IMF directs Bahamas to strengthen revenues
An International Monetary Fund (IMF) team led by Jarkko Turunen visited The Bahamas from March 10-23 to conduct discussions for the 2016 Article IV consultation.
Mr. Turunen at the end of his visit said Bahamas economic growth is estimated to have slowed down in 2015, as continued growth in air travel arrivals was offset by weaker domestic demand, owing in part to uncertainty over the opening of the Baha Mar resort. Credit to the private sector continues to be restrained by the elevated share of non-performing loans (at 14.2 percent of total in December 2015). Inflation remains modest, at 1.6 percent in October, despite a temporary increase owing to VAT introduction in January 2015. Unemployment, after a brief dip earlier in the year, rose to 14.8 percent in November. 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 percent in 2016, supported by the continued rise in tourism arrivals, and to receive an additional boost when Baha Mar opens.
Staff commend the authorities for the successful VAT introduction, which has made an important contribution to maintaining macroeconomic stability and strengthening policy credibility. A simple and effective tax policy framework, strong project management and a robust electronic system for registration, filing and payment created the right conditions for a smooth VAT launch. As part of the reform, the authorities eliminated the hotel room tax, reduced import tariffs and adjusted other domestic tax rates. VAT revenue over the first 12 months (at $536 million, or about 6 percent of GDP) has exceeded expectations, contributing to a decline in the FY2014/15 central government deficit to 4.4 percent of GDP (from 5.7 percent in FY2013/14). The central government debt nevertheless reached close to 68 percent 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 stabilize central govern- ment debt. Continued fiscal consolidation is critical for rebuilding fiscal and external policy buffers and boosting investor confidence. Policy priorities include:
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.
Further efforts to strengthen revenues. Staff welcomes recent progress in improving revenue administration. Further steps to ensure continued success in VAT implementation include strengthening administration and establishing a compliance audit program. Efforts should focus on moving further towards a fully-fledged central revenue agency, with a welldefined institutional and organizational structure, and continued modernization of customs and property tax administration. 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. Spending rationalization in the context of a medium-term budget framework. More emphasis on expenditure restraint would help preserve the hard-won benefits of the VAT.