IMF: Real GDP to decline by 16.2 percent this year

IMF: Real GDP to decline by 16.2 percent this year
The International Monetary Fund

NASSAU, BAHAMAS — The International Monetary Fund (IMF) has recommended that the government postpone the achievement of its debt target of 50 percent of GDP by another two years in response to the COVID-19 pandemic, given the significant increase in public debt.

The IMF, in a concluding statement on the 2020 Article IV Mission yesterday, noted, “The withdrawal of fiscal support is expected to start next fiscal year as the various pandemic and hurricane-related measures phase out. Given the significant increase in public debt, postponing the achievement of the debt target by another two years in response to the pandemic would be appropriate. However, achieving the debt target of 50 percent of GDP by the beginning of the next decade will require significant additional fiscal effort compared to what is planned in the medium-term budget framework. It is advisable to start preparing measures now and communicate a timetable to implement them as soon as the pandemic-related uncertainty subsides.”

The IMF also noted that the pandemic is expected to lead to a deep recession in this year, driven by the sharp drop in tourism and necessary disease-containment measures.

“Real GDP is projected to decline by 16.2 percent in 2020, followed by a modest rebound of two percent in 2021, and to converge back to its pre-pandemic level only by 2024. The current account balance is projected at a deficit of 17.4 percent of GDP in 2020 and will improve only gradually, consistent with the projected pickup in tourism in 2022,” the IMF noted.

It further noted that the country’s foreign reserves reached a record level of $2.3 billion in October and should remain well above the minimum suggested threshold of three months of imports over the medium-term.

The IMF has again recommended that this nation introduce income tax. “Tax policy and administration measures are essential to a robust consolidation. Comprehensive real estate price indices would facilitate market-value-based property taxation, while the progressive features of the current system could be strengthened by increasing the rate on higher-value residences. Income taxation can help achieve a more equitable income distribution. In tax administration, the review and modernization of the Department of Inland Revenue’s organizational structure should be prioritized. For customs, priorities include establishing an effective exemption monitoring and verification unit, strengthening risk management and developing post-audit clearance capacity,” it noted.

The IMF noted that this nation would benefit from a “robust financing strategy”.

“Central government debt is projected to increase to over 85 percent of GDP this fiscal year. Financing needs will decline only gradually over the medium-term, resulting in elevated risks of debt distress. A robust, multi-year government financing strategy should also aim to support the overall foreign exchange position. The new debt management office within the Ministry of Finance should be fully operationalized without delay,” the IMF said.

The Fund has pointed out that this nation faces long-standing structural impediments which the COVID-19 pandemic has brought to the fore.

“Reform priorities, many of which are listed in the recent report by the Economic Recovery Committee, include modernizing administrative services and rationalizing regulatory requirements for starting a business; enhancing the operational efficiencies of utility SOEs; and reducing frictions in the job-matching process,” the IMF noted.

It added, “The prospect of more frequent natural disasters makes it paramount to further enhance resilience. The disaster relief fund, which was exhausted following Hurricane Dorian, should be gradually rebuilt. A proactive data exchange among relevant agencies can increase agility of social programs, while better targeting could broaden the reach of services. A mandatory insurance for all private properties, not just for those financed by mortgages, can help increase private sector resilience. To ease the socioeconomic burden, a means-tested subsidy for insurance premiums could be considered.”

The Ministry of Finance said in a statement yesterday that despite the human, social and economic toll of the two unprecedented shocks hitting The Bahamas in recent times, this nation continues to receive international recognition for its overarching policy priorities to save lives, preserve livelihoods and lay a solid foundation for a robust recovery.

“Further, the country’s ongoing commitment to implementing fiscally responsible plans continues to be recognized as critical components to enhancing growth and resilience. As expected, the significant toll of the COVID-19 pandemic dominated much of the IMF report, pointing to the fiscal deviations that resulted from the government’s rapid emergency response. While recognizing the government’s actions as ’timely’, the report reinforces the government’s own assessment of a prolonged recovery that will take time to restore employment levels and economic output to pre-crisis levels,” the Ministry of Finance noted.