The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian economy is performing $200 million below potential, the IMF has warned, and is not expected to close this gap until 2019 at earliest.

The Fund, in its just-released full Article IV consultation report on the Bahamas, also warned that this nation’s economic competitiveness was “is weaker than suggested by fundamentals and desirable policy settings”.

In particular, it said that all measurements and economic models showed the Bahamas faced “lower potential growth and a still sizeable output gap” for at least the next three years.

The IMF said the Bahamas’ ‘output gap’, which measures how far short its current economic performance is short of its true potential, was equivalent to 2.5 per cent of gross domestic product (GDP).

Given that Bahamian GDP is around $8 billion in total, this implies that the country is some $200 million short of fulfilling its true economic potential.

“Potential growth has declined significantly over the last 15 years,” the IMF said of the Bahamas. “The decline started already in the late 1990s, with potential growth hitting a low point in the immediate aftermath of the global financial crisis (GFC).”

The Fund added that all three models and methods it had employed showed “a sizable negative output gap that has yet to be closed”.

“Actual real GDP contracted by more than 6 per cent in cumulative terms in 2008 and 2009, and as a result, the output gap turned sharply negative,” it continued.

“Estimates suggest that the output gap is still negative, with an average of -2.5 per cent across the three methods, and is not expected to close before 2019.”

The IMF said the fall-off in the Bahamas’ potential economic growth had been “driven mostly” by a decline in total factor productivity (TFP), which measures how efficiently and intensely factors of production, such as capital and labour, are used.

“All factor inputs have contributed to the decline in potential growth. However, the deterioration in growth prospects has been driven mostly by more negative TFP growth, which has been about -1 per cent of GDP on average since 2000,” the IMF said of the Bahamas.

Pointing out that some economists believed the Bahamas has been suffering from negative TFP since the early 1980s, the Article IV report added: “The large positive contribution of capital has been declining over time, despite the temporary effects of large investment projects (for example, Baha Mar-related investments boosted the capital contribution between 2011 and 2014).

“The contribution of labour also declined in the early 2000s, but has been improving modestly since then, in spite of considerable slack in the labour market.”

Comparing the Bahamas to the Caribbean, the IMF said this nation’s potential growth decline started earlier - and was larger - in this nation than elsewhere.

“Applying the same approaches to Barbados and Jamaica suggests that potential growth has declined also in these countries,” the Fund added.

“However, the pre-crisis decline in potential growth started earlier and was larger in the Bahamas. Over the last few years, estimates suggest that potential growth has been recovering somewhat faster in Jamaica. All three countries are also still struggling to close the output gap, amid both relatively low actual and potential growth.”

While the Bahamas’ current account deficit is forecast to drop to around 7 per cent of GDP in the medium-term, the IMF said its economic competitiveness remained weakness.

“Despite significant uncertainties, the external sector assessment points to an external position that is weaker than suggested by fundamentals and desirable policy settings,” the Fund added.

“Other indicators, such as relatively high energy costs and indicators of the business environment, show the Bahamas falling further behind its peers, and the declining share of tourism among Caribbean countries that focus on a relatively expensive, higher-end tourism experience point to persistent structural weaknesses.”

The IMF said that while the $981 million of foreign exchange reserves were below the traditional ‘three months worth of imports’ benchmark at the end of March 2016, they exceeded this when foreign direct investment-related imports were excluded.

However, when the vulnerability of small island states (SIDS) to natural disasters and external shocks was used as the benchmark, the Bahamas has just 45 per cent of the recommended foreign currency reserve levels.

“Reserves appear broadly adequate according to standard metrics, but fall short when taking into account small island specific factors, such as exposure to external shocks and natural disasters,” the IMF said.