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Country Commercial Guides for FY 2000: The Bahamas Report prepared by U.S. Embassy Nassau, released July 1999 Note*

II. ECONOMIC TRENDS AND OUTLOOK

Major Trends and Outlook

The Bahamian economy remains heavily dependent on tourism and, to a lesser extent, the financial services industry. Relying on a service-based economy, The Bahamas' per capita income was $14,492 in 1998. Gross Domestic Product, approximately $4.25 billion by Government estimates, is estimated to have grown at a healthy but moderate pace in 1998. This slightly dampened performance is attributable to a slowdown in the growth of tourism, as visitor arrivals increased only 3.1 percent in 1998, principally due to additional property closures in New Providence and Grand Bahama for upgrading. This trend had begun to reverse by the end of 1998, however, as renovated and expanded hotel properties began reopening and occupancy rates stayed high. Although the number of licensed "offshore" banks and trusts remained at 418 in 1998, according to the Central Bank their total expenditures exceeded $280 million. The financial services industry is estimated to employ 4000 Bahamians.

International investors' faith in the tourism potential of The Bahamas was evidenced by ongoing construction of new hotels, notably the $450 million expansion of the Atlantis Resort on New Providence's Paradise Island, and the announcement of several new resort development projects. Output was sustained by investment in the construction sector, as well as measured growth in financial services. Unemployment hit a 25-year low at just under 8 percent at the close of 1998. Government spending also contributed to growth, but the Government budget deficit remains a persistent problem, with the 1999-2000 shortfall projected at roughly $23 million. Overall Government debt amounted to $1.75 billion in 1998, roughly 41 percent of the GDP.

Growth in monetary aggregates (m3) rose 15.8 percent from 11.1 percent in 1997 boosting the money stock to $2.9 billion from $2.5 billion in 1997 reflecting growing individual and corporate bank balances, as well as strong inward foreign investment. Domestic credit expanded by 12 percent from $282.5 million in 1997 to $366.4 million in 1998. Consumer credit of $146.6 million accounted for 66.8 percent of personal loans in 1998 compared to 88.4 percent in 1997. Inflation remained low; prices rose only 1.3 percent in 1998.

Consumer spending abroad and on imports led to a deficit on the current account of the balance of payments of $592.7 million, up from an estimated $472.1 million in 1997. Net inward direct investment of $491 million helped to push the surplus on the capital and financial account to $490.9 in 1998 from $370 million in 1997. Benefiting from the flow of investment, the Central Bank's foreign reserves stood at $338.7 at the end of 1998, a year-end record high.

Because more than 80 per cent of tourists to The Bahamas are American citizens and residents, continued growth in the Bahamian economy depends largely on continued prosperity in the United States. As the current boom in hotel and resort construction subsides, the challenge for the Bahamian economy will be to encourage or generate new construction projects or to integrate construction workers into employment in the tourist sector and elsewhere. A continuation of growth in Government deficit spending and in consumer credit would exacerbate the effects of any future downturn. The most recent Government budget comes closer to closing the recurrent fiscal deficit than previous budgets, and the Central Bank has taken some recent steps to encourage tougher lending requirements for consumers.

Principal Growth Sectors

Tourism: The Bahamas was a vacation destination for over 3.35 million visitors in 1998, a decline of 3.1 percent over 1997 arrivals. Tourism and related services account for up to 60 percent of GDP -- supplying the Bahamian job market, directly and indirectly, with two thirds of the jobs in The Bahamas. American visitor arrivals for the period July 1997 to July 1998 accounted for 83 percent of total stopover visitors, down 4.5 per cent from 1997. Visitors from Canada decreased by 11.3 percent over 1997 figures, but constituted only 5 percent of visitors overall. The number of European visitors declined by 12.2 percent and accounted for 6.5 percent of the total stopover arrivals. Visitor expenditure for the first half of 1998 was $696.2 million. Average expenditure per stopover per visit increased from $791 in 1996 to $808 in 1997, an increase of 2.1 percent. Stopover spending was upheld by the increase in longer-staying non-American tourists and higher daily hotel room rates. The averages varied from destination to destination. Nassau/Paradise Island registered an increase of 3.9 percent in average stopover expenditure from $946 in 1996 to $983 in 1997. Grand Bahama saw a decrease in average expenditure from $558 in 1996 to $506 in 1997. The out islands average stopover expenditure increased by 6.6 percent from $788 in 1996 to $840 in 1997. Cruise ship visitors totaled 1.7 million in 1998 a decline of 1.2 percent of 1997 arrivals.

