A Strong Rebound

The Bahamian economy has shown a remarkable recovery from Hurricane Dorian in 2019 and the Covid-19 pandemic. Economic activity and employment have returned to pre-pandemic levels, and inflation has decreased below pre-pandemic levels. Public finances are improving, and borrowing costs have declined. However, growth is expected to slow to its long-run potential of 1.5% due to capacity constraints in tourism. Headline inflation is projected to stabilize around 2%, barring global commodity price shocks.

Despite this progress, challenges remain. Income per capita continues to lag behind the U.S., and issues like high electricity costs, a shortage of skilled labor, and barriers to business growth persist. Government debt surged during the pandemic, and borrowing costs are still high. The Bahamas is also vulnerable to natural disasters and rising sea levels, necessitating investments in resilience and fiscal buffers to better handle climate-related shocks.

Fiscal Buffers and Risks

The fiscal deficit was reduced to 1.3% of GDP in FY24, driven by increased revenue and controlled spending. Central government debt fell to 78.8% of GDP, but reliance on central bank advances has increased. The government’s debt target of 50% of GDP by FY31 is ambitious, with the FY25 budget aiming for a fiscal balance of -0.5% of GDP and 2.8% in FY26. Improved tax administration and lower interest payments will help, but additional policy measures are needed to meet these targets.

The introduction of a 15% qualified domestic minimum top-up tax on large multinational corporations is expected to generate new revenue. Further measures, such as replacing the business license fee with a profits tax, introducing a personal income tax for top earners, and increasing the VAT rate, are necessary to support fiscal adjustment. These steps, along with supply-side reforms, will help achieve the debt target and build fiscal credibility while funding investments in education, social transfers, and climate-resilient infrastructure.

Liquidity Management and Financial Stability

Introducing new liquidity management tools and reducing central bank advances to the government would help decrease systemic liquidity. Enhancing liquidity forecasting and implementing tools such as interbank repos or 30-day Treasury Bills could better manage systemic liquidity in the long term. Lowering the statutory limit on central bank advances to the government and repaying the outstanding advances would absorb liquidity and bolster the credibility of the fixed exchange rate regime. Additionally, a well-defined “escape clause” could allow for a temporary increase in the limit on central bank advances during exceptional, emergency circumstances.

Systemic financial stability risks are moderate. The credit gap remains negative after several years of credit contraction, and both household and corporate leverage are at modest levels. Banks are well-capitalized, holding a fifth of their domestic assets in cash or reserves. However, their high exposure to public sector debt remains a significant vulnerability.

(Source: International Monetary Fund)