Public Information Notice No. 98/22

Press Information Notice: IMF Concludes Article IV Consultation with The Bahamas

March 31, 1998

The IMF Executive Board on March 13, 1998 concluded the 1997 Article IV consultation¹ with The Bahamas.

Background

Since 1995, the Bahamian economy has experienced a marked recovery based on prudent financial policies, stepped up private investment—mainly in the tourism and shipping sectors— and continued growth in financial and other services. Real GDP growth went up from less than 1 percent a year in 1994–95 to around 4 percent in 1996 as increased hotel capacity and the pickup in consumer demand in the United States led to higher tourist expenditure. The recovery was also boosted by foreign investment in a large ship repair and transshipment terminal, steady growth in financial services, and a pickup in residential construction. The pace of the recovery is estimated to have moderated to about 3 percent in 1997 as a reduction in hotel capacity due to ongoing construction and refurbishment led to a slowdown in the growth of tourist expenditure.

In line with the increase in economic activity, the unemployment rate declined from more than 13 percent in 1993–94 to less than 10 percent in 1997. Inflation remains in the low single digits, reflecting the fixed parity of the currency with the U.S. dollar, the openness of the economy, and cautious financial policies. The rate of price increase declined from 1.1 percent during 1996 to less than 1 percent during 1997.

The overall position of the nonfinancial public sector shifted from near balance in 1995 to a deficit of 1.4 percent of GDP in 1996 mainly because of higher spending on infrastructure projects. Spending on infrastructure continued to increase in 1997, and indicators point to a further widening in the overall deficit to over 3 percent of GDP in that year. The deficits in 1996–97 were financed mainly through the issue of bonds to the domestic private sector.

Liquidity in the banking system remained largely unchanged in the twelve months ended September 1997 as the growth in private sector deposits was matched by credit expansion to the private sector. During this period there was little movement in interest rates on commercial bank deposits and loans, and the treasury bill rate fell slightly to 4.2 percent. The authorities have engaged in open market operations to maintain credit conditions consistent with maintenance of the fixed exchange rate peg with the U.S. dollar. In the area of bank supervision, the authorities’ recent efforts have focused on ensuring compliance with the prudential and accounting standards established by the Base Committee; they have also taken steps to establish a deposit insurance scheme.

The external current account deficit widened from 4 percent of GDP in 1995 to about 9 percent in 1997 as imports related to the construction of tourist facilities rose sharply. The deficit was financed mainly by private, long-term capital inflows, the international reserves of the central bank increased from US$163 million in December 1996 to US$218 million in December 1997. At end-1997 the stock of public sector external debt stood at 8.5 percent of GDP, and the ratio of public sector debt service to exports of goods and services at 5.5 percent.

The authorities have made progress in the area of structural reform. Regarding privatization, all but one of the major hotels have been sold, the government has reduced further its holdings in a commercial bank, and the partial divestment of the telecommunications company is proceeding. In the financial sector, a legal framework for the operation of trusts and mutual funds has been established, legislation authorizing the establishment of a stock market as well as a regulatory framework for the securities industry is expected to be approved shortly, and work has been initiated on updating regulations for pension schemes and insurance companies. Legislation was enacted in December 1996 aimed at making it a crime to launder the proceeds of any criminal activity, and the authorities intend to adopt the disclosure standards of The Offshore Group of Banking Supervisors, which call for banks to provide information on the use of funds when there is reasonable suspicion of criminal activity.

Executive Board Assessment

Executive Directors commended the authorities for the pursuit of sound macroeconomic policies that had been successful in preserving price stability, increasing investor confidence, and attracting significant flows of private investment. As a result of these policies, real GDP growth had picked up and is now more broad based, inflation remained low, unemployment continued to decline, and social indicators remained favorable.

Directors observed that sustaining the recovery over the medium term would require maintaining prudent financial policies. They noted that the restrained fiscal stance of earlier years had given way to a weakening of the government finances in Fiscal Year 1996/97, and they stressed the importance of restoring a tight fiscal stance.

Noting the lack of buoyancy in revenues in recent years, Directors welcomed the ongoing review of revenue performance. They pointed out that it was essential to broaden the tax base by reducing tax concessions and exemptions and to strengthen tax administration. On the expenditure side, Directors recommended containing the size of the wage bill and outlays on goods and services through phasing out the current system of uniform across-the-board pay increases and placing greater reliance on performance-based pay.

Directors stressed that wage restraint in the public sector, supported by improved education and training to increase labor skills, and greater flexibility in labor arrangements, would help maintain competitiveness in tourism and other sectors over the medium term.

Directors welcomed the authorities' commitment to pursue a monetary policy consistent with the fixed exchange regime, which they considered is serving the authorities well. Directors commended the authorities for their efforts to meet international standards of bank supervision and their prompt and effective response to the recent failure of a small domestic bank. They urged that the planned review of supervisory practices be carried out promptly, and that the capacity for the on-site inspection of banks be developed.

Directors noted that the large external current account deficit in 1997 was financed mainly by direct investment and other long-term private capital inflows, and urged the authorities to monitor external developments carefully.