By Gerrino J. Saunders

Journal Staff Writer 

While the International Monetary Fund (IMF) points out The Bahamas’ “remarkable recovery” in moving from crisis to growth following Hurricane Dorian and the Covid-19 Pandemic, it is also recommending some very specific actions the government should take to help meet its debt target of 50 percent of GDP by the fiscal year 2031. 

The IMF report actually began by acknowledging the exceptional recovery following two major events that stifled development like Dorian and the pandemic.

It said, “activity and employment have recovered to their pre-pandemic levels and inflation has fallen back below pre-pandemic levels. Public finances are improving and borrowing costs have declined. “

“Over the medium-term, growth is expected to slow to its long-run potential of 1.5 percent as capacity constraints in tourism become more binding. Barring global commodity price shocks, headline inflation is expected to converge to around two percent,” it said.

There is no doubt Prime Minister Davis and members of his government will use this unforeseen sort of endorsement by the IMF to help in their ongoing battle with the Official Opposition Free National Movement (FNM) that has hammered and lambasted the government for its inability to make life more safe and easier for the average Bahamian to make ends meet.  

The report said the government’s debt target of 50 percent of GDP by fiscal year 2031 provides a “useful anchor” for policy.   

The reports suggested that with the fiscal year 2025 budget targeting an overall fiscal balance of 0.5 percent of GDP and 2.8 percent of GDP in fiscal year 2026, along with improved tax administration and lower interest payments will get the government to a fiscal position that will place them on a path to reach its 2031 targets.  

However, the report also said in the absence of “additional policy measures”, revenues are likely to underperform and the fiscal balance will be smaller than assumed in the government’s forecast (especially in fiscal year 2026, putting the debt target out of reach for the fiscal year 2031.

Among the IMF recommendations to achieve the 22031 target is an increase in the value-added tax (VAT) rate from 10 percent to 15 percent, the introduction of personal income tax for top earners, replacing the business license fee with a 15 percent profits tax on large domestic firms; eliminating the ceiling on the property tax; reducing tax expenditures; raising water rates for heavy users and ensuring the collection of patient fees within the Public Hospitals Authority.

The recommendations did not stop there. The IMF said proposed reforms to civil service pensions should be supplemented with more holistic changes to both the civil service and National Insurance Board (NIB) pension systems.

As for NIB, the IMF proposed introducing a contribution for new hires, increasing the mandatory retirement age, and eliminating the possibility of early retirement at age 55.

The IMF said, “these are constructive changes that will lessen the actuarial imbalance of the civil service pension system.  However, additional steps are needed to harmonize the two systems including gradually raising the contribution rate for the NIB, aligning the minimum retirement age between the NIB and the civil service systems, and indexing the retirement age to life expectancy for both systems.”

Although there were close to a dozen recommendations by the IMF the idea of increasing VAT to 15 percent was the first to be rebuffed by the Davis administration.  

The statement released by the Office of the Prime Minister hours following the release of the IMF report noted that the recommendations made by the IMF are consistent with those made to previous administrations.

However, it said, “just as we (Davis administration) did not follow the 2021 recommendation to raise VAT to 15%, we have no intention of raising VAT. The global inflation crisis has led to higher prices in our country, adding to cost-of-living burdens for Bahamians.”

The OPM reminded that the Davis administration entered government at the end of 2021 at a time of “profound crisis, yet, the government moved immediately to end harmful policies, offer relief to Bahamian families, stabilize the nation’s finances, and boost economic growth.”

According to the Office of the Prime Minister, while there is much more work ahead, many more Bahamians are now working, and inflation is now below pre-pandemic levels.  Public finances are improving, borrowing costs are declining, and the nation is on a stronger, more sustainable path forward.

The OPM also noted that the Davis administration is implementing the nation’s first comprehensive energy reforms, including the first utility-scale solar farms, to reduce prices for homes and businesses and to strengthen the electricity grid. 

It said, “lower electricity prices and stable electricity supply are essential to supporting further economic growth and to encouraging investment by a new generation of Bahamian entrepreneurs. This administration will continue to implement reforms and deliver progress.” 

On a more cautious side the IMF report went on to say long-standing challenges and risks remain and that the country needs to restore fiscal buffers. 

The IMF report noted that income per capita continues to diverge from that in the U.S.  At the same time, expensive electricity, a shortage of skilled labor, and obstacles to business formation and expansion continue to weigh on growth. 

It said as in many other countries, government debt-GDP jumped during the pandemic and borrowing costs remain uncomfortably high. 

The IMF reminded that the “archipelago (The Bahamas) is also highly susceptible to natural disasters and rising sea levels, both of which argue for increased investments in resilience and building fiscal buffers so as to better respond to climate-related shocks.”

This is something the Davis administration has been fighting for at high level meetings of global leaders like at the recent COP-29 meeting in Baku, Azerbaijan and at the United Nations General Assembly in New York.  

The IMF report also spoke of an “upside risk” which includes, the execution of announced infrastructure and hotel construction projects and a higher-than-expected boost from an expansion of short-term rentals.  

According to the IMF the main downsides for The Bahamas stems from “large public debt rollover needs and the ever-present risk of natural disasters.”

The IMF said it came to its conclusions following an official staff visit (mission) to The Bahamas.  It is something they do annually in the context of a request to use IMF resources or borrow from the IMF.