World economies have had to tread over some rugged financial terrain during the past decade – trudging through a global recession that doesn’t seem like an end is in sight.
And unemployment levels have danced around double digits in most economies since the recession’s advent, begrudgingly forcing governments to be more fiscally proactive and sound in their budget allocations.
It’s the International Monetary Fund (IMF), which keeps an eye on global economies –assessing the stability of the international monetary system and making recommendations. The organization describes itself as an entity which takes the economic pulse of its member countries. Just as a doctor is an agent for healing, likewise is the IMF for those economies, and it also encourages greater fiscal transparency.
The IMF has a well-spring of knowledge and advice but more importantly, funding. It provides funding for its members to promote sustainable development projects that will help in the countries’ progress and reduce poverty and unemployment. Needless to say, member countries can breathe a sigh of relief thanks to the IMF, which gives it some real breathing room by providing funding to correct their financial infidelities. Continued support by the IMF is hinged on the efficiencies of national policy programs supported by the IMF.
Apart from this, its mandate is to encourage international monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
The IMF concept was conceived in July 1944 at a United Nations Conference in Bretton Woods, New Hampshire, United States. At that conference, the 44 governments represented aimed to establish a framework for economic co-operation that would negate past economic maladies which led to the Great Depression of the 1930s.
The organization was established in 1945 and “is governed by and accountable to the 188 countries that make up its near-global membership”.
With headquarters in Washington D.C., the IMF is also charged with monitoring the system of exchange rates and international payments that enable countries (and their citizens) to transact with each other. This is a significant component of the world financial system because it is credited for increasing the living standards of member countries, promoting sustainable economic growth and reducing poverty.
As of March 7th, 2013, it facilitated loans up to $266 billion, $166 billion of which has not been drawn.
The global recession touched down on many economies and the IMF sought to increase its position as a financial pillar for its members during this time, “strengthening its lending capacity and approving a major overhaul of its mechanisms for providing financial support in 2009, with further reforms adopted in August 2010 and December 2011.”
It must be a daunting task to police the financial activity of 188 countries and so one begs to ask, how is it possible to monitor member countries with great astuteness and accurate accountability? The strength of the IMF comes via a surveillance strategy geared at preventing crises in the international monetary system.
The organization reviews country policies as well as national, regional and global economic and financial developments to reduce the economic vulnerability of its members. It also provides regular assessment of global prospects annually in its “World Economic Outlook”, financial markets in its “Global Financial Stability Report”, and public finance developments in its “Fiscal Monitor” and publishes a series of regional economic outlooks.
Technical assistance and training is provided by the IMF to its members in tightening up their capabilities to implement and create effective policies. Pertinent areas for technical assistance offerings include tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks and statistics.
So the IMF is vital to The Bahamas during this time as the government prepares to introduce Value Added Tax (VAT) to broaden the tax base in the country, starting from July 1, 2014. With the country’s accession into the World Trade Organization (WTO), VAT will be introduced as a measure to help offset the reductions on import duty rates that with eventually come as part of membership in the WTO.
From July 1, 2014, the Bahamas will apply a 15% VAT to a broad range of goods and services and excise duties will reduced by some 15 percent on goods that will be subject to VAT when it is introduced.
With regard to the international transport of goods and passengers, a zero rate will apply. Goods and services that will be exempted include: Food and agricultural products that benefit from duty-free status under the Tariff Act; Other imports that benefit from the same, aforementioned status; Health and education services; Transfers of leases of land and residential buildings; Financial services and Social and community services.
Hotel Occupancy tax will also be replaced by VAT with a concessionary rate of 10 percent applied to hotels, including food and drink sold on their premises. “VAT filing and payment will be required on a monthly basis, and the VAT threshold will be set at USD 50,000 - requiring 3,800 local businesses to register to collect and remit VAT revenues to the Government.”
Apart from this new tax measure that will be implemented, the IMF also monitors the local offshore banking centers, trust companies, insurers onshore commercial banks etc, credit unions, and its policies imposed on member countries like the Bahamas cause them to enjoy investment grade credit among other things. The IMF also makes recommendations to improve regulatory and supervisory frameworks for banks to resolve weaknesses in that financial sector and strengthening the crisis management framework.
