Latest projection is for modest rebound of 2% in 2021

The International Monetary Fund (IMF) is projecting that The Bahamas economy contracted by 16.2 per cent in 2020, based on its latest Article IV consultations with the Bahamian government.

At the same time, the multilateral funding agency is predicting that the economy  will exhibit a modest rebound of two per cent in 2021 and should converge back to its pre-pandemic level only by 2024. In its assessment, which was completed on January 5, the IMF reported that unemployment for 2020 stands at 25.6 per cent while average inflation declined by 0.2 per cent.

According to the IMF Mission Team, “public debt is expected to jump to almost 90 per cent of gross domestic product  by 2021 and to remain more than 22 percentage points above its pre-pandemic level over the medium-term”.

The IMF reports that the local banking sector remains well capitalised, “but some banks and credit unions are vulnerable to pandemic induced risks, including an erosion of asset quality once loan moratoria expire with negative implications for profitability and capital adequacy”.

The assessment revealed that risks around the baseline in the banking sector are high, reflecting the uncertain evolution of the COVID-19 pandemic, noting The Bahamas’ vulnerability to natural disasters.

The IMF mission team observed that “the banking sector remains vulnerable to pandemic-induced risks. They urged the central bank to ask banks for regular loan portfolio reviews and risk assessments.”

IMF sympathises with loss of life, economic hardship caused by COVID-19

In their report, the mission team highlighted the importance of further developing macro-prudential tools and strengthening interagency coordination. The IMF expressed sympathy for the loss of life and economic hardship caused by the COVID-19 pandemic and commended the authorities for the timely measures to sustain public health, protect the vulnerable and cushion the impact of the pandemic on employment.

The IMF directors noted that “the recovery to pre-pandemic levels will likely take years and downside risks loom large, reflecting the uncertain evolution of the pandemic and The Bahamas’ vulnerability to natural disasters”.

They agreed that “the near-term priority is to save lives and livelihoods and postponing the achievement of the public debt target by another two years in response to the pandemic is appropriate”.

However, they made the point that putting debt on a clear downward path over the medium-term and rebuilding buffers will require significant fiscal effort.

The directors called for tax policy administration reforms and expenditure prioritisation to ensure a robust and equitable consolidation once the pandemic abates.

The IMF directors welcomed the central bank’s focus on reserve adequacy, emphasising that the COVID-19 related capital flow management measures are appropriate for now but should be phased out when the pandemic recedes. They recommended the establishment of an asset registry and real estate price index to reduce information asymmetries, which would also support financial inclusion.

IMF supports introduction of digital currency

The IMF directors supported the nationwide introduction of the central bank digital currency but pointed out that there are significant risks to financial intermediation, integrity, and cyber-security that require careful monitoring. They welcomed The Bahamas’ successful exit from the Financial Action Task Force list of jurisdictions under enhanced monitoring, but emphasised the criticality of continuous and effective AML/CFT implementation.

The directors underlined that The Bahamas faces long-standing structural impediments and vulnerability to natural disasters. They recommended modernising the business climate, rationalising state owned enterprises and reducing labour market frictions.

In concluding, the IMF directors called for gradually restoring the disaster relief fund, which was depleted following Hurricane Dorian, while improving the targeting of social programmes.