IMF calls for interest rate rise, predicts unemployment rate decline

IMF calls for interest rate rise, predicts unemployment rate decline
The International Monetary Fund.

Lender suggests tax policy reform: VAT hike, corporate and personal income tax

NASSAU, BAHAMAS — The International Monetary Fund (IMF) has recommended that the Central Bank allow interest rates to rise to support the country’s exchange rate peg to the US dollar, while noting that the COVID-19 pandemic has enacted “a tragic human and social toll” that has significantly weakened public finances.

The Washington-based lender shared preliminary findings in its Staff Concluding Statement of the 2022 Article IV Mission released yesterday.

It projected that the country’s unemployment rate will continue to decline at 13.9 percent this year, and drop to 12.7 percent in 2023. The unemployment rate rose to 25.6 percent in 2020 during the COVID-19 pandemic, and fell to 18.1 percent last year.

Regarding its interest rate recommendation, the IMF said: The exchange rate peg to the U.S. dollar has served as an anchor of macroeconomic stability. It is recommended that the central bank allows interest rates to rise, as needed by market conditions, to support the currency peg without having to resort to a drawdown of international reserves.”

“If the market environment were to deteriorate markedly, consideration may need to be given to a temporary tightening of capital flow management measures,” the IMF continued.

“Further amendments to the 2020 Central Bank Act—including lowering the ceiling on credit to the government and restricting central bank purchases of securities issued by public corporations—would help safeguard the central bank’s institutional and financial autonomy and bolster confidence.”

The IMF noted that the country’s real GDP growth is estimated at around six percent this year, although a full recovery to pre-pandemic levels is not expected before end-2023. 

“Inflationary pressures are building in line with global developments and are expected to ease only gradually,” it read.

“Despite this, it will be important to allow higher international food and energy costs to pass through to domestic prices alongside targeted support to protect the poorest members of society. The tourism recovery is projected to narrow external imbalances over the medium term and thereby keep international reserves at adequate levels.”

The IMF noted that ongoing revenue enhancement efforts should be paired with a “well-calibrated tax policy reform”.

“Options include gradually bringing VAT rates close to the regional average of 15 percent, further limiting tax concessions, and increasing property tax rates on higher value residences,” the statement read.

“In addition, consideration could be given to corporate and personal income taxes for large businesses and high earners.”

The IMF warned that with about 40 percent of the population fully vaccinated, the emergence of new COVID-19 variants could prolong the pandemic and induce renewed economic disruptions.

“Alternatively, rising cases in source countries could dissuade travel and lead to a renewed decline in tourism. Higher food and oil prices, including because of the effects of the war in Ukraine, could erode consumer demand and impose a particularly heavy burden on the vulnerable.”

The IMF noted that there is a need for a greater emphasis on energy reforms and educational programs to improve the inclusion of young workers and the underemployed will raise growth potential. 

“The authorities are working with the ILO and employers to implement a national apprenticeship program to address skills gaps. Encouraging digitalization, streamlining administrative processes, closing data gaps, and publishing statistics in line with international standards will all improve the business climate.”