ANGUILLA
1. RECENT ECONOMIC PERFORMANCE A. Overview Preliminary data indicate that the economy expanded at a double-digit rate during 2006, following GDP growth rates of 16.4% in 2004 and 10.9% in 2005. Continued slowing in the rate of activity growth is expected during 2007, mainly as a result of Government policy action to reduce the potential for overheating by containing the rate of new investment project implementation, mainly in the private sector. Foreign investment inflows remained strong during the year, resulting in sharp increases in imports of both investment and consumption goods, in a substantial increase in government revenue, and in an 8.4% rise in consumer prices compared with 4.5% in 2005; although the upward movement in fuel import prices also contributed both to inflation and to the public revenue intake. The labour market remained tight, although the potential for wage-rate increases was partly offset by the importation of labour. The level of private sector activity permitted a slowing in the growth of public spending, in line with the completion of a number of major projects, although recurrent spending continued to rise; and there was some downward movement in the public debt. At the same time, however, prospects for continued economic growth over the medium term remained favourable, given the level of planned investment in new construction in tourism and related industries to meet visitor demand, and given the level of programmed public sector supporting investment. The authorities have been keeping the rate of real estate development under continuous review, with a major consideration being greater involvement and participation of nationals in the development and ownership of new facilities. B. Sectoral Performance Tourism The tourism industry has been the major driver of economic activity in Anguilla, with substantial 16
CDB Annual Economic Review 2006
growth in visitor arrivals in recent years encouraging, and facilitating, a high volume of mainly externallyfinanced construction activity; while the country has remained, and has continued to position itself as, a high-end destination rather than catering to a massbased industry. Between mid-2002 and the end of 2006, planned foreign investment in tourism-related projects, some of which had commenced, amounted to $1.8 billion (bn); and, on completion, the projects were expected to triple the number of rooms from 800 at the end of 2006. During them first eleven months of 2006, total visitor arrivals were 19% higher than during the corresponding 2005 period; and it was expected that the growth in total arrivals for the year would exceed 10% compared with 2005, following year-onyear growth of 15% in both 2004 and 2005. Improved airlift as a result of substantial improvements to Wallblake Airport, ongoing marketing efforts, and the opening of the island’s first golf course late in the year were contributors to the improved performance; and these factors should enhance the attractiveness of the destination sector over the medium term. Construction Output in the construction sector rose strongly during the year, reflecting growth in both residential and business construction, with the latter including tourism-related projects. While data on the actual rate of expansion were not readily available, available indicators, including domestic banking system lending to the sector, suggested that the rate of growth in construction activity remained in double digits. A high rate of output growth in the sector is expected over the medium term given the number of public and private sector projects that are currently in the advanced planning stages. Financial Services Preliminary data suggested that the offshore business sector retained its share of total valueadded during 2006, growing at least as fast as overall GDP. Data for the first half of the year indicated that the 1,320 new business firm registrations, including 1,097
Anguilla
new international businesss corporations (IBCs), were somewhat above the totals for the corresponding 2005 period. During the course of the year there was ongoing effort further to update and strengthen the legislative framework for offshore business sector operation. C. Prices, Wages and Employment The high level of economic activity during the year, together with the substantial construction sector contribution to output growth and its associated demand for imports and for labour, resulted in increased inflationary pressure in the economy, although wages pressure was at least partly relieved through importation of labour. In 2006, year-on-year consumer prices growth amounted to 8.4%, compared to 4.5% in 2005, as all subindices, with the exception of Clothing and Footwear, recorded increases. The category which exhibited the largest increase was Household Goods, where prices rose by 32.5%. The outturn reflected the increased demand for household furnishings, appliances and utensils in an environment of strong growth in both residential and visitor accommodation. High global oil prices directly affected the Transportation and Communication, and Fuel consumer price categories. D. Fiscal Policy and Public Debt During 2006, the Central Government recorded its fifth consecutive recurrent account surplus. Boosted principally by accommodation tax receipts, stamp duty collections, and taxes on trade, recurrent revenue had, by the end of the third quarter,already exceeded the original full-year projections. Recurrent revenue, at $67.1 mn, was 42.9% more than the 2005 total, and contributed to an overall fiscal surplus of $2.8 mn compared with a deficit of $5.7 mn in 2005. Tax collections on domestic activity amounted to $29.2 mn, $12.9 mn above the level of the previous year. A doubling in stamp duty collections to $16.9 mn reflected the high level of land transfers in a booming real estate environment; while tax collections from international trade and transactions rose by 28.3% as imports continued to increase. The strongly favourable revenue outturn encouraged the authorities to increase expenditure levels. By the end of 2006, recurrent expenditure at $53.8 mn was 37.2% more than during 2005, and exceeded the original budgeted total of $46.3 mn. Outlays for personal emoluments rose by 20.3% to $18.2 mn, reflecting wage and staffing level increases; while tranfers rose nearly 50% to $13.9 mn as a result of increased funding for the Health Authority, the Albena Lake Hodge Comprehensive School, and the Tourist Board to cover rising operating costs. Outlays on goods and services grew by 48% to $19.3 mn.
