TURKS and CAICOS ISLANDS
1. RECENT ECONOMIC PERFORMANCE A. Overview The Turks and Caicos Islands (TCI) recorded strong GDP growth for the fourth consecutive year in 2006, estimated at 10.8% compared with 12% in 2005 and 11.6% in 2004, driven mainly by the expansion in the tourism industry and a surge in construction activities. The agriculture, transport and communication, real estate and wholesale and retail trades sectors also contributed to economic growth in 2006. The strengthening of economic activity during 2006 occurred in the context of relative price stability, notwithstanding high petroleum import prices. Inflation was estimated at 1.5% in 2006 compared with 3.7% in 2005. The fiscal performance improved significantly during the first nine months of FY 2006/07, ending December 2006, compared with the corresponding period in FY 2005/06. Strong recurrent revenue growth resulted in a substantial increase in recurrent account savings in FY 2006/05,despite a large increase in recurrent expenditure. Substantial growth in capital revenue resulted in a lower overall deficit in FY 2006/07 compared with FY 2005/06, in spite of substantial capital spending. B. Sectoral Performance Tourism Valued-added in tourism increased by an estimated 18.9% in 2006, compared with growth of 15.5% in 2005 and 6.5% in 2004, respectively, reflecting an increase of 12.5% to 225,000 in stayover arrivals and substantial growth in the number of cruiseship passengers, the latter following the opening of new terminal facilities in Grand Turk. Growth in the industry is expected to continue as a result of substantial investment in a range of visitor facilities across the archipelago, and in consequence of substantial ongoing marketing and promotion efforts in North America, Europe, and Asia.
Turks and Caicos Islands
Construction Value-added in the construction sector increased by an estimated 7.6% in 2006 compared with growth rates of 24.6% in 2005 and 28.2% in 2004 respectively. While the slowdown in growth reflected the completion of a number of major projects, the absolute level of activity remained high given the base from which output growth is being calculated and the number of substantial projects still under implementation. The sector remained predominantly tourism driven,although there was a substantial residential component in the level of activity. Construction on public sector projects was an important contributor to sector activity. Agriculture Output growth in the agricultural sector was estimated at 4.9% in 2006 compared with 7.2% in 2005 and 10.4% in 2004. While the production of both lobster and conch was higher in 2006 compared with the previous year, lobster production continued to be affected by poaching from foreign vessels due to the inadequate level of effective monitoring, and surveillance of marine operations. There was substantial progress with crop production on the pilot agricultural project in North Caicos. Financial Services The level of activity in financial services grew by an estimated 13.6% during 2006 compared with 18.8% in 2005, as a result of an increased level of domestic business. Offshore business activity was minimal reflecting low demand for services as the authorities sought to ensure proper supervision and regulation of institutions During the year, a committee comprising representatives from the public and private sectors was established, chaired by the Governor, to oversee efforts to review legislation, introduce new products, and undertake increased marketing and promotion of the offshore business sector. C. Prices, Wages and Employment The rate of inflation, as measured by the change in
CDB Annual Economic Review 2006
99
consumer prices, rose by 1.5% in 2006, compared with 3.7% in 2005 and 2.7% in 2004. Domestic price movements tend to closely reflect US patterns on account of the openness of the economy and the high level of trade between TCI and the US. Expenditure on wages and salaries in the civil service during the first nine months of FY 2006/07 was estimated $55.5 mn, 26.1% higher than $44 mn for the corresponding period FY 2005/06. Higher total personal emoluments in FY 2006/07 reflected mainly an expansion in public sector employment in both established and non-established positions as well as salary revisions during the year following a public sector restructuring and re-grading exercise. There were indications that the level of employment increased from the 2005 level as a result of the higher level of economic activity during 2006. D. Fiscal Performance and the Public Debt Fiscal Management Fiscal performance improved in FY 2006/07 owing mainly to substantial revenue growth, despite high levels of expenditure, resulting in substantial growth in the recurrent surplus and a reduction in the overall deficit. Fiscal operations during the first nine months FY 2006/07 ending December 2006, produced a surplus on recurrent account of $7.2 mn, compared with $2.3 mn for the corresponding period in FY 2005/06. Recurrent revenue grew by 32.7% to $147.4 mn in FY 2006/07 from $111.1 mn in FY 2005/06 as a result of increases in import duties ($15.9 mn or 41%), stamp duty on land transactions ($8.9 mn or 38%), accommodation tax ($3.2 mn or 36%) and work permit fees ($1.8 mn or 16%). Recurrent account spending over the same period totaled $140.2 mn, or 28% higher than the $108.8 mn for the corresponding period in FY 2005/06, mainly as a result increased outlays on wages and salaries, medical expenses, subventions to statutory bodies, and scholarship expenditures. Total employment costs increased by 26% to $55.5 mn in FY 2006/07 as a result of the re-grading of positions in the civil service and the increase in employment in both established and non-established positions. Expenditure on medical referrals abroad rose by $4.2 mn or 46% to $13.3 mn in FY 2006/07 from $9.1 mn in FY 2005/06. Subventions to statutory bodies increased by $9.2 mn or 84% to an estimated $20.2 mn in FY 2006/07 with the Tourist Board and Airport Authority receiving the majority of the increase. The expenditure on student scholarships was $15.2 mn during the first nine months of FY 2006/07, $4.2 mn or 38% higher than for the corresponding period in the previous year. 100
CDB Annual Economic Review 2006
