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IMF report: Return to growth of 2.5%by 2012

The International Monetary Fund(IMF)is projecting a return to economic growth of about 2.5 percent by 2012 in The Bahamas, if global conditions improve, and modest growth in real gross domestic product(GDP)this year as tourist arrivals rebound.

The projections were included in the results of an Article IV consultation with The Bahamas, which was concluded on October 27. The results were released on Monday.

The IMF further noted that the external current account deficit, projected to widen somewhat in 2010 and 2011, is expected to narrow over the medium term from higher tourism receipts and continued foreign direct investment. Concern was expressed, however, about the ratio of central government debt to GDP, which is projected to continue rising over the medium term.

“Directors noted that a sharp contraction in domestic activity amidst the global downturn has weakened the fiscal position and banks’balance sheets,”the report said.”Prudent macroeconomic policies have now laid the foundations of a recovery, but the outlook remains exposed to downside risks. It continued,”In order to boost economic prospects,(IMF)directors encouraged the authorities to build adequate buffers against external shocks and address vulnerabilities in the fiscal domain and in the financial sector.”

The IMF credited The Bahamas for its commitment to medium term fiscal adjustment and its strategy to reverse the recent rise in its public debt-to-GDP ratio, which stands at 47 percent at the end of June.”Directors commended the authorities’efforts to strengthen the financial system and their close cooperation with supervisors in other jurisdictions,”according to the report, which also welcomed recent enhancements in the oversight of the financial sector and in the legal framework for security markets. The assessment pointed out the The Bahamas’relationship with the U.S. dollar, saying it has provided a”nominal anchor”and has encouraged authorities to increase foreign exchange reserves over time. Prime Minister Hubert Ingraham said last week that international reserve levels were strong in 2009, showing an increase of$253 million that year following an$109 million rise in 2008. Ingraham attributed the spike to the government’s foreign currency borrowing during the 2009-2010 fiscal year combined with weakened domestic demand. The IMF report also expressed its concerns about the increasing level of non-performing loans, and suggested that closer monitoring is needed in that area. According to the latest Central Bank of The Bahamas Monthly Economic Financial Developments report for October, loan loss provisions grew by$12 million to$258 million. The IMF report also mentioned that broader reforms to the tax system and public finance management would be necessary over the medium term in order to continue improvements in the fiscal position.

“Directors agreed that far-reaching structural reforms are necessary to lift medium-term growth prospects. They welcomed the authorities’plans to improve business conditions, including for small and medium-sized enterprises, and to strengthen public infrastructure in a manner consistent with the fiscal consolidation strategy,”noted the report.

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