The International Mone-tary Fund (IMF) has urged the government of The Bahamas to continue a policy of fiscal tightening in order for the economy to reach its growth potential, suggesting that a comprehensive tax reform is needed to take the country forward.
A recent survey released by the IMF noted that low inflation, a sound banking system and generally prudent fiscal policies have set the stage for private-sector-led growth.
During the presentation of the 2005/06 Budget Com-munication in the House of Assembly by Deputy Prime Minister Cynthia Pratt on May 25, the nation was told that The Bahamas is poised for strong rates of economic growth that will be sustained in the years to come.
Minister Pratt revealed that current projections made by the recent IMF Article IV Mission suggests a strong growth of 3.5 percent to occur in 2005 in the Bahamian economy compared to the three percent recorded in 2004. This increase she added was due to the volume of investment projects coming on stream.
However, the current IMF survey stated that challenges remain, most notably the Bahamian government deficit, which rose sharply during the economic slowdown of 2001/2002 and remains above three percent of the gross domestic product.
“To this end, a comprehensive tax reform ﾖ entailing the introduction of a value-added tax or sales tax and a lowering of important tariffs ﾖ would help sustain revenues and reduce vulnerability to external shocks, while also facilitating the possible accession to the World Trade Organisation, (WTO)” the IMF report stated.
But, in Minister Pratt’s presentation, she stated that within the context of WTO, there will be pressure on The Bahamas to reduce and simplify its Customs Duties. The reduction in Customs Duties would mean finding a satisfactory replacement to yield the same level of revenues.
Despite this awareness, she said there is national consensus that The Bahamas should not adopt an income tax system. She further stated that the government is fully mindful that reform of the revenue structure would mean the implementation of a Value-Added Tax (VAT) or a similar tax.
‘This Government has no intention of introducing such a tax now or in the near future,” Minister Pratt said. “Indeed no government would be able to implement a VAT at short notice. This is because VAT is a complex measure requiring careful planning and preparation, extending over several years, and would involve considerable consultation with those likely to be affected by such businesses. It would also involve the preparation of legislation to give effect to it.”
Minister Pratt noted that in recognition of the fact that it would be useful to explore all aspects of a possible VAT for implementation at some future date when the necessity and desire for change materializes, the Ministry of Finance is continuing to commission reports on operational aspects of VAT. “However, I can assure the House that there are no plans to implement a VAT now or in the immediate future,” she said.
All attempts to contact Finance Minister of State James Smith about the matter proved fruitless.
On the expenditure side, the IMF survey stressed the importance of containing public sector wages increases to maintain international competitiveness, especially in the tourism industry. Fiscal strengthening, it added, should also be supported by structural policies and private infrastructure investment, which in turn would help diversify the economy.
Within the Budget Communication, Minister Pratt said expert advice has indicated that the country would do well to limit the ratio of government debt to GDP (Gross Domestic Product) as near as possible to 30 percent of GDP, so as to avoid the problems which would arise from a ratio significantly in excess to that level.
By LISA S. KING, Freeport News Reporter