The capital account improved mainly as a result of a substantial increase in capital revenue despite large increase in capital expenditure. Capital revenue rose from $4.6 mn in the first nine months of FY 2005/06 to $32.3 mn for the corresponding period in FY 2006/07 in response to an inflow of $29.6 mn in land sales. Capital expenditure amounted to $42.2 mn, up from $23.9 mn in FY 2005/06, with most of the funds being spent on improving infrastructure across all the islands.. Consequently, the overall fiscal deficit amounted to $2.7 mn compared with $17 mn for the corresponding period in FY 2005/06. The authorities have acknowledged a need to improve fiscal stability and predictability, with an important element in this process being the control of expenditure. There has been particular concern over the evolution of spending on medical referrals and on scholarships, although both categories of operations are regarded as being worthy of strong public support. Although policy development work has been done covering the two areas and guidelines for expenditure management have been introduced, it is clear that substantial issues still exist that need to be addressed. Public Debt Total public debt outstanding at endDecember of FY 2006/07 was estimated at $75 mn compared with $54.6 mn at end FY 2005/06, with commercial banks being owed $47.3 mn, and multilateral institutions $27.8 mn. At end of FY 2005/06, the composition of the total public debt was commercial banks $36.5 mn and multinational institutions $18.1 mn. The growth in l borrowing during FY 2006/07 was intended to finance the capital programme. The Government’s ability to contract new borrowing is dependent on meeting the fiscal guidelines as agreed with the UK authorities, given the country’s status as an Overseas Territory.
2. MAJOR POLICY ISSUES A. Fiscal Management Fiscal performance in TCI improved in the last two years as reflected in the increase in the recurrent account surplus and a reduction in the overall deficit. However, in the context of an extensive capital programme to accelerate the pace of a more balanced development in all the Islands, fiscal stability is required to finance the Government’s development agenda. The fiscal management priority should aim to further increase the recurrent surplus to help finance the capital programme as well as to achieve reserves targets,
Turks and Caicos Islands
which underpin the Government’s borrowing ability. While revenue performance is projected to be high, inadequate expenditure management can jeopardise the achievement of fiscal targets over the medium term. Improved expenditure management will be critical particularly in the areas of health care, scholarship expenditures and transfers to statutory entities to achieve the desired level of fiscal savings. Likewise, the PSIP needs to be rationalised to reflect prioritisation of projects and resource availability. In addition, Government may need to focus on improving the management of statutory entities to streamline their operations to ensure transparency and accountability, thereby reducing the level of transfers to these entities. B. Infrastructural Development The provision of public infrastructural capital is important for the continued future development in TCI since rapid economic growth has placed significant pressure on existing physical infrastructure. The Government has placed a high priority on developing physical infrastructure to achieve a more balanced development across all the islands of the archipelago. The provision of economic infrastructure in the less populous territories is necessary to arrest economic stagnation in these Islands. The Government aims to expand its infrastructure development programme to promote the development of tourism in all the Islands by focusing particularly in the transport sector (sea and airport facilities, roads and the causeway bridge), the provision of healthcare (medical facilities), and educational and sporting facilities. A transport sector study was recently completed which sets out the areas of focus for implementation. However, the major challenge is the financing of these infrastructural projects. C. Environmental Sustainability and Natural Hazard Management Tourism development and sustainability in TCI is based upon the preservation of the natural beauty of the islands. The increasing reliance on tourism will require the Government to expand the level of the current effort to conserve the environment. While the focus is on the up-market end of the tourism industry, high-income visitors are more likely to demand value for money and will react faster to perceptions of environmental degradation. The natural environment which serves as the main attraction to visitors and the source of income require effective and sustainable management. TCI’s location makes the country highly prone to natural hazards like hurricanes and tropical storms. The fact that
the islands are low lying increases the risk of flooding and of damage from hurricane storm surges; in addition, the implications for the TCI arising from the possible effects of global climate change need to be factored into the physical development programme for the islands and into the disaster preparedness framework. D. National Development Planning The economy of TCI faces a number of challenges over the medium to long term, including further strengthening of public; promoting economic diversification to reduce vulnerability to exogenous shocks; enhancing social; addressing critical issues related to the provision of infrastructural development in the archipelago; and further enhancing the prospects of sustaining economic and social development. The Government in recognition of the need for planned development in TCI launched the process for the preparation of a tenyear national development plan. A National workshop was held in May 2006 with sectoral representatives and members of sub-committees to review and decide on the broader development options and to begin the priortisation of policies and programmes; and this led to the preparation of a draft national development vision, which embodied the values and attitudes proposed to be the guiding principles for the development of the economy and society of TCI in the future. The next stage of the planning process is to revise and finalise the various reports through further consultations and to elaborate the draft 10-year national development plan. The plan is expected to contain specific programmes, policies and projects as well as a medium term economic and social strategy.
