The BAHAMAS
1. RECENT ECONOMIC PERFORMANCE in New Providence. Increased use of hotel spas and golf courses helped to boost hotel revenue, while timeshares and mixed-use accommodation showed lower utilisation rates. While uncertainty associated with the requirement that US nationals returning home produce passports may explain part of the contraction in the number of visitors arriving by sea, it is anticipated that implementation of a full refund initiative, in which US visitors are compensated for the money spent in acquiring passports, could provide some relief. In terms of niche tourism, events and group meetings have continued to be a lucrative market segment, and the country has intensified the marketing effort in the US to consolidate its position as a leading conference centre. Group travel business to The Bahamas increased by 15% during the year, and groups can now benefit from a new convention tax reduction policy. In the future, air arrivals from Europe will probably decline as a result of Virgin Atlantic’s decision to cease its weekly flight from London as of March 2007. Construction There was substantial activity in the construction sector during 2006, reflecting expansion in both residential and tourism-oriented accommodation. Activity in both residential and non-residential building, which is mainly tourist-driven, is expected to continue. While Phase III of the Atlantis expansion project is still under construction, two other large resort projects are in the pipeline. The value of residential mortgage commitments was $271.8 mn at the end of 2006, a 5.8% decline over 2005. In the commercial segment, mortgages expanded by 17.1% over the previous year. Financial Services At the end of 2005, the authorities undertook a strategic review of the financial services sector, The Bahamas Strategy and Branding Survey, the results of which are expected to guide the development
The Bahamas
A. Overview During 2006, GDP in The Bahamas grew by 4% its highest rate since 1999. Contributing to the growth was a high level of both residential and tourism industry construction activity, much of it financed by inflows from the US as part of asset protection strategies. Continuing investment in tourism also reflected ongoing confidence in the future of the industry in the country, proximity to the US, and the reputation of The Bahamas as a safe destination. Many of the tourism projects involve the Family islands. Booming economic activity has resulted in tightness in the labour and credit markets. While inflation slowed in 2006, as a result of the slackening in oil prices towards the latter part of the year, credit continued to increase, funding growth in imports, which in turn boosted government revenue and contributed to an improved fiscal outturn, despite increased, investment in key infrastructure and public service delivery in order to complement the tourismrelated developments. B. Sectoral Performance Tourism Data for the first ten months of 2006 indicate that visitor arrivals declined by 4.7% compared with the corresponding period in 2005, responding to a 7% fall in sea visitors,. While air arrivals remained steady (rising by 0.5%), sea arrivals decreased across all the main landing points, with New Providence recording a 6.7% reduction. Airlift capacity from the US and Canada improved during the year. Despite the decline in visitor arrivals, based on preliminary indicators, tourism revenue is expected to have achieved another record performance in 2006, with revenue being boosted by both higher room rates and longer stays, particularly in large hotels
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of a second five-year strategic plan for the industry. The Bahamas is already a well-known centre in the area of private wealth and fund administration, and is now seeking to increase in its participation in insurance and investment funds-related activities, which are perceived to be growth areas. Regulatory capacity and responsiveness have been complemented by new legislation to increase the depth and breadth of the private banking industry. The new arrangements include the Foundations Act, the Purpose Trust Act and an amendment to the Perpetuities Act. In addition, a comprehensive framework for Private Trust Companies (PTCs) has been introduced to provide increased flexibility and cost efficiency. In response to changes in regulation and technology, the introduction of the Specific Mandate Alternative Regulatory Test (SMART) Fund, a flexible investment vehicle that allows innovative structuring of investment funds, will also enable product diversification and economies of scope. There were 248 banks and trust companies licensed to operate in 2006, down from 250 in 2005. Revocation of licenses mostly affected public and restricted companies, as 14 licences were withdrawn overall in these categories, while 11 new licenses were issued during the course of the year. C. Prices Wages and Employment Consumer prices rose by 1.8% in 2006, compared with a rise of 1.9% in 2005. Following an uneventful hurricane season, a strong economic performance and outlook, and a heightened level of private sector demand, employment opportunities increased. New jobs were created primarily in the construction sector, leading to a decline of 2.6 percentage points in the unemployment rate to 7.6%, the lowest in over 10 years, from 10.2% in 2005. Although the decline in unemployment was broad-based across the major islands was broad-based, the largest fall – 4.3 percentage points – was recorded in New Providence, where the unemployment rate stood at 6.6% at year-end. Males accounted for about 56% of the growth in the labour force during the year, with new male recruitment expanding by 4.7%, compared with a 1.8% increase in the labour force. Household income in The Bahamas rose by an estimated 11.6% to an average of $43,420 during the year. D. Fiscal Policy and Debt Operations Bolstered by a growing economy, declining unemployment and improvements to the revenue collection process, the authorities were able to embark on an intensified capital works programme without damaging the fiscal position. The overall deficit stood at $125.4 mn, approximately 1.9% of GDP, compared
