The International Monetary Fund says in its newly released report on economic and fiscal activity in The Bahamas that the fiscal position has been “relatively week in recent years and that public debt has risen significantly.
“Although prospects for the tourism sector appear generally favorable, realizing the economy’s growth potential would require a strengthening of the fiscal stance over the medium term to place the debt-to-GDP ratio on a downward path,” said the final report of the recent IMF Article IV mission to The Bahamas.
“This fiscal strengthening should be supported by structural policies and private infrastructure investment that would help promote the diversification of the economy.”
Several directors also suggested that in light of the significantly adverse impact of hurricanes on the Bahamian economy, consideration could be given to establishing a system to improve disaster management.
Against this background, directors welcomed theﾠauthorities’ intention to lower the government debt-to-GDP ratio to 30 percent over the medium term, as well as their preparation of multi-year budget forecasts.
Nonetheless, in part to provide greater room for policy responses to adverse shocks, directors recommended a further strengthening of theﾠ2005/06 fiscal stance relative to the budget proposal and closer monitoring of budgetary developments to help ensure that the more stringent objective is achieved.
Directors suggested that both revenue and expenditure measures could be used to support fiscal tightening.
While welcoming the ongoing modernization of the customs administration, they noted that other revenue measures, such as adjustments to user fees, also would likely be needed.
Directors noted that a comprehensive tax reform, entailing the introduction of a VAT or sales tax and a lowering of import tariffs, would help sustain revenues and reduce the vulnerability of the economy to external shocks, while also facilitating the possible accession to the World Trade Organization (WTO) that the authorities are presently considering.
Notingﾠthe importance of adequate preparatory work for the introduction of a value added tax, directors welcomed the studies commissioned by the government on operational and other aspects of the proposed system.
On the expenditure side, directors emphasized the importance of containing public sector wages – which have risen significantly in recent years – for maintaining international competitiveness, especially in the tourism industry. Theyﾠalso recommended reducing and rationalizing transfers to public corporations.
Directors observed that the fixed exchange rate peg to the U.S.ﾠdollar has served the Bahamas well, and welcomed the authorities’ plans to strengthen the monetary policy framework in support of the exchange rate peg.
They considered that the development of a secondary market for government securities could provide a useful basis for developing more market-oriented instruments for effective central bank control over commercial bank liquidity.
Directors supported the authorities’ intention to relax exchange controls on capital transactions to improve the efficiency of the domestic financial sector.
However,ﾠthey cautioned that controls would need to be eased in a gradual and prudent manner, whileﾠkeeping prudential systems strong and international reserves at an adequate level, andﾠtherefore welcomed the authorities’ intention to proceed cautiously in this area.
Directorsﾠsupported the monetary authorities’ strategy of keeping international reserves at a level of at least the equivalent of base money, and stressed that the central bank should be prepared to withdraw some of the banks’ excess liquidity if such a step were needed to protect international reserves.
Directors commended the authorities on their implementation of recommendations in the Fund’s offshore financial center assessment report.
They encouraged the finalization of guidelines for overseas regulators that will permit the efficient exchange of information while meeting the need for confidentiality. They also welcomed the actions to strengthen the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework.
Directors encouraged the authorities to reinvigorate the privatization program with an appropriate regulatory framework. In particular, they recommended that opportunities to divest the state airline and public utilities be actively pursued, and that other public enterprises be managed on a commercial basis or be privatized.
Directors welcomed the authorities’ efforts to promote diversification of the economy, including the development of a National Information and Communications Framework to help promote e-commerce in the Bahamas.
They considered that these efforts will help foster a more broadly based growth and reduce the vulnerabilities arising from the high degree of dependence on the tourism sector.
Directors encouraged closer integration into the global economy through accession to the WTO, and emphasized that the multilateral trading system would provide the Bahamas with formal mechanisms to resolve trade differences.
They also welcomed the recent publication of revised national accounts statistics.
In addition, the team encouraged participation in the data module of the Report on Observance of Standards and Codes (ROSC) to help identify further steps to improve the quality of economic statistics.
The Bahama Journal
