The International Monetary Fund (IMF) says the Bahamas is experiencing a tourism-led rebound and the economy grew nearly 14% last year, with net tourism receipts tripling from 2020.
“The strong recovery is expected to continue into 2022, with real GDP growth projected at 8%. The war in Ukraine, which adds considerable uncertainty to the outlook, is expected to affect the Bahamas primarily through higher commodity prices,” the IMF said, adding that it expects average inflation to rise to 6 .75% in 2022 and only gradually decreasing as supply chain constraints ease.
The Washington-based financial institution said the coronavirus (Covid-19) pandemic has aggravated medium-term growth challenges and public finances have deteriorated.
“Young people have experienced significant learning losses and employment will take time to recover. Additionally, the pandemic could have lasting effects on travel, technological change and climate risk. »
He said the Phillip Davis administration has pledged to ease spending through tax cuts and increased investment and education spending. However, with public debt close to 100% of GDP and high financing costs, room for maneuver is limited.
The IMF said the government was looking to rebuild fiscal buffers over the medium term, noting that the budget deficit is expected to be halved this year, to around 6.75% of GDP.
The authorities plan to achieve a medium-term fiscal surplus of 1.5 percent of GDP, mainly through improvements in tax collection to bring public debt down to the 50 percent target over the next ten years. The Central Bank of the Bahamas continues to focus on preserving the US dollar peg and phased out pandemic-related capital flow management measures last year.
The IMF said the banking sector had strong capital positions and the expiration of pandemic-related loan moratoriums had led to only a small increase in non-performing loans. The current account deficit improved to 19.7% in 2021, in line with the recovery in tourism, but is expected to remain high in the near term given import price pressures.
International reserves remain at a comfortable level, boosted by the IMF’s new General Special Drawing Rights (SDR) allocation last year.
IMF executive directors endorsed the direction of the Article IV consultation, welcoming the “strong economic rebound”, supported by the authorities’ decisive policy response and the recovery of tourism.
But they warned that downside risks to growth persist, including from mounting inflationary pressures and pandemic-related uncertainty and, in this context, stressed the need to safeguard the recovery, preserve debt sustainability and promote sustainable, inclusive and diversified growth.
They also stressed the importance of rebuilding reserves and ensuring debt sustainability in the context of a medium-term fiscal consolidation plan.
They said that since significant financing needs are likely to persist, Nassau is encouraged to implement a stronger debt management strategy, while welcoming the authorities’ efforts to improve revenue administration.
The IMF has highlighted the need for significant tax reform and rationalization of expenditure to create space for health, education and investment spending, as well as targeted support for the most vulnerable. Public enterprise and pension reforms as well as improvements in budget transparency and accountability would be important steps to help build credibility.