Economy and Trade
As one of the wealthiest Caribbean countries, with an economy heavily dependent on tourism and offshore banking, the Bahamas’ prospects for growth are being adversely affected from two different directions. First, the global downturn has significantly affected tourism, and second, a proposed review by the US Administration, under President Obama, of offshore banking could create significant difficulties for this sector.
Tourism, together with tourism-driven construction and manufacturing, accounts for approximately 60% of GDP, and employs half of the archipelago’s labor force directly or indirectly. Tourism is heavily dependent on prosperity in the United States, the source of more than 80% of visitors. To help offset the effects of the global economic downturn, particularly on employment, the Bahamas administration, headed by Hubert Ingraham, is boosting public spending on infrastructure projects. Financial services constitute the second-most important sector of the Bahamian economy and, when combined with business services, account for about 36% of GDP.
Economic Policy over 12 Months
The key policy issues for the Bahamas in 2008–2009 all focus on four major themes—the impact of high food prices on the poor, how to react to a severe downturn in the tourist trade, the future of offshore banking and, last but by no means least, the challenge posed by climate change. As Prime Minister Hubert Ingraham said at a meeting in October 2008 with the IMF, much of the land mass of small island nations lies 1.5 meters above sea level. Moreover, the most significant economic development in these islands has taken place in susceptible low-lying coastal zones, all of which are at risk from the predicted rises in sea levels attendant on global warming.
Yet another policy issue to be grappled with is the debt-servicing burden across the region. Ingraham told the IMF that many island nations struggled to address social issues because of the heavy debt-servicing burden (Jamaica, he noted, spends 54 cents of every revenue dollar on debt-servicing). One of the government’s fears was that rising debt caused by the downturn could increase this burden and exacerbate social challenges.
In the country’s 2008 budget in May, the Bahamas introduced a moderate fiscal stimulus designed to provide financial relief to low wage earners, who were struggling to cope with high food and energy prices. However, the government also emphasized its commitment to fiscal prudence in the medium term.
New regulations for the financial sector put in place by the government in December 2000 caused many international businesses to leave the Bahamas. The laws were a response to the Bahamas being blacklisted by the Financial Action Task Force, which targets countries that have lax laws on money laundering and the funding of terrorism. The government has since acknowledged, however, that the regime put in place to ensure that the “know your customer” provisions of the Financial Transactions Reporting Act, has frustrated both locals and international clients, and contributed to driving offshore business away from the Bahamas. In the face of criticism that the Bahamas’ new regime was now more stringent than that which applied in Europe and the United States, the government has sought to soften the reforms rather than to render the country’s offshore industry uncompetitive.
In January 2009, the Attorney General and Minister of Legal Affairs, Michael Barnett, announced a wide-ranging program of law reform for the country for the year ahead, to modernize the country’s legal system.
Economic Performance over 12 Months
Information from the Central Bank of the Bahamas shows that by the end of 2008, the country’s tourism industry was being severely affected by the global downturn. Layoffs in the hotel industry continued through December 2008 into 2009, pointing to significantly reduced seasonal activity and weaknesses in the short-term outlook for tourism. Private spending in the general economy was also characterized as “weak,” being affected by both consumer uncertainty and the accumulated slowdown in credit expansion. The Bank said that both liquidity and external reserves continued to contract and there was some cause for concern in a further erosion in credit quality indicators in the banking sector, with consumer and business defaults threatening to rise.
In all, tourism, the main revenue generator for the country, fell by a further 6.1% over the first nine months of 2008, having slumped by 4.2% in 2007. The short-term signs were for matters worsening, as arrivals on the islands fell by 15.2% in the second half of 2008, according to port-of-entry data.
The average annual inflation rate firmed up during 2008 to 4.5%, from 2.5% in 2007. Cost increases on imports underlined price increases on food and drink of around 6.7%.
The islands’ offshore banking sector is currently threatened in some degree by the crackdown on offshore tax havens proposed by President Obama in his presidential campaign. The US Stop Tax Haven Abuse Bill, even with the new regulatory regime in place, could have an adverse impact on both existing capital flows to the Bahamas and the formation of new offshore ventures.
The package of new laws introduced by the Bahamas in 2000 included the Financial Transactions Reporting Act and much stricter “know your customer” rules. The FTRA set a deadline of mid-2002 for the identification of the owners of all accounts in the Bahamas offshore industry established before 1 January 2001. Of itself, this caused many international businesses to leave, though the deadline was extended to 31 December 2002.
In December 2006, however, the government introduced new legislation for private trust companies, which set out that Bahamian PTCs, in common with other structures such as foundations, will not require regulatory approval. A PTC is only required to arrange its affairs with a regulated Bahamian service provider or registered representative. Bahamian trust law provides exemption from the Bahamas Exchange Control Regulations for non-resident beneficiaries, as well as exemption from all taxes and from stamp duty. The offshore banking and trust sector employs more than 10% of the country’s workforce and contributes 12% of GDP, according to the Bahamas Investment Authority.
Support for Inward Investment and Imports
The key agency for investors is the Bahamas Investment Authority, which operates from the Office of the Prime Minister. It is designed to be a “one-stop shop” to simplify investing in the Bahamas. Its mandate is to develop investment policies, promote investment, evaluate project proposals, monitor projects, and provide support. (Further information can be obtained from: BIA, Office of the Prime Minister, PO Box CB 10980, Nassau, NP, the Bahamas. Tel: +1 242 372-5970-4).
Tax Exemptions
Under the Hawksbill Creek Agreement, businesses established in the Freeport Free Trade Zone, a 230-square mile zone on Grand Bahamas Island, pay no taxes on profits, capital gains, etc. For investments generally into the Bahamas, contact the Bahamas Investment Authority, which has the power to negotiate on customs duty exemption.
Statistics
GDP growth: 2.8%
GDP per capita: US$29,900
CPI: 2.4%
Key interest rate: 5.5%
Exchange rate versus dollar: Bahamian dollars per US dollar: 1.0 (fixed)
Unemployment: 7.6%
FDI: Not listed
Current account deficit/surplus: −US$1.442 billion
Population: 307,451
Source: CIA World Factbook except where stated
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