The Bahamas is part of what the IMF calls Caribbean Small States which also includes Antigua and Barbuda, , Barbados, Belize, Dominica, Grenada, Guyana, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
These Caribbean small states are also privy to debt relief by the IMF via the Commonwealth Debt Initiative. According to a published paper titled “Caribbean Small States: Challenges of High Debt And Low Growth (Feb. 2013), “Since 2000, in addition to debt restructuring, a number of Caribbean countries have received debt relief. These have involved a combination of debt write-offs, debt restructuring, debt swaps, and debt buy-backs. These operations have taken place at different times, and have benefitted different countries.”
The Bahamas, just like its fellow members from the Caribbean is extremely prone to natural disasters like hurricanes – which affect the livelihood of many of its residents. In fact, the IMF report considers the Caribbean to be one of the most disaster-prone regions in the world. From its assessment, the IMF concludes that “moderate storms reduce growth by half a percentage point, while severe ones have an impact close to 1 percentage point.”
The IMF lends its financial support to countries like the Bahamas in times of crisis so that there are no drastic economic fallouts as a result of cleaning up after natural catastrophes.
Then there are the not so natural disasters like that of Colonial Life Insurance Company (CLICO insurance. It’s a pity that no-one saw this coming until it was too late.
The IMF makes note that “The collapse reflected a weak insurance regulatory environment and the rapid deterioration in the global economy, and left a hole of about 3½ percent of GDP on average across Caribbean countries, but as high as 12 percent in Trinidad and Tobago and 10 percent of GDP in ECCU countries.”
The IMF report notes that growth in the Caribbean has stagnated in the last two years.
It states, “While many of the cost disadvantages are structural, some are policy driven. Labor costs are high in the Caribbean, in part reflecting a high degree of unionization, and have grown faster than productivity. Electricity costs are also among the highest in the world, reflecting sector inefficiencies, lack of investments, and/or monopoly powers of generators and distributors. Trade protectionism is high, not only through tariffs but also non-price restrictions. The high cost of credit derives from poor transmission of easy monetary policies in the U.S., deposit rates floors in selected countries, information asymmetries due to the absence of credit bureaus and lengthy credit recovery processes due to judicial procedures.”
As part of the IMF, the Bahamas gets an independent view of its financial status in comparison to its competitors in the region. It’s a microscopic look at its strengths, weaknesses – with recommendations to address the problems in a strategic and intellectual manner.
On February 4, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with The Bahamas. It noted that although there were higher exports as the global economy seemed poised for a rebound, the external current account deficit widened in 2011. This was attributed to higher imports – a reflection of a surge in foreign direct investment –related imports and exorbitant world oil prices.
The IMF consultants reported that economic growth is expected however as the country moves forward – it will be in a weaker debt position. Strong tourism and construction activity are attributed to the growth in GDP.
It added that “Growth could increase further over the medium term if new projects and trade initiatives materialize. Inflation is likely to stay low—projected at over 2 percent (year on year) at the end-2012—but reducing the high level of unemployment will remain a challenge. Pressures are projected to continue from a large external current account deficit and a rising government fiscal deficit. The risks to the outlook, however, are tilted to the downside, given uncertainty about prospects for the U.S. recovery and global food and fuel prices, and on the domestic front, about the pace of fiscal consolidation and implementation of structural reforms.”
The IMF executives, although embracing the gradual recovery of the Bahamian economy which it credits to a rebound in tourism and ongoing investment projects, expressed concern about the high rate of unemployment, adding that the economy faces “downside risk” from an uncertain external environment considering too that fiscal and external imbalances have widened.
“IMF Directors agreed that the main challenge is to strengthen the fiscal and external positions, rebuild macroeconomic buffers, and implement policies to enhance medium-term growth.
IMF Directors emphasized that the key policy priority is to strengthen public finances. They acknowledged the need to balance fiscal consolidation with efforts to support growth and employment. At the same time, they noted that delayed fiscal consolidation could pose risks to long-term debt and external sustainability. IMF Directors, therefore, encouraged the Government to embark on a credible medium-term strategy to strengthen revenue mobilization and improve tax administration, rationalize expenditures, and place public enterprises on a sound financial footing.”