Anguilla
The improved fiscal situation allowed the public debt to decline.. Public sector debt was estimated at $39.6 mn at the end of November 2006, approximately 7% lower than the December 2005 year-end figure, reflecting declines in both the Central Government’s debt and that of the public corporations. The domestic component of total outstanding debt of the Central Government, which accounted for 70.9% of total public sector debt, was $28.1 mn at the end of November 2006. Governmentguaranteed debt stood at $5.9 mn, the main beneficiary being the Anguilla Development Board. During 2006, Anguilla met the debt benchmarks established by the UK Government in respect of its Overseas Territories: public sector debt, at 36.2%, was well within the ceiling of 80% of recurrent revenue; the ratio of debt service to recurrent revenue was 5.2%, below the 8% ceiling; and the ratio of liquid assets to recurrent expenditure, at 27.8%, exceeded the floor of 25%. Capital expenditure for 2006 was estimated at $16 mn. As at September 2006, capital expenditure had fallen by 18% from the 2005 level to $10.2 mn,as a number of major projects were completed. The bulk of the government’s capital works programme was concentrated on implementing the medium-term air transportation sector plan, to which the EU has committed $11.7 mn. EU funding permitted the partial repayment of a $15 mn commercial bank bridging loan to fund the airport expansion project. Other major developments included road rehabilitation projects, a pier development project, and the provision of infrastructure related to secondary education. E. Financial Sector At the end of 2006, monetary liabilities in the banking system amounted to $381 mn, 12.7% higher than one year earlier, reflecting continued growth in the tourism and construction sectors. The major contribution came from a $28.7 mn surge in private sector foreign currency deposits, as a result of the higher level of economic activity, robust FDI flows, and the sale of lands and property. Private sector demand was reflected in a 15.8% increase in domestic credit to $281 mn,. On the other hand, Central Government borrowing from the banking system declined by 57% to $8.5 mn. F. External Sector There was a sharp rise in the level of expenditure on imports reflecting higher prices for petroleum products and larger quantities of imported consumption and capital goods. The value of imports rose by 34.5% to $174.7 mn, compared with an increase of 26.8% 17
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in 2005, and this was reflected in a rise in the trade deficit to $162.5 mn from $115.1 mn in 2005. Imports of consumption goods, representing approximately one-half of the imports, stood at $86.3 mn, $19 mn more than in 2005, as rising incomes facilitated private demand. Similarly, public and private sector investment resulted in a 29.7% increase in capital goods imports to $48.8 mn. These patterns are expected to continue.
B.
Fiscal Sustainability and Debt Management
2. MAJOR POLICY ISSUES A. Human Resource Development The five-year education sector development plan for the period to 2010 is consistent with the twin objectives of providing citizens and residents of Anguilla with quality education and raising the level of student achievement. The policy framework is one which emphasises both forging strategic alliances with the community, and devising cost effective and alternative options of education programme delivery. A social development levy is seen as an important initiative in education financing, especially as it relates to welfare programmes that encourage social inclusiveness, such as subsidised lunches for financially disadvantaged students. Among the high priority areas, the operational strategy identifies improvements in the schools transportation service, and the expansion of the careers advisory service through the provision of a Careers Officer to complement the work of an existing career guidance counsellor in the secondary school system. Improving technical and vocational training, particularly in in incormation and communications technologies, is regarded as a critical area for attention, and a technical sixth form has been introduced at the secondary level. Pastoral care and development, a new key area under the plan, is to be delivered through counselling programmes that include the development of mediation skills; while improved support staffing is intended to enhance the quality of special needs education services. In the context of family members of migrant labourers in Anguilla, new challenges to the delivery of universal primary and secondary education relate to increasing average class sizes and language proficiency, as many of the newlyarrived students are primarily Spanish-speakers. In the post-secondary sector, the Community College is to be further developed. and will incorporate the existing hospitality training programme, which is playing a key role in the expanding tourism industry.