3. PUBLIC SECTOR INVESTMENT PROGRAMME A. Development Objectives The general developmental objective of the authorities is to promote balanced economic growth and enhance social development in the country. The economic and social development is expected to be achieved through effective economic management, good governance, improved social service delivery, infrastructural development, national security, and environmental preservation. The authorities have identified the development of tourism and the offshore business sector as the major pillars of its development strategy and is pursuing a programme further to develop these areas of operations.
Turks and Caicos Islands
CDB Annual Economic Review 2006
101
B. Composition of the PSIP The PSIP is estimated at $198.2 mn for the three-year period FY 2006/07 to FY 2008/09, with estimated allocations of $90 mn to be spent in the first year, $70.2 mn in the second year and $38 mn in the third year. The focus of the PSIP during the period is primarily on infrastructural projects in the key sectors of transportation, education, health, community development and sports. Economic infrastructure development is focused mainly on port (airport and seaport) and roads development. The major projects in the PSIP include the upgrading of the South Caicos Airport Terminal; North Caicos Airport re-development; North Caicos Port; South Dock Redevelopment project in Providenciales; South Caicos Port development; road development in Providenciales, Grand Turk, South and North Caicos and national sub-division roads in all the islands; and the North/Middle Caicos Causeway Bridge Project. Other major projects include a new primary school in Providenciales, Phase II of the Community College, extensions of high schools, low-income housing, and the construction of a national stadium. C. Financing The financing of the PSIP during the period FY 2006/07 to FY 2008/09 will comprise mainly of loans, and the use of locally generated revenue, given the termination of UK grant funding in 2005. External loans of $91.3 mn are expected to finance 46.1% of the PSIP financing requirements, with grants of $15.4 mn accounting for 7.8%; and the remaining $91.5 mn or 46.1% is expected to come from local revenue. The only major source of grant funding for TCI is the EU, under the EDF programming arrangements. Consequently, prudent fiscal and financial management will be required to ensure that adequate levels of fiscal savings are generated to finance the proposed investment projects and to build reserves to enhance increased borrowing. Fiscal projections for the period FY 2006/07 to FY 2008/09 indicate that the agreed borrowing guildelines will be met. However, the Government has contemplated new modalities for infrastructure financing in the context
of limitations imposed by the borrowing guidelines. The Government is considering several joint venture arrangements and private sector initiatives with regard the provision of infrastructural projects. The projects, which are likely to be financed by private initiatives, include the construction of the medical facilities at Grand Turk and Providenciales, the Government Office Block at Providenciales, and port re-development at Providenciales. D. Implementation Issues Weak institutional capacity continues to affect performance in project implementation especially in the Ministry of Works and Utilities, and the Ministry of Finance There is also weakness in project monitoring and supervision mainly because of skills deficiencies in executing agencies. A major concern is the limited supply of skilled labour to meet the increased demand associated with the implementation of a larger PSIP. To address this particular weakness, the Government has established a central Project Management Unit to maximise the use of public sector capacity.
4. MEDIUM-TERM ECONOMIC PROSPECTS Medium term economic prospects for the TCI appear favourable, with economic growth is projected to average 8% annually over the next three years. There is strong investor confidence and the performance of the tourism industry has been good, with the up-market focus contributing to lower levels of visitor expenditure volatility, and the absence of a mass-based industry resulting in reduced loading of the environment. Continued strong growth in tourism is anticipated given TCI’s market niche as an unspoilt up-market resort, with the expansion of room capacity, increased flights to TCI, greater promotional campaigns and marketing, and with the expected growth of cruiseship tourism. The expansion in tourism is expected to drive activity in the rest of the economy. With the continued expansion of the industry, however, the environmental issues will become increasingly important.
102
CDB Annual Economic Review 2006
Turks and Caicos Islands