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BAH | Oct 19, 2020

IMF projects Bahamas economy to shrink by 14.8%

/ Our Today

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The International Monetary Fund offices.

By Durrant Pate

The International Monetary Fund (IMF) is projecting that The Bahamas’ economy will shrink by 14.8 per cent this year before rebounding by 4.6 per cent in 2021.

In its just released World Economic Outlook for October 2020, the IMF has projected downgrades in some emerging and developing economies, with an outlook of a 5.4 per cent contraction in the Caribbean region’s real gross domestic product, which it notes will rebound in 2021 with 3.9 per cent growth.

The fund has also projected a 17.5 per cent contraction in account balances this year, which it expects to ease in 2021 when it projects an account balance contraction of 15.9 per cent and 7.7 per cent in 2025. Consumer prices in The Bahamas are projected to increase by 1.8 per cent this year and continue rising by 2.1 per cent in 2021.

“Most economies will experience lasting damage to supply potential, reflecting scars from the deep recession this year and the need for structural change.”

World Economic Outlook, October 2020: A Long and Difficult Ascent

The IMF has projected consumer prices will balloon by 2.2 per cent in 2025. Speaking to the impact of the COVID-19 pandemic on economies around the world, the IMF states that both advanced and emerging market economies are likely to register significant losses of output relative to their pre-pandemic forecasts.

In the report entitled World Economic Outlook, October 2020: A Long and Difficult Ascent, the IMF says “small states as well as tourism-dependent and commodities-based economies are in a particularly difficult spot. Most economies will experience lasting damage to supply potential, reflecting scars from the deep recession this year and the need for structural change.”

Sovereign debt levels are set to increase

According to the fund, “the persistent output losses imply a major setback to living standards relative to what was expected before the pandemic… . Moreover, sovereign debt levels are set to increase significantly, even as downgrades to potential output imply a smaller tax base that makes it harder to service the debt. On the plus side, the prospects of low interest rates over a longer period, alongside the projected rebound in growth in 2021, can help alleviate debt service burdens in many countries. To ensure that debt remains on a sustainable path over the medium term, governments may need to increase the progressivity of their taxes and ensure that corporations pay their fair share of taxes while eliminating wasteful spending.”

The IMF’s World Economic Outlook report.

The report cited that many countries already face difficult trade-offs between implementing measures to support near-term growth and avoiding a further build-up of debt that will be hard to service down the road. This, considering the COVID-19 crisis hit to potential output.

“Policies to support the economy in the near term should therefore be designed with an eye to guiding economies to paths of stronger, equitable, and resilient growth,” the IMF report noted.

Continuing, the report stated that tax and spending measures should privilege initiatives that can help lift potential output, ensure participatory growth that benefits all, and protect the vulnerable. The additional debt incurred to finance such endeavours, the IMF added, is more likely to pay for itself down the road by increasing the size of the economy and future tax base than if the borrowing were done to finance ill-targeted subsidies or wasteful current spending.

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