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BS | Dec 6, 2020

IMF paints grim immediate future for The Bahamas

/ Our Today

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The iconic Hilton Resort overlooking the Nassua waterfront in the Commonwealth of the Bahamas. (Photo: BlackPast.org)

Gov’t. debt to jump by over 85% as IMF recommends increase in property taxes and the imposition of income taxes

The International Monetary Fund (IMF) has painted a grim immediate future for The Bahamas at the conclusion of the Caribbean territory’s Article IV Mission with the fund.

The IMF has projected that The Bahamas debt will increase to over 85% of Gross Domestic Product (GDP) and recommended that the government increase real property taxes on higher valued residences as well as the introduction of income taxes. According to the IMF, “real GDP is projected to decline by 16.2% in 2020, followed by a modest rebound of 2% in 2021 and to converge back to its pre-pandemic level only by 2024.” 

The IMF stated that the current account balance is projected at a deficit of 17.4% of GDP in 2020 and will improve only gradually, consistent with the projected pick up in tourism in 2022. Foreign reserves reached a record level of $2.3 billion in October and based on the IMF projection should remain well above the minimum suggested threshold of three months of imports over the medium-term. 

Recommendation to phase out hurricane- and pandemic-related tax waivers

The IMF is recommending that the government phase out the broad set of hurricane- and pandemic-related tax waivers at the first legislative opportunity, as there are more effective and targeted measures to support the vulnerable.

Less than a year into the recovery efforts of Hurricane Dorian, the Bahamas was dealt another setback amid the coroanvirus pandemic—which has left the local economy reeling. (Photo: Salon.com)

This, as the IMF is of the belief that tax policy and administration measures are essential to a robust consolidation.

In its concluding statements at the end of its Article IV Mission, the IMF acknowledged that “The Bahamas has been hit hard by COVID-19. The pandemic will lead to a deep recession this year and it could take years for employment and incomes to return to pre-crisis levels.”

“The overarching policy priorities are to save lives, preserve livelihoods and mitigate scarring effects, while setting the stage for a robust recovery. This will require a package of near-term fiscal support, credible plans to secure fiscal and financial sustainability over the medium term, and structural reforms to enhance potential growth and resilience,” the mission team observed.

COVID-19 hit hard

The mission team highlighted in their report the two unprecedented shocks faced by The Bahamas in recent time. The fund focused most of its attention on the shock caused by COVID-19 and the effects of the second shock, which was Hurricane Dorian.

According to the IMF mission team, “the pandemic has exacted a significant human, social, and economic toll on The Bahamas.”

“The archipelago was just starting to recover from the severe damage caused by Hurricane Dorian in the fall of 2019, when the global outbreak of COVID-19 devastated its tourism-dependent economy. It has since become one of the hardest hit countries in the Caribbean, with over 7,500 infections and more than 160 deaths due to COVID-19,” the IMF mission team continued.

The Bahamas’ once-bustling tourism sector struggles to find its footing in the pandemic. (Photo: Oyster Hotel Reviews)

The IMF noted that the Bahamian government mounted a rapid emergency response to support the economy taking measures to sustain public health, protect the most vulnerable and cushion the impact of the pandemic on employment.

In addition, the government provided food assistance, doubling the duration of unemployment benefits, deferring tax payments for companies that retained at least 80 per cent of their workforce and extending loans to small- and medium-sized enterprises. 

These measures came on top of the recovery measures following Hurricane Dorian. As a result, and amid significant revenue shortfalls, the 2019/20 fiscal deficit increased to 6½ percent of GDP—about 5½ percentage points higher than budgeted and public debt increased to 69 percent of GDP. 

Ensuring that adequate reserves are available

The central bank meanwhile focused on ensuring adequate reserves and asked banks to extend loan moratoria to provide some relief to borrowers. Faced with large financing needs, the authorities requested IMF emergency assistance and on June 1, 2020. The IMF Executive Board approved access of 100 per cent of quota (SDR 182.4 million or about $250 million) under the Rapid Financing Instrument (RFI). 

The RFI provides financial assistance to countries whose public debt is assessed as sustainable, without the need to have a full-fledged program with conditionality in place.

In response to the fallout from the pandemic, the IMF has extended emergency financing to more than 75 countries, including many countries in the Caribbean region.

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