20220508-IMF-The_Bahamas_Selected_Issues_27页_477kb

The Bahamas: Selected Issues Summary

Core Content

This document presents an analysis of The Bahamas' fiscal framework and pension system, focusing on the need for reform in light of recent economic shocks and demographic changes.

Main Findings

Fiscal Framework Review

1. Background and Motivation

   • The Bahamas introduced a rules-based fiscal framework in 2018, including a budget balance operational target and a debt anchor.
   • The framework is supported by a Fiscal Responsibility Council and a Fiscal Strategy Report (FSR) that outlines the transition path to the targets.
   • The debt anchor is set at 50 percent of GDP, with a 0.5 percent GDP deficit target for the overall balance, aiming to be achieved by FY2020/21.

2. Current Targets in the Post-Pandemic World

   • The pandemic and Hurricane Dorian have significantly delayed the convergence to the debt target.
   • The current deficit target of 0.5 percent of GDP is insufficient to reduce the debt ratio to 50 percent over the next decade.
   • The debt ratio reached over 100 percent of GDP in 2020/21, and the government now intends to achieve the debt target by FY2030/31.
   • A stochastic simulation suggests that even with the current deficit target, the debt ratio may not decline significantly without additional measures.

3. Options for the Framework Review

   • Modify the Timeframe: Delaying the achievement of the debt target by at least two years may be necessary due to the severity of recent shocks.
   • Support Economic Growth: A growth-friendly fiscal adjustment, including tax reforms, increased public investment, and reduced non-productive spending, is recommended.
   • Automatic Adjustment Mechanism (AAM): Introducing an AAM could enhance the credibility of the framework. The mechanism would trigger adjustments based on deviations from fiscal targets.
   • Natural Disaster Fund: Reviving the natural disaster fund could help manage smaller-scale disasters, but significant additional revenue mobilization would be required. A smaller fund may be more feasible.

4. Conclusions and Recommendations

   • The current calibration of fiscal rules needs to be revisited.
   • A 50 percent debt ceiling is still considered appropriate given the vulnerability of the Bahamian economy to shocks and climate change.
   • The government's envisaged 1.5 percent medium-term surplus seems appropriate, provided that it is supported by a growth-friendly policy mix, including tax reforms and increased public investment.
   • Implementing an automatic adjustment mechanism and re-establishing a natural disaster fund are recommended to improve fiscal credibility and resilience.

Key Information

• Fiscal Rules:

  • Overall deficit target: 0.5 percent of GDP (achieved by FY2020/21).
  • Government debt ceiling: 50 percent of GDP (targeted for FY2024/25).
  • Recurrent expenditure growth: Long-term nominal GDP growth.
  • Escape clause: Allows temporary deviations under exceptional circumstances such as natural disasters.

• Fiscal Projections:

  • Debt ratio reached over 100 percent of GDP in 2020/21.
  • The active fiscal consolidation scenario assumes a 1.5 percent overall surplus by FY2026/27, with revenue-GDP ratio reaching 25 percent and recurrent spending growth capped at nominal GDP.

• Natural Disaster Fund:

  • Established before Hurricane Dorian, with initial resources of 0.4 percent of GDP.
  • Depleted after the disaster, and the government is considering re-accumulation.
  • Simulations show that a natural disaster could significantly derail fiscal consolidation, necessitating a larger surplus if the fund is not re-established.

• Automatic Adjustment Mechanism (AAM):

  • Could help ensure convergence to the debt target and minimize the risk of overshooting.
  • Based on a notional account that tracks cumulative deviations from fiscal targets.
  • Triggers adjustments depending on the deviation level (e.g., 0.75 percent of GDP for deviations between 1.5 and 3 percent, 1 percent for deviations over 3 percent).

• Pension System:

  • The Bahamas has two pension schemes: one for civil servants and one for the private sector.
  • Civil servants can retire at 55 with 5 years of service or at any age after 30 years.
  • The mandatory retirement age is 65.
  • Benefits are calculated based on final salary and years of service, with a cap of 67 percent of final salary after 40 years.
  • High internal rates of return due to high accrual rates and last/best earnings reference, combined with low or absent contribution rates, are a concern.
  • Retirement age for civil servants is very low, and the private sector's minimum contribution requirement may leave some elderly without pensions.
  • A social pension exists for those without other pension entitlements.

Policy Options

• Fiscal Adjustment:

  • Increase revenue-GDP ratio to 25 percent through tax reforms and improved tax administration.
  • Reduce current spending to 20 percent of GDP.
  • Increase capital expenditure to 3.5 percent of GDP.
  • Cap recurrent spending growth at nominal GDP.

• Pension Reforms:

  • Gradual implementation of pension reforms is recommended to avoid sudden disruptions.
  • Increasing contribution rates and adjusting benefit formulas to reduce the internal rate of return.
  • Raising the retirement age for civil servants and private sector workers.
  • Introducing a natural disaster fund to enhance resilience against smaller-scale disasters.

References

• Eyraud, Luc., Anja Baum, Andrew Hodge, Mauriusz Jarmuzek, Young Kim, Samba Mbaye, and Elif Ture, 2018a. "How to Calibrate Fiscal Rules, A Primer", International Monetary Fund How to Notes.
• Eyraud, Luc., Victor Duarte Lledó, Paolo Dudine, and Adrian Peralta Alva, 2018b. "How to Select Fiscal Rules, A Primer", International Monetary Fund How to Notes.
• Gbohoui, William and Olusegun Akanbi, Forthcoming, "Integrating Natural Disaster Shocks to the Calibration of Fiscal Rule Limits", International Monetary Fund How to Notes.
• The Bahamas, 2018. IMF country report 18/118.
• The Bahamas Selected Issues, 2018. IMF country report 18/119.

Additional Notes

• The document includes a box on Jamaica's automatic adjustment mechanism, which serves as a reference for potential implementation in The Bahamas.
• Figures and tables are used to illustrate fiscal projections, the impact of natural disasters, and the effectiveness of the automatic adjustment mechanism.