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IMF expresses some concerns for Bahamas economy

CMC,

Added 02 July 2019

imf

International Monetary Fund (GP)

WASHIGTON – The International Monetary Fund (IMF) says while it welcomes the strengthening economic activity and the prospect of continued growth in the Bahamas, it is still concerned at the high unemployment rate, rising public debt and risks associated with external imbalances.

The Washington based financial institution has since underscored the need for the Hubert Minnis administration to rebuild policy buffers, safeguard financial stability and further enhance resilience to natural disasters.

The IMF is projecting that economic growth will be 1.8 per cent this year before converging to its potential of 1½ per cent in the medium term.

It said the increase in inflation is projected to have been temporary.

“Domestic bottlenecks and lagging economic diversification constrain medium-term growth, and unemployment is projected to decline only gradually. External accounts are expected to strengthen over the medium-term, backed by high tourism receipts, fiscal consolidation and lower oil prices, and the current account deficit is projected to converge to five per cent of real gross domestic product (GDP).

The IMF noted that real GDP expanded by 1.6 per cent in 2018, up from 0.1 per cent the previous year.

It said that economic activity was supported by tourism, while foreign investment projects continued to provide the impetus for construction sector activity. The consumer price index (CPI) increased by 2.2 per cent on average in 2018 due mainly to the Value Added Tax (VAT) rate increase from 7.5 to 12 per cent in July last year.

Unemployment remains high, at 10.7 per cent in November 2018, as employment creation has lagged labour force growth. The current account deficit widened to 16.4 per cent of GDP in 2018, reflecting higher oil prices and imports associated with the conclusion of a large foreign direct investment (FDI) project.

The budget deficit narrowed to 3.4 per cent of GDP in the financial year 2017-18 down from 5.5 per cent a year earlier. Central government debt increased to 63.3 per cent of GDP in the same period from 54.4 per cent in the previous financial year.

The IMF noted that the banking system is well capitalised, but credit to the private sector continued to contract in 2018, even if at a more moderate rate. Banks have improved their balance sheet quality and average non-performing loans (NPLs) declined from its peak of 15.4 per cent in 2013 to 9.1 per cent in 2018. The financial system is resilient to current stability threats.

The IMF is projecting that economic growth will be 1.8 per cent this year before converging to its potential of 1½ per cent in the medium term.

It said the increase in inflation is projected to have been temporary.

“Domestic bottlenecks and lagging economic diversification constrain medium-term growth, and unemployment is projected to decline only gradually. External accounts are expected to strengthen over the medium-term, backed by high tourism receipts, fiscal consolidation and lower oil prices, and the current account deficit is projected to converge to five per cent of GDP.

But the IMF said that while it welcomed the strengthening economic activity and the prospect of continued growth, underpinned by prudent policies and comprehensive structural reforms, at the same time, it noted the still high unemployment rate, rising public debt, and risks associated with external imbalances.

It also welcomed the decisive steps to consolidate the fiscal position and the authorities’ commitment to fiscal sustainability and macro-financial stability.

The Washington-based financial institution said it “particularly welcomed the enactment of the Fiscal Responsibility Law, noting that its effective implementation would bolster policy credibility and ensure durable gains from fiscal consolidation”.

It encouraged steps to further strengthen public financial management systems, tighten expenditure control, and operationalize the fiscal council as planned and “also saw value in a comprehensive review of the tax regime to enhance its efficiency and progressivity, including by reducing distortions and other preferential treatment”.

The IMF stressed the importance of advancing structural reforms to boost competitiveness and unlock the economy’s potential for high and inclusive growth. In view of the planned accession to the World Trade Organisation (WTO) and recommended prioritising reforms that tackle high energy costs, improve access to credit, and address skill mismatches in the labour market.

“Lowering the cost of doing business would help attract needed foreign direct investment,” it added. (CMC)

IMF expresses some concerns for Bahamas economy

 

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