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 of offshore banking by the US administration, under President Barack Obama, 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
Government economic policies have focused on offsetting the impact of the global downturn on islands. The government has maintained spending while revenues have fallen sharply, leading to an increased fiscal deficit, which is being financed by new external and domestic borrowing.
In June 2009, the International Monetary Fund (IMF) said it supported the government’s fiscal policy of maintaining priority spending and expanding targeted social benefits, despite dwindling fiscal revenues, while streamlining nonessential spending, introducing administrative and legal reforms to enhance revenue collection, and strengthening the public enterprise sector to reduce its burden on the public finances.
In its 2009–10 budget, the government said that three core pillars would influence fiscal policy: the need to maintain fiscal flexibility in order to deal with any worsening of economic conditions; the implementation of projects to maintain employment and upgrade infrastructure; and a reduction in the debt/GDP ratio as economic conditions allow.
In 2009 and 2010, the government has also focused on removing the Bahamas from the Organisation for Economic Co-operation and Development’s (OECD) “Gray List” of countries assessed as uncooperative in relation to international standards for the exchange of tax information. The islands’ offshore banking sector employs more than 10% of the country’s workforce and contributes 12% of GDP, according to the Bahamas Investment Authority. The sector received a boost in March 2010, when it reached the internationally agreed tax standards of the OECD and was removed from the Gray List.
The country maintains a fixed exchange rate with the US dollar and this inevitably places a limit on the central bank’s freedom to maneuver in terms of the conduct of monetary policy. However, the islands’ economy is closely geared to that of the United States, which accounts for the bulk of tourism arrivals and investment. Thus the lax monetary policy pursued by the Federal Reserve during the global economic downturn has been helpful to the Bahamas.
The recession in the Bahamas has had an impact on nonperforming loans, which rose to around one in 10 loans in January 2010. However, the central bank said that the financial system remained stable, with commercial bank capitalization well in excess of the mandatory 8% of risk-weighted assets, leaving the reduced asset quality adequately covered by bank capital positions.
Economic Performance over 12 Months
Since the middle of 2008, the global downturn has significantly affected economic activity in the Bahamas. Tourism began to decline in September 2008, leading to the cancellation or postponement of a number of foreign direct investment projects. Real GDP contracted by around 1.7% in 2008, having grown by 4.3% in 2006 and 0.7% in 2007. In 2009, the economy shrank by a further 3.9%. The central bank forecasted in January 2010 that GDP would decline by 0.5% in 2010.
Unemployment rose to 14.5% in March 2009, up from 7.9% at the end of 2007, with hotel and construction accounting for most of the layoffs. The jobless level amounted to 14.2% by the end of 2009, according to the central bank. Inflation fell to 1.8% in 2009, from 4.5% in 2008 and is forecast to decline further to just 0.6% in 2010, according to the authorities.
In March 2010, the World Travel & Tourism Council forecast that tourist arrivals in the Bahamas would fall by a further 4.1% in 2010. However, the tourism industry received a boost in April 2010 when a Chinese bank arranged a US$2.5 billion financing deal for a stalled mega tourism project. The resort, which is expected to open in 2013, should create around 8,000 new jobs for Bahamian workers across all sectors of the hospitality industry. In addition, the tourism sector is showing signs of revival. The number of tourist arrivals on cruise ships, for example, rose by 19% in 2009. Cruise prices have been slashed as cruise lines move to fill rooms. However, security may pose a threat to the industry. A spate of crime that seemed to target cruise passengers on tours in Nassau resulted in 18 tourists being robbed at gunpoint.
The higher fiscal deficit, which is expected to reach 7.9% of GDP in 2009–10, is being financed through borrowing, which has resulted in a rise in central government debt. Indeed, central government debt is expected to rise to nearly 48% of GDP by the end of fiscal 2009–10, up from 40% of GDP at the end of the fiscal year 2008–09.
Support for Inward Investment and Imports
The key agency for investors is the Bahamas Investment Authority (BIA), 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 the BIA.
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 BIA, which has the power to negotiate on customs duty exemption.
Statistics
GDP growth: −4% (2009 est.)
GDP per capita: US$29,800 (2009 est.)
CPI: 2.4% (2009)
Key interest rate: 5.5% (2009)
Exchange rate versus US dollar: B$1 (fixed)
Unemployment: 14.5 (official, 2009)
FDI: n/a
Current account deficit/surplus: −US$283.2 million (2009 est.)
Population: 310,426 (July 2010 est.)
Source: CIA World Factbook except where stated
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