The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday demanded “a decisive shift in structural policies” to increase the Bahamas’ economic growth rate beyond the forecast 1.5 per cent, branding this as essential to cut high unemployment.

The Fund, in a statement on its recent Article IV consultation with the Bahamas, also urged the Christie administration to place “more emphasis on spending restraint to help preserve the hard-won benefits of Value-Added Tax (VAT”).

The concerns expressed by the IMF team, which concluded its almost two-week stay in the Bahamas yesterday, mirror almost exactly those articulated by Moody’s, the international credit rating agency, in its recent half-year assessment of the Bahamas.

The Fund urged the Government to “contain increases” in public sector wages and hiring levels, especially given the relatively low level of labour productivity.

It also warned that the proposed National Health Insurance (NHI) scheme needed to be financially sustainable, and called on the Government to start addressing the ‘ticking timebomb’ that is the $1.5 billion unfunded public sector pension deficit.

“A decisive shift in structural policies is needed to raise potential growth, estimated at only 1.5 per cent over the medium term, to improve competitiveness and reduce high structural and youth unemployment,” the IMF said.

While its concerns appear to have changed little from last year’s Article IV consultation, the IMF also praised the Government’s efforts to develop the National Development Plan as a tool that could provide a ‘road map’ to tackling structural problems and roadblocks in the economy.

“The authorities should finalise the plan and, acknowledging that it takes time for structural reforms to bear fruit, promptly move towards implementation. Focus should be on a comprehensive strategy aimed at diversifying the economy and lifting barriers to growth,” the Fund advised.

It urged the Government to tackle the Bahamas’ structural economic problems via a three-pronged approach - strengthening human capital and reducing labour force skills mismatches; reducing ‘red tape’, bureaucracy and costs on business; and investing in “growth-enhancing infrastructure”.

“Policies should aim at improving productivity through better educational outcomes, further strengthening existing apprenticeship and vocational training programmes, easing restrictions on labour mobility and seeking to reverse the ‘brain drain’ of skilled Bahamians,” the IMF said.

As for boosting the business environment, it added: “Policies should aim at strengthening competitiveness by reducing energy and other utility costs, and better aligning wages with productivity.

“Reforms to improve the ease of doing business should focus on alleviating the administrative burden and time necessary to start a business; strengthening contract enforcement and frameworks for resolving insolvencies and registering property; and improving access to credit (including through prompt establishment of a Credit Bureau).”

The IMF said the Bahamas’ infrastructure investment priorities needed to focus on information and communication technology; transportation; public utilities and projects that support economic diversification and enhance resilience to natural disasters. It added that the use of public-private partnerships (PPP) would ease the burden on the Government’s finances.

While praising the Government for the relatively smooth introduction of VAT, which had exceeded expectations by yielding $536 million in gross revenues during its first 12 months, a sum equivalent to 6 per cent of GDP, the IMF said this needed to be counter-balanced with spending restraint.

“More emphasis on expenditure restraint would help preserve the hard-won benefits of the VAT,” the IMF said. “The authorities should contain increases in public wages and employment, especially in view of weak labour productivity growth.

“Efforts to streamline expenditures would also benefit from advancing on-going reforms to modernise the public financial management system, including strengthening internal controls, procurement practices, and Budget preparation and execution.

“A shift in composition towards growth-enhancing infrastructure spending, and further intermediate steps towards a medium-term Budget framework, would allow fiscal policy to better balance the need for continued consolidation and support for the recovery.”

While backing the hiring of PowerSecure to manage the Bahamas Electricity Corporation (BEC), the Fund warned that other loss-making government entities, such as Bahamasair and the Water and Sewerage Corporation, “continue to be a significant drag on government finances”.

Subsidies, it added, amounting to about 1.4 per cent of Bahamian GDP in fiscal year 2014-2015.

“Reforms should aim at reducing their operational inefficiencies, fostering an enabling regulatory environment, and aligning tariffs with costs of service delivery,” the IMF said.

While Baha Mar attracted little mention from the IMF, it urged the Government to continue its “resolute implementation of the current VAT regime with few exemptions”.

“The authorities should resist pressures to weaken the VAT regime’s efficiency through the introduction of exemptions,” it added, effectively rebuffing the FNM’s pledges to exempt food, healthcare and other breadbasket items from the tax.

Yet despite VAT’s success, the IMF warned: “The central government debt nevertheless reached close to 68 per cent of GDP in December 2015.

“Looking forward, strong VAT revenue is expected to support further fiscal consolidation and, when combined with efforts to constrain spending, to help stabilise central government debt.

“Continued fiscal consolidation is critical for rebuilding fiscal and external policy buffers and boosting investor confidence,” it added.

“The authorities should also review the efficiency of tax exemptions and concessions, including to the tourism sector, and consider simplifying domestic taxes that are not business-friendly.”

As for the economy, the IMF said: “Lower oil prices and the winding down of Baha Mar’s construction have helped narrow the still sizeable current account deficit.

“International reserves stood at $841 million in January 2016, equivalent to about 2.5 months of next years’ projected imports of goods and services.

“Looking forward, real GDP growth is projected to increase to about 1.5 per cent in 2016, supported by the continued rise in tourism arrivals, and to receive an additional boost when Baha Mar opens.”

The IMF also called on the Government to “step up efforts to facilitate the cleaning up of bank balance sheets to spur credit growth”, a reference to the 14.2 per cent of non-performing loans that continue to clog the system.