Despite the favourable fiscal performance during 2006, the authorities in Anguilla face potential fiscal management challenges over the medium term. Expanding and improving physical and institutional infrastructure to keep pace with and to facilitate ongoing private investment will require not only ongoing capital investment but expanding levels of recurrent spending to provide the associated required increases in inputs and maintenance; and high levels of economic activity will bring with it inflationary pressures and other undesirable effects related to robust aggregate demand. The scope for downward flexibility on the expenditure side is generally low in respect of both recurrent and capital spending, with the additional issue that lower than required levels of capital investment will restrict the potential for growth in the future; and there are always continuing attempts to provide justification for increases in recurrent spending. On the other hand, most countries in the region, including Anguilla, have experienced considerable revenue-side volatility during the past decade, with consequential effects for reliance on the generation of surpluses to finance investment and to cover contingencies. Operating freedom is further constrained by the need to observe the UK Government’s prudential fiscal guidelines, with the liquid assets to recurrent expenditure ratio likely to prove the most troublesome during the period ahead. A strong focus will be required to establish and maintain efficiency and effectiveness in public expenditure, particularly on the recurrent side. This is particularly important given the fact that much of the public sector capital investment over the medium term has already been identified, and the funding requirements exceed current projections for the fiscal surplus. Further into the future, effective debt management will be a critical component of ongoing arrangements to integrate the budget and planning functions, and to extend the budgeting horizon to encompass a multi-year perspective. The revenue volatility issue is particularly important given the level of dependence of the small-island economy on tourism, foreign investment, and offshore business services, all externally driven, for growth, employment and incomes, and given the level of vulnerability to adverse external shocks, both natural and economic. The potential adverse impact of revenue volatility has been an important consideration in the evolution of the benchmarks in the UK prudential guidelines.
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Anguilla
C. Development of Heritage Tourism Archaeological work has revealed significant intact petroglyphs in the Fountain Cavern, thought to have been the work of the Taino Arawaks. A major issue for the authorities will involve reconciling the use of the cave system, at least initially, primarily for historical and sociological research, on the one hand, or as an important visitor attraction, on the other. Fountain Cavern can play an important role as part of the development of heritage tourism; equally, there is no other known archaeological site like Fountain Cavern in the Lesser Antilles, and there are only a few comparable sites in the Greater Antilles. The authorities will need to proceed carefully with the development of this important natural resource, including the associated franchise values.
4. MEDIUM-TERM ECONOMIC PROSPECTS Anguilla’s medium-term prospects are favourable, driven by tourism, financial services and construction. As the public sector’s revenue base is closely linked to external developments, strengthening of fiscal and debt management practices is critical to successful economic management in the medium term. Tourism is the main plank of the economy and its rapid expansion raises potentially serious challenges, chief among which is environmental sustainability. It will be necessary to monitor developments in the sector closely and provide for effective environmental management in the economy. Interventions in the education sector, ranging from upgrades of physical facilities to financial assistance for tertiary education and training, will need to be complemented by the provision of skills development programmes that also target issues of gender, youth, mobility and multiculturalism. As boundaries between public education and training, enterprise level, commercial, non-profit and non-formal skill training weaken, there will be need for new approaches at the sector and local levels, approaches which take account of the changes taking place at all levels. To facilitate implementation of the country’s development programme, the retention of key staff in the public sector is vital, given the pace of development and the ambitious social agenda in the areas of health, security and education. The ability of GOA to implement its plans for continued economic growth is also affected by downside risks emanating from a slowing US economy, high oil prices, and climate or environmental damage.
3. PUBLIC SECTOR INVESTMENT PROGRAMME The authorities in Anguilla recognise that a key element of the medium-term development strategy involves the development and proper management of human resources; and there is therefore strong focus on education and professional development, health care, the management of crime, and on a sustainable policy with respect to immigration. The critical focus is on social inclusion, that citizens and residents possess a strong interest in developing the country. In accordance with this recognition and focus, the capital programme for the next fiscal year involves spending on primary and secondary education, on the Community College, on the Juvenile Center, and on the prison. At the same time, in order to meet infrastructural development requirements for tourism and trade, there will be further investment in road development, in the construction of new pier facilities at Blowing Point, and in thye development of a master plan for a container port and landfill site at Corito.
Anguilla
CDB Annual Economic Review 2006
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