with a deficit of 2.4% of GDP in 2005. Increases in all major revenue components pushed overall revenue to $1.34 bn, 9.6% above the $1.22 bn recorded in 2005. The rate of increase was , slower than during the two previous fiscal years (17.6% and 10.1%), but was on par with the average rate of growth over the the previous four years. Tax revenue rose by 9.3% to $1.2 bn, while non-tax collections increased by less than 1% to $136 mn. Revenue performance has been consistently strong during recent years. Revenue from import duties increased by 14% to $725.7 mn, compared with increases of 18.4% and 3.6%, respectively, during the previous two years. Although threshold for the real property tax was increased in 2002/03, property tax revenue collections have continued to increase, rising by 29.3% during the year. Collections from the selective tax on services and from business and professional licences rose by 44.5% and 6%, respectively. With the formation of a Revenue Compliance Unit, the authorities have sought to enforce tax compliance and reduce revenue leakage. Additionally efficiency gains are being achieved in the revenue-collection process from a new cash receipting system which has replaced the manual receipting system. With the ability to accept credit cards, the system provides the public with greater payment flexibility. In Abaco, the second largest revenue point, the Treasury Office has further provided greater flexibility to the public through on-line tax collection processing. Under the influence of strong growth in capital expenditure, fiscal expenditure, excluding net lending, for the second successive year increased by double digits, growing by 12.5% to $1.46 bn compared with a 6.8% average rate of growth for the previous three years Reflecting strong growth in personal emoluments and in expenditure on goods and services, recurrent spending rose 10.4% to $1.3 bn, as against an average rate of growth of 6.5% over the previouspast four years. Agreements covering higher wages for civil servants along with increased staffing levels pushed the personal emoluments component by 12.8% to $553.7 mn; while, spending on goods and services rose 17.9% to $275.4mn. Transfer payments, which could decline if the long-mooted privatisation of Bahamasair is completed, rose by 4.4% to $440.5 mn. With continuing infrastructural work on tourism-related public sector facilities, along with water supply, road infrastructure and housing projects, capital expenditure rose by 31.5%
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to $162.4 mn. Spending levels were also boosted by higher international commodity prices, pushing up prices of construction materials and machinery. Driven largely by an 8.3% ($161.9 mn) increase in outstanding domestic borrowing, Central Government debt continued to expand. At the end of 2006, Government’s debt obligations, excluding contingent liabilities totalled $2.4 bn, a 7.2% increase over 2005. External debt liabilities and Treasury Bills remained relatively constant at $286.1 mn and $192.5 mn, respectively. However, in order to support the growing capital works programme there was a sharp 9.6% ($160.9mn) increase in the outstanding Government securities issue, which accounted for the majority of the rise in Government’s indebtedness. Government guaranteed debt fell by a marginal 0.2% ($0.8 mn) due primarily to reductions in indebtedness of governmentowned entities. The largest declines occurred in debt owed by Bahamas Mortgage Corporation and the Bahamas Electricity Corporation. E. Financial Sector Strong growth in credit and investment-related outflows erased much of the excess liquidity that was accumulated during the previous two years. During the first 11 months of the year excess liquidity contracted by $60.4 mn, while excess reserves declined by $30.6 mn. Domestic credit expanded by 11.8% to $5.6 bn. Mortgage lending accounted for $308.6 mn and consumer loans $212 mn were the principal categories that contributed to the growth in credit during the first 11 months of 2006. Despite the robust growth in credit and imports, the volume of domestic deposits rose by $261.5 mn, compared with an increase of $304 mn in 2005. F. External Sector Since August 2004, when credit restrictions were removed, the growth in private sector demand and the accompanying expansion in imports, exacerbated by higher oil and commodity prices, have had a negative impact on the external reserves. During the first ten months of 2006, foreign reserves fell by $148.2 mn, almost twice the decline in 2005. The current account deficit widened to $338.3 mn, approximately $50.2 mn more than in 2005. Though strong net capital account inflows ($181.4 mn) have traditionally offset the current account deficit position, investment directed towards real estate and property development also increased
the imports of construction-related products. Oil imports rose by 55.1%, while non-oil imports rose by 2%. Domestic exports continued to be sluggish expanding only marginally, and despite continued decreases in visitor arrivals, net travel revenue rose by 1.3%. This overall pattern is expected to continue.
