position statistics, both to be advanced in 2021.

Authorities’ Views

46. The authorities acknowledged the importance of structural reforms to achieve faster and inclusive growth. They concur with the recommendations laid out in the ERC report and are internally discussing an implementation timeline. They also agreed with staff’s recommendation for mandatory property insurance and pledged to bring a new law to parliament in 2021 to mitigate risks associated with natural disasters. They are preparing the final draft of the Statistics Bill for debate in Parliament, which will establish an independent statistical office with a comprehensive mandate to collect and disseminate data.

Staff Appraisal

47. COVID-19 has hit The Bahamas hard and it could take years for employment and incomes to return to pre-crisis levels. The authorities introduced timely measures to sustain public health, protect the most vulnerable and cushion the impact of the pandemic on employment. Nevertheless, real GDP is projected to contract by about 16 percent in 2020, followed by a modest rebound of 2 percent in 2021, and to converge back to pre-pandemic levels only by 2024. Risks around the baseline are high, reflecting the uncertain evolution of the pandemic, and the vulnerability to natural disasters.

48. The near-term priority is to save lives and livelihoods but maintaining stability will require significant fiscal effort over the medium term. While postponing the achievement of the public debt target by another two years in response to the pandemic is appropriate, putting debt on a clear downward path over the medium-term and rebuilding buffers will require decisive and credible fiscal measures. It is therefore advisable to start preparing measures now and communicate a timetable to implement them once the pandemic-related uncertainty subsides. As financing needs will decline only gradually, a robust, multi-year government financing strategy should be put in place and the new debt management office within the Ministry of Finance should be operationalized without delay.

49. Tax policy and administration measures are essential to a robust and equitable consolidation. Comprehensive real estate price indices would facilitate market-value-based property taxation, while the progressive features of the current system could be strengthened by increasing the rate on higher value residences. Income taxation can help achieve a more equitable income distribution. In tax administration, the review and modernization of the Department of Inland Revenue’s organizational structure should be prioritized. For customs, priorities include establishing an effective exemption monitoring and verification unit, strengthening risk management, and developing post-audit clearance capacity.

50. A reprioritization of public spending would promote inclusive and resilient medium-term growth. Savings could be achieved through containing administrative costs and improving the operational efficiency of SOEs. The planned comprehensive spending review should be used to identify areas offering scope for savings, and to develop a guiding framework to rank outlays by their medium-term effects on growth and resilience.

51. Monetary policy should continue focusing on reserve adequacy. The COVID-19 related capital flow management measures are appropriate for now but should be phased out when the pandemic recedes. The new central bank law, which limits lending to the government, and the listing of government debt on the Bahamas International Stock Exchange in July 2020, will help strengthen domestic debt markets. Establishing an asset registry and real estate price index would reduce information asymmetries.

52. The banking sector remains vulnerable to pandemic-induced risks. Lower incomes and higher unemployment will weigh on asset quality as loan moratoria expire. The central bank should provide guidance to banks to ensure their estimates of expected credit losses are robust and ask for regular loan portfolio reviews and risk assessments. The recent reforms of the crisis management framework are timely, but their effective implementation, including by ensuring adequate staffing at the central bank, remains key. Going forward, further developing some macroprudential tools and strengthening interagency coordination will be essential to enhance financial sector stability.

53. The “Sand Dollar” can help foster financial inclusion, but effective implementation of the strengthened AML/CFT framework remains key. The CBDC may allow previously unbanked parts of the population to participate in digital payments and enhance payment infrastructure resilience to natural disasters. However, there are significant risks to financial intermediation, integrity, and cybersecurity that require careful monitoring. To this end, the effective implementation of the country’s AML/CFT framework and tax transparency efforts will be critical.

54. The Bahamas faces long-standing structural impediments and significant vulnerability to natural disasters. Reform priorities include modernizing the business climate, rationalizing SOEs, and reducing frictions in the labor market. The disaster relief fund—exhausted following Hurricane Dorian—should be gradually restored, while better data collection and management can help improve agility and targeting of social programs. The Bahamas would benefit from mandatory property insurance with a means-tested subsidy for premiums for all private properties.

55. It is recommended that the next Article IV consultation takes place on the regular 12-month cycle.

Table 1.

The Bahamas: Selected Social and Economic Indicators, 2018–26

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

The Department of Statistics revised the 2013–2018 National Accounts data to provide a more accurate measure of GDP. These revisions incorporated new data sources and recommended methodological changes.

The data refer to fiscal years ending on June 30.

Net International Reserves.

Table 2a.

The Bahamas: Operations of the Central Government, FY2018–26

(In millions of Bahamian dollars)

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Sources: Ministry of Finance; and Fund staff projections.

Fiscal year ends June 30.

Excludes payment arrears and promissory notes for the resolution of Bank of The Bahamas.

Table 2b.

The Bahamas: Operations of the Central Government, FY2018–26

(In percent of GDP)

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Sources: Ministry of Finance; and IMF staff projections.

Fiscal year ends June 30.

Excludes payment arrears and promissory notes for the resolution of Bank of The Bahamas.

Table 3.

The Bahamas: Balance of Payments, 2018–26

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Sources: Central Bank of The Bahamas; Department of Statistics; and IMF staff projections.

Includes errors and omissions.

Table 4.

The Bahamas: Summary Accounts of the Central Bank and the Financial System, 2018–26

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

Under the assumption that reserves are used to sterilize the monetary impact of government drawing down on its deposits at the central bank.