By NEIL HARTNELL
Tribune Business Editor
The International Monetary Fund (IMF) yesterday upped the average five-year GDP growth rate that the Bahamas needs to both absorb new workforce entrants, and slash the existing jobless rate in half, from 5 per cent to 7 per cent as it urged this nation to rapidly tackle “structural impediments”.
The Fund, in its full Article IV report, painted a bleak picture of the Bahamas’ prospects to make a major dent in the current 15.7 per cent unemployment rate in the short-term - in a report that was completed a full month before the Baha Mar crisis erupted.
The two percentage point increase in the 2013-2018 average growth rate target places near-term hopes of achieving a major unemployment cut even further out of reach, given that the IMF is projecting that Bahamian GDP will expand by 1.8 per cent and 2.8 per cent, respectively, in 2015 and 2016.
These growth rates are less than 50 per cent of what the IMF says is necessary, with the Article IV revealing that St Lucia is the only Caribbean nation requiring a greater economic expansion to achieve the same objectives.
“Growth is expected to strengthen over 2015–16 with the improvement in US activity and the opening of Baha Mar [report written prior to the crisis], but significant structural impediments remain,” the IMF warned.
“Staff estimates potential GDP growth at about 1.5 per cent over the medium term, insufficient to generate a significant reduction in the unemployment rate.
“Structural impediments, including in the labour market and the energy sector, imply that significantly higher growth than currently projected will be required to absorb new entrants into the labour force and reduce the unemployment rate to single digits over the medium term.”
The IMF now estimates that a 4 per cent average growth rate over the next four years will be required to just absorb the 3,000-4,000 high school leavers that enter the workforce every summer.
Current projected growth rates place the Bahamas well short of that objective, too, even if Baha Mar had opened as scheduled.
Put simply, the IMF’s increased 7 per cent estimate for a growth rate that will both absorb new workforce entrants and cut the existing jobless rate in half reiterates that the Bahamian economy is not expanding fast enough to cater to a growing population and provide jobs for all those wanting to work.
This represents arguably the greatest policy challenge for the current and future governments, and the IMF report indicates far-reaching structural reforms are required to both achieve this goal and enhance the Bahamian economy’s competitiveness.
“Labour market rigidities constrain the potential supply of labour in the medium term,” the IMF said. “Persistently high unemployment rates suggest the presence of wage rigidities, while business surveys cite a lack of skilled labour as an important constraint to growth.
“Persistently high unemployment underscores the need for policies to promote more inclusive growth.... Since the onset of the global financial crisis, the unemployment rate has remained in double digits mostly due to depressed domestic demand and exports, and may have contributed to the recent rise in crime rates.
“There is evidence of significant structural unemployment, which suggests the existence of impediments to job creation and proper functioning of the labour market. Evidence points to skills mismatches, which partly reflects deficiencies in the education system and migration of skilled labour,” the Fund added.
“At the same time, according to the private sector, efforts to hire foreign labour to fill skill shortages are occasionally hampered by difficulties in securing work permits. Moreover, the job content of growth appears relatively low and is compounded by low productivity and high real wages.”
Digging into the subject more deeply, the IMF said Bahamian unemployment appeared “significantly structural”, blaming this on a “dysfunctional education system” and the increasing tendency of skilled workers to seek jobs abroad.
Its Article IV report added: “A relatively low job content of growth is compounded by low productivity and high real wages.
“A recent IMF study estimates growth–employment elasticity to average 0.5 percent for the Bahamas. This implies that without structural reforms, higher than currently projected real GDP growth will be needed over the medium term to absorb new entrants to the labour force, and to significantly reduce unemployment from its current high level.
“Moreover, despite a relatively high labour force participation rate, 73 percent in 2014, labour productivity, for the most part, has not kept pace with real wage growth in the last decade.”
The IMF said income inequality in the Bahamas was “relatively high”, while Bahamian men “appear to be lagging in educational attainment, and much more in securing technical and educational jobs”.
The Government, in its response to the Fund’s findings, “acknowledged that income inequality is high” but blamed “highly paid expatriates” particularly in the financial services sector, for making this appear worse than the reality.
Calling for comprehensive policy reforms to address these woes, the IMF said: “Such policies should aim to reignite strong medium-term growth, remove impediments to job creation, strengthen existing active labour market programs, and combat crime.
“Government’s social safety net programmes need to be streamlined, while the educational system should be reformed to better align curricula with skills demand and improve educational outcomes.
“It will also be critical to align wages to productivity, and enhance the efficiency of labour market and immigration regulations and institutions.”