THE BAHAMAS 1. RECENT ECONOMIC PERFORMANCE

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1 1. RECENT ECONOMIC PERFORMANCE A. Overview Real GDP in The Bahamas is estimated to have risen by 3.5% in 2005, up from 3% a year ago. Construction provided the main impetus for growth, as tourism output was affected by the passage of hurricanes Frances and Jeanne one year earlier. Building activity during the year was boosted by major hotel expansion, rebuilding efforts following the passage of hurricanes in 2004, and a more favourable lending environment after the relaxation of credit controls in Heightened domestic demand however, coupled with rising oil prices more than offset foreign investments, resulting in a net loss of foreign reserves. There was nevertheless significant improvement in public finances as a result of this demand, which boosted collection of international trade taxes, and facilitated some expansion in recurrent and capital expenditures. B. Sectoral Performance Tourism Total tourist arrivals increased marginally in 2005, rising by 0.9% compared to growth of 8.9% in 2004, and were due mainly to the effects of hurricanes Jeanne and Frances in September Although both air and sea arrivals were adversely impacted by the hurriances, sea-based tourism was more severely affected by the weather systems and registered an overall decline of 0.5%. Air arrivals, however, after recording decreases in the early months of 2005, picked-up during the course of the year to record overall growth of 4.4%, up from the 1.5% experienced a year earlier. With respect to sea arrivals, while solid forward-bookings boosted sea arrivals in January and February, the lagged effects of the hurricanes resulted in consistent declines from March to August. Spatial data for the first ten months of the year showed that sea-based visitors were down in both New Providence and Grand Bahama, while sea arrivals to the Family Islands were relatively unchanged. Air arrivals, however, increased slightly in New Providence and the Family Islands rising by 0.4% and 0.2%, respectively, as this category of visitor was able to benefit from greater chartered and scheduled airlift, as well as the presence of brandname resorts in the Family Islands. Construction Construction activity in The Bahamas is estimated to have increased with the commencement of Phase III of the Atlantis expansion project, valued at $1 billion (bn). Hurricane-related repairs and renovations as well as a favourable interest rate environment, also boosted activity in Total mortgage commitments nearly doubled to $330.4 mn from $188.9 mn over a similar period in Residential mortgage commitments increased by 66.7% due to the building of new structures as well as activity on existing structures, while commercial commitments largely reflected work on existing structures. Financial Services At the end of 2005, 250 licenses were granted to offshore banks and trust companies, compared with 266 at December-end 2004, as decreases were recorded in both the number of public and restricted companies. The fall-out in this sector is likely the result of continued efforts to improve the legislative and regulatory framework. Neverthess, improvements to the sector continued in 2005, with the establishment of a commission to formulate recommendations for the merging of regulatory functions, while plans are continuing to revise securities legislation in the jurisdiction. C. Prices and Employment The effect of rising oil prices was evident in The Bahamas, as inflation, which was a mere 0.8% in 2004 rose to 2.7% at the end of The medical, food and housing and sub-groups registered the greatest increases, rising by 3.4%, 3.1% and 3%, respectively, with education and medical costs also showing substantial rises. 25

2 The overall unemployment rate remained unchanged in The Bahamas at 10.2%. While the rate in New Providence also remained unchanged at 10.9%, unemployment in Grand Bahama rose to 11% from 9.3% due to the disruption in economic activity caused by hurricanes Frances and Jeanne. D. Fiscal Policy and Debt Operations Public finances improved significantly in 2005 due in large part to the pick-up in real sector activity and improvements in revenue collection measures. As a result, despite some growth in recurrent and capital expenditures, robust revenue growth led to a narrowing in the overall deficit from $199.1 mn (3.5% of GDP) in 2004 to $162.9 mn (2.7% of GDP) in While the deficit remained on the recurrent account, it narrowed significantly from the $73.5 mn (1.3% of GDP) recorded in 2004 to approximately $9 mn (10.1% of GDP) in Total revenue rose by 16.8%, driven by higher collections from both taxable and non-taxable sources. Tax receipts increased by 15.4%%, and were due to a 25.5% surge in taxes on international trade and transactions owing to heightened private sector demand and rising oil prices. Consequently, import duties and stamp taxes on imports, which collectively account for approximately 60% of tax revenues, increased by 23% and 38.2%, respectively. Selective taxes on services, increased by a further 45.3% ($15.9 mn) on account of heightened air arrivals. Nontax revenue also contributed to the improved performance, rising by 34.6% on the strength of higher collections from fees, fines