2. MAJOR POLICY ISSUES A. Environmental protection As a result of their complementarities, the heavy reliance on tourism will require equally strong effort to conserve the environment (both physical and social) and prevent its degradation. While building a robust and diversified tourism product along with an intensified trade and commerce programme are reasonable objectives, there will be longer-term ecological, economic and cultural implications that will be difficult to evaluate, particularly, given the scale of projected development. In addition, The Bahamas, as an archipelago of low-lying small islands, is likely to experience adverse consequences from global climate change. The scale of development envisaged over the medium- and longer-term, and the implications for carrying capacity limits, require earlier and more focused attention on environmental conservation than would otherwise be the case; and the need for care is intensified by the high level of average household income and the implications of this for consumption levels, resource use, and for waste generation. The potential consequences for fisheries and for coral reef ecosystems should be clear. While the thrust is focused on inducing private sector investment, exposing more areas to tourism-related infrastructure, one of the main policy challenges for an industry largely driven by foreign investment, is to ensure the protection of precisely those factors which attract the investment, and which drive the industry.. The legal, policy, and enforcement frameworks governing the protection of coastal and island ecosystems may need to be strengthened;, and investment in sewerage facilities, waste management, water treatment and coastal zone protection may need to be accorded higher priority. Similar considerations relate to fisheries conservation. B. Health In FY 2006/07, the authorities propose to spend $219.4 mn., or approximately 15% of the budget, on healthcare. The current hybrid healthcare system - a mix of public and private entities - comprises three hospitals, two of which are private, along with approximately 150 satellite clinics and mini-hospitals. This forms the backdrop to the proposal for a National Health Insurance (NHI)
The Bahamas
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scheme, as spiralling costs and rising demand have led to a search for new ways of funding the public healthcare system. Rising costs have adversely affected universal healthcare delivery capacity; and there have been, reported shortages of drugs, diagnostic equipment and health professionals. The NHI Bill seeks to establish a public-sector healthcare system financing and servicespurchasing mechanism that will be funded by a payroll tax. While the country has been able to keep its healthcare system adequately staffed with nurses, unlike the situation in other parts of the Caribbean, maintenance costs have been rising, reflecting high demand for trained professionals. Under recently-concluded contract negotiations between The Bahamas Nurses Union and the Public Hospitals Authority (PHA), nurses will receive a 4% wage increase; however, they are also seeking medical insurance coverage, enhanced staff training, and a larger staff complement, among other things. Addressing these will push costs up further.
estimated to require $162.4 mn in capital expenditures, which represent a 31.5% rise over the previous year’s provisional outturn. The work has included improvement to the Fox Hill Prison, and to facilities for the Lands and Surveys, and Customs departments. The programme of investments emphasises improvements to social infrastructure through the expansion of health care and educational facilities.. The development needs of the country, and the broad spatial distribution of the requirements, will mean a substantial public investment programme into the future, with consequential implications for the provision of inputs to provide the services for which the investments were initially made, and for asset maintenance.
4. MEDIUM-TERM ECONOMIC PROSPECTS Economic performance in The Bahamas will remain heavily tied to tourism and to the offshore finance and business sector. Growth prospects are good, however, partly because of proximity to the US and the strong economic links which have developed with that market over a very long period, and partly because of the enviable reputation that The Bahamas has developed and maintained both in the global financial marketplace, and in the tourism industry. The nature of the country has allowed it to offer a highly varied tourism product; the ability of visitors easily to combine business activities with vacations has been a major contributor to employment and incomes. Challenges will include responding to economic performance volatility in the US; maintaining the attractiveness and integrity of the offshore financial and business centre, particularly in the face of challenges from emerging markets elsewhere; and coping with the need to conserve the physical and social environment, which is key to the attractiveness of the islands in the first place, while meeting the expectations of nationals for continued improvement in living levels. Of critical importance will be the need to balance the expectations of both visitors and nationalsfor a carefree lifestyle against equally strong expectations for continued physical security, a balance that has so far been wellmaintained.
C. Family Islands Development The authorities in The Bahamas, through a mix of measures and incentives to private investment, have attempted to provide for more broad-based social and economic development in the Family islands, and have introduced over the years incentives packages aimed at directing external investment flows to the Family Islands. It is anticipated that the presence of new private sector investment will contribute to the provision of infrastructure, utilities and community development. The development and environmental conservation issues faced in the more developed islands will need to be faced again in the Family Islands; and the spatial matching of jobs and labour supplies, while satisfying the interests and preferences of developers and residents and preserving the special character of the Islands, will prove a huge challenge.
3. PUBLIC SECTOR INVESTMENT PROGRAMME The authorities have assigned priority to policies and programmes consistent with enhancing both the delivery of public services and the incentives framework for domestic private sector-led growth. Activities and programmes to develop human resources, improve social security systems, reduce poverty, and provide police protection and community security are also high on the national agenda. The PSIP for 2006/07 is
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