BAHAMAS

Badrul Haque

Economic performance in the first half of 1997 suggests that the economy could achieve a growth rate of 4 percent for the full year. This higher growth rate would be achieved mainly due to increased cruise visitors and longer average length of stay by stopover visitors coupled with increased room rates. Together with continued renovation of additional hotels and increased construction-related activities in the major centers of tourism, economic performance in 1997 is projected to be better than the estimated outcome of 3.5 percent growth rate in 1996.

Renewed economic buoyancy follows privatization of major hotels since 1994 and completion of major renovations by the new owners, as well as increased marketing and an improved foreign investment regime. While tourism receipts will continue to increase because of the factors referred to earlier, the number of stopovers are expected to remain virtually unchanged. Indeed, in the first five months of the year, stopover tourists declined by over 4 percent. However, this decline was more than offset by a 3 percent increase in the average length (nights) of stay and about 11 percent increase in the room rates. Moreover, cruiseship visitors increased by about 11 percent (Figure 1).

Despite increased economic activities, domestic saving is unlikely to have increased beyond the 11 percent of GDP achieved during 1990-92, the latest period for which official data on national income are published. External saving, which increased substantially during 1994-96 and is projected to remain high in 1997, is the major source of finance for higher investment in the country. Indeed, annual foreign investment approved by the National Economic Council has averaged over 10 percent of GDP in recent years. To the extent that these approvals translate into actual investment, domestic investment in the mid-1990s is about twice the historical rates.

Foreign investment remains mainly in the tourism-related sectors, although increased investments have been attracted in off-shore banking, shipping registry and a container terminal. However, tourism-related investments are now more geographically and product-wise diversified. For example, Gorda Cay and Little San Salvador are being developed for cruise-ship passengers by Disney and Holland American Lines, respectively; several large investments have either been approved or are under discussion for islands other than New Providence and Grand Bahama, which together account for over two-thirds of the national population; and, lands for second-homes are also being purchased by foreigners in several islands. Since the enactment of the revised foreign land-holding act in 1993, investment in the mainly second-home sector has been growing -- from an average monthly approval of about US$2 million in 1994 to US$4 million in 1995. Preliminary indications are that this inflow of foreign investment has continued to accelerate, benefitting mainly Abaco, Eleuthera, Exuma, Grand Bahama and New Providence.

Data on the unemployment rate in 1997 are not available at the time of writing. However, increased economic activity in 1997 is likely to lower the unemployment rate below the 11 percent estimated for year-end 1996. The dimensions of unemployment are unlikely to have changed qualitatively from those reported in the previous SEP. The particularly high unemployment rate reported among the female population reflects the proportionately high representation of this group in the tourism industry where hotels were closed for a significant period for major renovations. Nevertheless, the female unemployment rate is usually higher at different times and in different locations in The Bahamas.

The inflation rate is projected to rise slightly to 2 percent from 1.4 percent in the preceding year, due mainly to increased wages. The Government announced a wage increase to all civil servants amounting to some half-a-percent of GDP in 1997. The domestic interest rate spread of the weighted average lending and deposit rates remains high at about 7 percent. It is not clear whether this reflects risks associated with lending or inefficiency/oligopolistic pricing behavior by commercial banks. Nevertheless, the continued real lending rate of over 10 percent per annum limits the number and volume of projects that can be undertaken with funds borrowed from the financial institutions (Figure 2).

Information on the non-financial public sector's overall balance is not available for 1997, but it is expected to be somewhat worse than the 1.1 percent of GDP of the preceding year due to increased capital expenditure by non-financial public corporations and increased wage payments to public sector employees. Central government overall balance is projected to deteriorate. Even if programmed increases in capital expenditures do not materialize, the overall deficit will amount to about 3 percent of GDP, a situation last exceeded in 1991 at the beginning of a recession. This reflects increases in government salaries and wages bill, which continues to absorb about half of the government's expenditure of now about 20 percent of GDP, and expenditures on subsidies and transfers, mainly to households, which amounts to over one-tenth of current expenditure.

In the financial sector, monetary and credit policies up to the first half of the year has been relatively lax compared with recent years. Domestic credit increased by about 10 percentage points of GDP but 95 percent of this increase went to the private sector. In contrast, money supply (M1) increased by about 1 percent of GDP. Foreign currency credit increased to finance mainly investment-related imports (Figure 3).

In the external sector, the current account deficit is projected to improve somewhat to below 7 percent of GDP from over 8 percent in the preceding year, due mainly to increased travel receipts. Exports of goods and non-factor services are projected to increase by about 7 percent. Imports will continue to remain high due to construction- and tourism-related imports. A US$10 million increase in international reserves is projected, due in part to commercial borrowin of US$50 million in April 1997 through private placings in the United States. The loan is in two tranches with maturity of 10 and 15 years, respectively. This borrowing, however, will not raise external debt since repayment will exceed new debt accumulation (Figure 4).

Recent Policy Measures

The Government's decision to award across-the-board wage increases in the public sector, with a transitory and a permanent component, at a time when private sector activities are up, are likely to impact the economy adversely as the increases are not apparently related to any productivity increases. These increases are in addition to the implementation of a minimum public sector wage policy. Moreover, all temporary civil service workers with at least 5 years of continuous service were made permanent. The fiscal impact of these decisions are reflected in a higher deficit for 1997.

Prospects

Prospects for economic growth in 1998 and beyond depends on the actions taken by the government in the second half of 1997. In the general election held on March 14, 1997, the government was re-elected to another five year term. Available data, including the budget for FY96/97, suggests that both monetary and fiscal policies are more expansionary than they have been in recent years. If the deterioration in the fiscal balance is corrected, the economy could continue to grow by 3-4 percent or more in 1998 and beyond. Otherwise, the economy could again experience high inflation, loss of external competitiveness as a tourist destination and low economic growth.