and forfeitures which grew by 43.4% ($27.1 mn). Consequently, total recurrent revenue is estimated to have increased by 16.7%, while capital revenue declined by 18.7% ($2.8 mn). Total expenditure increased by 9.7% in 2005, reflecting increases in both recurrent and capital outlays. Consumption expenditures, which comprise spending on goods and services and personal emoluments rose by 6.4%, with expenditure on goods and services growing by 10.6% and wages and salaries by 4.5%, reflecting in part the wage increase awarded to civil servants, which included a lump sum payment of $700 in December, to be followed by incremental salary increases thereafter. There was also a small increase in interest payments 6.4% ($7.2 mn), but this was confined to an increase in local currency payments, as external payments declined slightly. Subsidies and other transfers rose by 19.7%, as subsidies increased by 9.8%, while transfers to non-profit institutions nearly doubled to $52.1 and transfers to households grew by 17.4% ($11.6 mn). The pace of capital spending accelerated to 35.8% in 2005, up from 15% a year earlier. This period s outturn was motivated to a large extent by the recovery effort in the wake of hurricanes Jeanne and Frances in 2004, as well as on-going infrastructural improvements, which resulted in a 67.1% ($17.5 mn) rise in expenditures on public works and the water supply. This was followed by increased expenditures in the general public service, which rose by 28.5% ($4.2 mn) and education (up 71.5% or $8.9 mn). As in previous years, the deficit was financed primarly from the sale of Government securities as well as short term advances. Central Government s debt increased by a further 6.5% ($136.6 mn) to bring the stock of direct charges to $2.23 bn at year-end. The increase was concentrated in locally denominated debt, which rose by 7.5% ($135.4 mn), as the Central Bank, public corporations and the private sector increased their holdings of treasury bills and government securities. Total external debt was virtually unchanged, rising by 0.4% to $285.7 mn, due to a small increase in outstanding loans from international financial institutions. If contingent liabilities are included, the total stock of debt at the end of September was $2.7 bn, up from $2.5 bn a year earlier. The Bahamas Mortgage Corporation, the newly established Clifton Heritage Authority and the Airport Authority accounted for the majority of the increase in government guaranteed debt. E. Financial Sector There was some tightening of excess bank liquidity in 2005 as holdings of excess reserves and liquid assets declined by $207.3 mn in contrast to a rise of $210.4 mn over the same period a year earlier. This was due mainly to a more favourable lending environment and positive spin-offs from hotel expansions. The increase in domestic credit in 2005 more than doubled when compared to Total domestic lending rose by approximately $645.1 mn compared to growth of $ mn a year earlier with increases being recorded in both Bahamian dollar and foreign currency credit. The removal of limits on outstanding commercial bank credit 26

3 and lower lending rates on consumer and other local loans were the principal factors underlying the $568 mn rise in locally denominated credit. The increase was led mainly by a 67% increase in consumer credit and a 33% rise in mortgage lending. Net credit to government grew by a further $77.9 mn, $24 mn more than in 2004 while credit to the rest of the public sector declined by $17.2 mn following a decrease of $3.3 mn in Foreign currency domestic credit was also on the rise in 2005, is likely to have been the result of positive spin-offs effects from the expansion in the tourism industry. Total foreign currency lending is estimated to have grown by $77 mn, a turnaround from the $28.5 mn reduction in F. External Sector High import demand following the removal of credit control restrictions, relatively strong growth in The Bahamas main trading partners, as well as rising oil prices, were the principal factors that generated the $89 mn decline in reserves, compared to an increase of $183.7 mn in Available information for the first half of the year suggests that the current account deficit more than quadrupled to $184 mn, as imports increased by 10.8%, while exports rose by 8.5%. Net tourism earnings were also down during the first half of the year, declining by 8.7%, concomitant with the 5.6% decline in arrivals in the first six months of 2005, and contrasts with a 22.7% rise in net earnings a year earlier. The capital and financial account was boosted by a $52.6 mn increase in foreign direct investments, while domestic banks and other private sources increased their inflows by $135.4 mn. 2. MAJOR POLICY ISSUES A. Private Sector Development The private sector in The Bahamas is generally considered to be well developed, benefiting from its promotion as a business-friendly environment since businesses pay no taxes on personal or corporate income, capital gains, dividends, royalties, sales, estate, inheritance or payroll. This environment, plus accommodative legislation particularly in the tourism and international financial services sectors, has spurred substantial investments in these sectors, with positive spinoffs in other sectors, most