BRITISH VIRGIN ISLANDS
1. RECENT ECONOMIC PERFORMANCE A. Overview Strong growth in the tourism and international business services industries spurred growth in the British Virgin Islands (BVI) in 2006, as real output is estimated to have risen by 7.2% compared to 5.8% a year earlier. Construction activity, however, slowed in 2006 as a result of a lower number of commercial building starts and a decline in Government’s capital works programme. The rise in real sector activity, particularly in financial services, had a positive influence on government revenues, and coupled with some curtailment in capital expenditure, led to a strengthening in Government’s overall position. B. Sectoral Performance Tourism Strong growth in the global economy, implementation of innovative marketing programmes and the upgrading of tourism visitor sites were the main factors contributing to a rise in visitor arrivals. Long-stay arrivals rose by 3.1%, while the 5.1% rise in cruise arrivals was attributed to an increase in cruiseship calls, reversing the decline a year earlier when there was a concern that the authorities were planning to reduce the number of cruiseships allowed in the destination. Financial Services The international business services sector expanded in 2006, reflecting growth in the global economy and in particular Asia; ongoing marketing efforts, most notably road-shows; continuing improvements to the legislative framework; and the BVI’s reputation as a sound jurisdiction. The captive insurance, international business corporation (IBC), and mutual funds industries continued to perform, with the number of licenced institutions increasing during the first nine months of the year; while the number of general and restricted trust licenses showed a slight decline.
British Virgin Islands
During the year, the BVI established an International Affairs Secretariat (IAS) to inter alia oversee the operations of the BVI Finance Centre and its London office, and co-ordinate the Government’s relations with external publics. The IAS will also represent the BVI at regional and international fora and provide intelligence on international developments impacting the economy. C. Prices Wages and Employment The rate of inflation declined to 1.8% over the ten months to October 2006 compared with 3.5% over the corresponding 2005 period, mainly reflecting the behaviour of imported petroleum prices. The largest price increases were recorded for food, services and clothing while prices for housing and transportation declined. The economy of the BVI is typically characterised by unemployment rates below 4%, and labour market conditions tightened during the year with the rise in the level of activity.
D. Fiscal Policy and Public Debt There was some strengthening of public finances during 2006, as robust revenue growth led to an increase in fiscal savings. This outturn, coupled with a reduction in capital expenditures, led to a narrowing in the overall deficit. The current account surplus rose to $10.9 mn from $4 mn, while the deficit narrowed to $11.4 mn from $21 mn a year earlier. Total revenue increased by 14.3% during the first seven months of the year, mainly reflecting higher collections of import duties (up 20.9%) and financial services (up 17%) as the number of registered companies continued to expand. On the expenditure side, while spending on recurrent items rose by a further 8.7%, capital spending contracted by 11%. The stock of outstanding debt declined slightly, falling
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from $52.1 mn to $48.3 mn at the end of 2006. At the end of 2006, the BVI remained well within the United Kingdom’s borrowing guidelines. The net debt as a ratio of revenues was estimated at 17%, well below the maximum limit of 80%,while debt servicing a percentage of operating revenue was 2.5%, below the maximum 10%. The reserve ratio (liquid assets as a percentage of current expenditure), however, was calculated at 24.3%, slightly below the stipulated 25% floor.
