NASSAU, Bahamas (CMC) — The International Monetary Fund (IMF) Friday said that The Bahamas is highly vulnerable to the effects of climate change, including gradual sea level rise, biodiversity loss and intensifying hurricanes.

It said that together, these challenges threaten to undermine the country’s potential output over the long term by inflicting damages to physical assets and eroding natural capital, which is vital to its tourism-driven economy.

“Importantly, these risks are unevenly distributed with smaller islands being more exposed and sensitive than the larger, more developed ones. Addressing these disparities as well as closing economy-wide adaptation needs through investments in structural resilience can unlock large potential output gains,” the IMF said as it examined a range of issues affecting the Caribbean Community (Caricom) country ranging from “determinants of sovereign spreads” to the “implications of the electricity sector reform in The Bahamas”.

According to the Washington-based financial institution, to analyse Bahamian sovereign spreads, a fundamentals-based model is estimated using data on emerging market economies.

It said the main findings are that while both domestic and global covariates are important determinants of spreads, a sizeable effect comes from the interaction of global risk aversion and a country’s risk rating; and that inclusion in the Emerging Market Bond Index Global (EMBIG) is a significant driver for emerging markets.

“The spreads in The Bahamas would have compressed by 56 basis points compared to other countries with similar fundamentals if the archipelago were included in this index.”

The IMF said that though the population in The Bahamas has expanded swiftly since 2010, the stock and affordability of new housing have not kept pace due to limited wage growth and financing constraints.

The study takes stock of recent trends in the residential housing market in the country as it discusses the potential drivers of reduced housing affordability.

“The authorities have taken various initiatives guaranteed loan programmes [and] construction of public rental units to alleviate housing shortages. However, there is room for additional public spending in housing. Easing access to credit for residents would also support increased homeownership.”

On the issue of electricity sector reform, the IMF noted that low efficiency and reliability in the energy sector, paired with high costs, dampens competitiveness and holds up growth in the country.

It takes stock of the country’s electricity sector and examines the potential macroeconomic impact of the government’s proposed electricity sector reform that seeks to increase renewable energy and modernise transmission and distribution infrastructure.

“Over the medium term, the reform has the potential to narrow the current account deficit, reduce vulnerability to commodity price shocks, boost growth and significantly reduce CO2 emissions. However, such power projects should have a clear delineation of risk sharing between the private and public sector,” the IMF added.