notably, distribution. Consequently, the private sector in The Bahamas comprises predominantly hotels and restaurants, financial services and persons in the wholesale and retail trade. The private sector is very active, as several agencies have been formed to lobby and represent the interests of businesses in The Bahamas. These include The Bahamas Employers Confederation, The Bahamas Hotel Employers Association and The Bahamas Chamber of Commerce, with locations in Nassau, Grand Bahama and Abaco. The aforementioned organisations, along with Nassau Tourism and Development Board, comprise the Coalition of Private Sector Agencies. These agencies, singly or under the coalition, engage in consultations with GOCB on macroeconomic and environmental issues and provide feedback on proposed legislative changes. Indeed the Financial Services Consultative Forum was established in 2002 to facilitate discussions on areas of importance in the financial services sector. Notwithstanding the sophistication of the private sector in The Bahamas, there is scope for further development. One area in which assistance may be needed is in facilitating business establishment and development. Specifically, there needs to be greater awareness of the support services provided by both public and private sector, so that businesses know where to access the required services. In this regard, the formation of a onestop shop providing a range of services to address the needs of businesses, from start-up to further business development could assist the private sector, and in particular small businesses. Also of some concern, is the availability of financing for small and medium-sized enterprises. To some extent difficulties in obtaining financing may reflect the limited viability of the venture or inadequate preparation of business plans, and assistance in business development services may help in this regard. Nevertheless, there is a view that commercial banks are risk averse to lending in the areas of small business development, particularly in an environment now characterised by heightened mortgage construction activity. In recognition of the need for financing, GOCB has established a venture capital fund and made $2 mn available over two years, to support business development, but financing constraints still exist particularly within traditional lending institutions. B. Poverty Reduction In 2005, the Department of Statistics published The Bahamas Living Conditions Survey for the year The survey was the first conducted for The Bahamas, and provides information and discussion on a variety of social development indicators 27

4 such as population patterns, poverty, household expenditure, health and education issues, the employment situation, community services, social programmes and housing. However, from a basicneeds perspective, poverty may be the most critical. For the purpose of the survey, the annual poverty line is $2,863 per person. This translates to an overall poverty rate for the entire Bahamas of 9.3% and a rate of 5.1% for households, with an indigency rate of 1%. Interestingly, the survey estimates that on average a poor individual needs an additional $873 per year to reach the poverty line, which implies that $24 mn would be required annually to lift all persons out of poverty. The poverty rates were found to be highest in the Family Islands, which reached as high as 21%, compared to New Providence and Grand Bahama where poverty was estimated at 8.3% (see Table 1 below). However, given that more than 70% of the population live in New Providence and Grand Bahama, the actual number of poor persons is higher in these population centres. Other findings when analysed by gender, nationality and age cohort is that a greater proportion of the poor are females, and that nearly half of the poor are children below the age of 14. With respect to nationality, though nearly one quarter of Haitians live in poverty, the vast majority of the poor are still Bahamian. For The Bahamas as a whole, income inequality appeared to be relatively high, as measured by a Gini coefficient of 0.57, however within specific regions, income was more evenly distributed. In New Providence/Grand Bahama, the Gini coefficient was estimated at 0.386, and for the Family Islands. Deeper analysis of the poverty findings, however, revealed some key issues. These include: (a) (b) (c) Alleviating poverty in the Family Islands should be top priority, as residents in these islands are worse off than in New Providence/ Grand Bahama, as evidenced by the higher poverty gaps in these islands. The nexus between education, employment and poverty, as the survey found lower employment rates and substantially less education in poor households. The survey also revealed that 20% of persons in poor households had completed higher secondary school education. The findings suggest therefore, that further training and more effective matching of labour market demands by the educational system would help to raise longterm earning capacity and alleviate poverty. Vulnerability of children given that nearly half of the poor are TABLE 1: POPULATION POVERTY INDICATORS Poverty Proportion of Distribution of Population Rate Population Poor All Bahamas Region New Providence/Grand Bahama Abaco, Eleuthera & Andros Exuma and Long Island Other Family Islands Gender Male Female Nationality Bahamian Haitian US, UK or Canadian Other Age Group and older Source: Bahamas Survey of Living Conditions