these developments are the damage to marine plant and animal life as a result of cruiseship traffic; and secondly the relatively low average level of expenditure per cruise visitor. In 2005, the average long stay visitor spent $1,155 while the cruise visitor spent an average of $100. A programme which effectively targets cruise passengers with a view to facilitating their return as longstay visitors would benefit the BVI both environmentally and economically. B. Environmental Management
2. MAJOR POLICY ISSUES A. Improving Tourism Competitiveness The tourism industry is one of the two main pillars of the BVI, making significant contributions to output and employment. BVI has established itself as a quality highend destination catering to hotel ,charter-boat visitors, and cruiseship passengers. However, as regional and global tourism markets become more competitive, BVI will need to continuously upgrade its product offering and promotional efforts. The authorities have recognised this and have consistently engaged in the refurbishment of tourism sites and re-branding the image of the BVI, particularly since the country is generally categorised as a mature destination. In addition, effort is ongoing to improve standards in all aspects of the industry, and there is continuous training of industry personnel. In 2006, the BVI began the process of upgrading its immigration and customs processes with the introduction of new travel forms. This is to be followed by up-to-date data entry protocols which will result in the authorities having real-time information on all visitors to the BVI. This will greatly assist officials in identifying the demographic, location and other useful characteristics of visitors which will allow for more focussed promotional campaigns. Notwithstanding these improvements, there is a need for greater diversification of visitor markets. At present, approximately 70% of the visitors come from the US, with the UK providing the second highest number of visitors, accounting for 10%. This high level of market concentration exposes tourism to high market vulnerability. The broader European market appears to be the most natural choice for diversification, given historical linkages, air-lift considerations and the longer average length-of-stay of these visitors. Effort will also need to be directed towards the formulation of an effective programme for the conversion of cruise passengers to long-stay visitors. Since the start of the present decade, the number of cruise visitors has more than doubled to 449,152 in 2005. Two issues related to 40
CDB Annual Economic Review 2006
Over the past decade, the BVI has enjoyed a relatively fast pace of development based on tourism and offshore business (mainly financial) services The strong growth in tourism is projected to continue over the medium to long term, and there are plans for considerable new investment in hotels and resorts. This, has raised some sustainability issues. The first relates to the location of planned investments which could damage the natural environment. Greater co-ordination between ministries responsible for physical development planning and environmental concerns will be critical in ensuring that proposed projects are not implemented at the expense of environmental degradation.The second sustainability issue relates to the potential for overcrowding in the destination. The BVI has essentially marketed itself as a luxury tourism destination by adopting a lowvolume, high-value strategy. However, with the planned additions to room stock coupled with the already rapid growth in cruise tourism, care must be taken that the higher volume of tourists does not place undue burden on the natural environment or adversely affect the marketing strategy. These concerns are exacerbated by the needs of a growing population, the growth rate of which has accelerated over the past two years. In this regard, an assessment of the carrying capacity of the destination would be extremely useful in ensuring that overcrowding does not occur and that growth is sustainable over the long term. C. Improving Tax Administration Over the past 10 years, BVI has established a track record of sound fiscal performance, with fiscal savings averaging 5% of GDP over 1996-2005. This performance has been due in part to buoyant revenue collections from international financial services. The sizeable receipts generated from this industry, however, have resulted in the BVI becoming increasingly dependent on financial services. Indeed, revenues from this sector account for over 55% of total government revenue, making the BVI vulnerable to industry-specific shocks. Moreover with the raising of licensing fees in 2005,
British Virgin Islands
consistent raising of the income/payroll tax threshold and the planned reduction of duties on some imports, the trend of growing dependence on the sector is set to continue. The tax structure should, therefore, be revisited, and greater attention will need to be paid to developing other sources of activity, incomes, and government revenue.
preparatory work on the new high school will take precedence. Much effort has also been directed towards the refurbishment of community and recreational centres. Based on past trends it is expected that most of these projects and programmes will be financed primarily from government revenues, supplemented by domestic and external borrowing. One of the main challenges confronted the authorities in the management of this process is the absence of a formal PSIP to ensure that the stated development objectives are achieved. Ideally, the PSIP should flow from the NIDS to ensure that capital expenditures are more efficiently targeted. Additionally, the annual budget would be drawn from the existing PSIP to ensure that annual expenditures are consistent with long-term objectives.
3. PUBLIC SECTOR INVESTMENT PROGRAMME The main development objectives as outlined by the National Integrated Development Strategy (NIDS) are to: • • • • • Improve the standards of living of BVIslanders; Ensure an ecologically sustainable environment; Ensure strong social integration with supportive social services; Maintain good governance; and Build community spirit.
4. MEDIUM-TERM ECONOMIC PROSPECTS The medium-term prospects for the BVI continue to be favourable based on ongoing efforts to improve the legislative framework for financial services, and on planned investment in tourism. The latter industry is expected to benefit from the provision of additional room over the medium term as a number of hotels and resorts are constructed in the sister islands. There are plans to increase the tax threshold from $7,500 to $10,000, but any revenue loss may be offset by higher collections of license fees if growth in this sector continues on trend. There is scope for further consolidation of public finances provided that the authorities can continue to contain expenditure growth.
These objectives were generally supported by the 2007 budget, which included the projects and programmes that the authorities propose to implement over the medium and long term.The most significant interventions will be made in the health sector to address an ongoing sewage problem, drainage concerns, construction of a new hospital, and the purchase of an incinerator. Tourism is also expected to receive support, most of which is for visitor site and infrastructure development. Plans have also been completed for the construction of new roads as well as road refurbishment; while, in the education sector, computerisation of schools and
British Virgin Islands
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