5 (d) (e) young persons, as well as youth unemployment. The survey found that 33% of youths in poor households neither worked nor were in training. Even among non-poor households, this unattachment rate was still relatively high at 20%. The results suggest that greater effort will need to be expended in targeting programmes towards children below fourteen years of age, and increasing employment opportunities, possibly through apprenticeships, work attachments and in ensuring a greater matching of skills with those required by potential employers. Inter-generational transmission of poverty, through reduced access to early childhood education, high class-repetition rates among children, low rates of tertiary enrolment relative to the non-poor and underweight/overweight children. Low coverage of social programmes, which may have little impact on poor persons, and may require some assessment of current programmes to ensure that the needs of the poor are adequately met. To effectively fight against poverty GOCB may need to address the issue from three main aspects, namely capability enhancement, vulnerability reduction, and good governance. Capability enhancement involves empowering persons to be able to take advantage of employment opportunities and to participate meaningfully in social and governmental processes. Importantly this involves human resource development in both the formal and informal education systems, and ensuring that the skills taught are relevant to the needs of the labour market. Vulnerability reduction however involves ensuring that persons on the margin of poverty do not slip into poverty and the already-poor do not descend further into poverty. This involves greater emphasis on supporting interventions such as developments in housing and health, mainstreaming of natural hazard risk management which mostly affect the poor and those on the margin, and community development initiatives and ensuring that the basic needs of persons are met. Good governance, the third aspect involves public sector reform to ensure that adequate regulatory systems and social protection measures are effectively designed and administered to ensure adequate targeting and coverage of poor individuals, as well as promoting participation of citizens. A holistic approach to poverty reduction is therefore not only specific programmes targeted at the poor, but requires consideration in all aspects of economic management and public policy formulation. C. Addressing the Millennium Development Goals In September 2000, United Nations member states agreed to a set of objectives called Millenium Development Goals (MDGs) aimed at combating poverty, hunger, disease, illiteracy, reducing mortality, and fostering partnerships for development. These eight MDGs as well as The Bahamas current status as it relates to these MDGs are summarised in Table 2 below. Although most statistics are not available for both years, for those indicators where information is available, the data show a definite improvement over the 10-year period, particularly as it relates to reducing child mortality. Given that The Bahamas is considered as a country with a high level of development in light of its favourable social and economic conditions, there is a need for The Bahamas to customize the MDGs to reflect its reality and its own development concerns. This could include reducing by 50% the number of poor persons who fall below the poverty line by 2015 and /or eliminating extreme poverty, since by comparison poverty in The Bahamas is the lowest among BMCs. More ambitious objectives could also include achieving universal secondary education, eliminating the gender disparity in incomes, jobs and education, mainstreaming environmental sustainability into public policies especially given the dependence on tourism, and ensuring that all persons have access to safe drinking water and improving efficiency and effectiveness of the public service. Within this context, The Bahamas could also try to customise MDGs to the specific islands to ensure that improvement in social conditions are not heavily skewed towards population centres but is distributed equitably across all islands. 29

6 PUBLIC SECTOR INVESTMENT PROGRAMME The main long-term development objectives as articulated by GOCB are to inter alia: (a) (b) Preserve economic stability through sound macroeconomic and fiscal policies, which includes lowering the debt to GDP ratio to 30% over the next 5 years. Further develop the key tourism and financial services sectors but also focusing on diversification through the development of agriculture, manufacturing and ecommerce. (c) (d) (e) TABLE 2: STATUS OF MDGs Improve citizens safety by strengthening laws against violent crimes, developing security forces and prison reform, and creating an environment for increased dialogue between civil society and Government. Promote the Family Islands and small business development. Strengthen of the social services by improving the provision of education and health care services and reducing the incidence of poverty. (f ) Improve air, sea and ground transport. Item na Na Goal 1: Eradicate extreme poverty and hunger (Halve poverty ($ 1 per day) by 2015) Goal 2: Achieve universal primary education (Both sexes complete primary school by 2015) Literacy rates, aged 15-24, both sexes (%) Goal 3: Promote gender equality and empower women (Eliminate gender disparities in primary and secondary education by 2015) Girls to boys ratio, primary level enrolment na 1.01 Girls to boys ratio, secondary level enrolment na 1.03 Girls to boys ratio, tertiary level enrolment na na Proportion of seats held by women in national parliament 8 20 Goal 4: Reduce Child Mortality (Reduce by 2/3 the under 5 mortality rate by 2015) Children under five mortality rate per 1,000 live births Infant mortality rate (0-1 year) per 1,000 births Children 1 year old immunized against measles Goal 5: Improve Maternal Health (Reduce by ¾ the maternal mortality rate by 2015) Maternal mortality ratio per 100,000 live births na na Births attended by skilled health personnel (%) na 99 Goal 6: Combat HIV/AIDS, malaria and other diseases (Halt and begin to reverse the spread of HIV/AIDS and incidence of major diseases by 2015) HIV prevalence rate, aged 15-49% Na 3.0 Tubercolosis, DOTS detection rate (%) Na 52 Goal 7: Ensure environmental sustainability (Integrate sustainable development principles into policies) Forested land area as percentage of land area Carbondioxide emissions (CO2), metric tonnes (tns) of CO2 per capita 6.1 na % of population with access to improved drinking water sources Na 97 % of population with access to improved sanitation Na 100 Goal 8: Develop a global partnership for development (Deal comprehensively with debt problems. Make available benefits of new technologies) Small islands ODA received as percentage of GNI Small Islands ODA received (US$) Telephone lines and cellular subscribers per 100 population Personal computers per 100 population Na na Internet users per 100 population

7 The PSIP for Fiscal Year (FY) 2005/2006 envisages spending of $132.9 mn compared to actual expenditures of $90.4 in FY 2004/2005. The capital budget allocations focus mainly on infrastructure and social sector development, with no increase being targeted towards productive sector activities. The majority of the increase will be targeted towards improving public works and water supply with expenditures in this category expected to rise from $31.2 mn to $55.7 mn. Expenditures on education are also expected to rise by a further $4.1 mn in keeping with GOCB s focus on human resource development. Community and social service expenditures are also expected to receive a boost of $3.5 mn, while spending on health and defense are projected to rise by $2.3 mn each, with the rise in defense mostly directed towards a new police communications system. These development expenditures are likely to be financed predominantly from local currency borrowing, and, to a lesser extent, external loans. There is a need to strengthen PSIP management in The Bahamas, particularly as it relates to improving coordination between Ministry of Finance and executing agencies, and also in improving the institutional capacity of key ministries. Specifically assistance is required in the areas of project planning, design, evaluation and oversight functions to boost project execution and portfolio management. The need for an enhanced framework for the PSIP becomes more critical in light of budgetary constraints that may arise as GOCB seeks to reduce its debt to GDP ratio to more sustainable levels over the medium term, and as public sector wages continue to rise. It is therefore essential that implementation issues be addressed now to ensure maximum efficiency and impact of projects. 4. MEDIUM-TERM ECONOMIC PROSPECTS The medium term outlook for The Bahamas is favourable, barring adverse economic shocks or natural disasters. Tourism is expected to recover in 2006 following the destruction inflicted by the hurricanes in 2004, and should also benefit from on-going promotional efforts, training of key persons in the industry, as well as planned and ongoing increases to hotel-room stock. In the near term however, the expansion in hotel stock will likely result in an increase in construction activity, as new construction is expected to take place in New Providence while work continues on Phase III of the Atlantis Expansion project valued at $1 bn. Additionally, domestic consumption is also expected to be boosted by the wage increases awarded to civil servants over the next three years. The threat of rising oil prices however, presents downside risks for The Bahamas. This may occur directly through the higher prices for imported goods which may be exacerbated by heightened domestic demand, higher costs of travel, and indirectly by restrictive policy measures implemented by major trading partners to offset the effect of rising oil prices. While these demands, in addition to the accommodative lending environment will place additional pressure on external reserves, these may be partially or wholly offset by greater tourism receipts and capital inflows. With the increase in demand, and ongoing measures to increase revenue collection, revenues are likely to be higher, but finances may be strained by additional contractual arrangements and capital outlays. 31