In December 1998, Sun International opened the $450 million "Phase II" of its successful Atlantis Resort on Paradise Island, adding elaborate aquarium displays, a casino, and increasing the size of the mega-resort to 2,340 rooms. The Bahamas' largest single employer other than the Government, Sun employs roughly 5,500 persons. Sun has enjoyed high occupancy rates through the beginning of 1999 and created some modest spillover for neighboring hotels on Paradise Island. Canadian investor RHK Capital, Ltd. is scheduled to open the historic British Colonial Hotel in downtown Nassau after over a year of renovation. RHK envisions a hotel catering to business travelers, located in the heart of Nassau's financial district. RHK also acquired the South Ocean Resort with an eye toward developing an all-inclusive resort on the less-developed south side of the island of New Providence (the island where Nassau is located). The Sandals all-inclusive resort in Nassau, owned by a Jamaican investor, added a total of 210 new rooms in 1998. 1998 also saw a major renovation at the French-owned Club Med Resort on Paradise Island, and the opening of a 112-room Holiday Inn in Nassau by U.S. investors.

Tourism in Grand Bahama suffered in 1998 because of the continued closure for renovation of three major hotels purchased by Hong Kong-based Hutchison Whampoa. Reconstruction of these hotels, the Lucayan Beach Hotel, the Grand Bahama Beach Hotel and the Clarion Atlantik Beach Hotel, should be completed by January 2000. Portions of the properties on Lucayan Beach opened in the spring of 1999, injecting some long-awaited money and activity into Freeport's tourism sector. The sale of the three hotels to Hutchison Whampoa leaves the Radisson Cable Beach Hotel the only principal hotel still owned by the Government, along with two small hotels on Andros Island.

All the major cruise lines operating out of Florida make calls in The Bahamas either in Nassau or in Freeport. Disney Cruise Lines and Holland America Cruise Lines have purchased small islands and developed their own ports of call in The Bahamas. The Cruise Ship (Overnighting Incentive) Act of 1995, allows cruise ships to open their stores and casinos while in port. In order to benefit from this Act, however, cruise ships must be in port a minimum of 18 hours. Although the Act has not encouraged cruise ships to change their schedules to stay in port on Sundays, they are staying longer and passengers are venturing on shore to sample Bahamian culture and participate in local activities.

The casino taxation act was amended in October 1995 to allow for the establishment of small-scale casinos through the reduction of the basic tax and winnings tax rates for casinos of less than 10,000 square feet. The basic tax was reduced from $200,000 to $50,000 for casinos with floor space of less than 5,000 square feet. The tax rises to $100,000 for casinos of 5,000-10,000 square feet. Unlike the winnings tax rate for traditional casinos (25 percent on the first $20 million, all the way down to 5 percent on earnings over $20 million), small casinos pay a progressive winnings tax rate of 10 percent on the first $10 million to gross winnings, and 15 percent thereafter. Although the amendment was made specifically for the establishment of a casino at the Club Med Resort on the island of San Salvador, it sets the stage for licensing small casinos elsewhere.

As a further incentive to draw tourists, the Government amended the Lotteries and Gaming Acts in October 1995 to allow for sports betting. Gamblers must be physically present at the time of betting, and may bet on "any athletic game or sport taking place within or outside The Bahamas other than horse racing." A sports bar and betting area have already been set up inside the Crystal Palace Casino on Cable Beach to accommodate sports gamblers.

Financial Services: Financial Services, the second major sector of the Bahamian economy, consists primarily of banking, trust administration, insurance and mutual funds activity. Financial services accounts for approximately 15 percent of GDP, with the banking share predominating. There were 418 licensed banks and trust companies in the country in 1998, including 9 commercial banks. The gross economic contribution of the banking sector to the Bahamian economy exceeds $298 million. The financial sector employed roughly 4000 persons in 1998.

Offshore company incorporation continued to flourish under the International Business Companies Act (IBC), which was passed in 1989 to enhance the country's status as a leading financial center. The Act simplified and reduced the cost of incorporating offshore companies in The Bahamas. IBCs -- "shell corporations" which can be formed in a matter of hours with minimal documentation -- have grown from approximately 8,000 in 1990 to currently nearly over 84,000 today, although many may be single-transaction firms. The Bahamian Government does not release IBC revenue figures but the fee for incorporating an IBC is $250. Subsequent amendments to the Act include limited liability and limited duration companies.

Following the passage of the Mutual Funds Act in 1995, offshore mutual funds recorded significant growth. There are currently about 600 such funds operating in The Bahamas, with funds under management of a value of $80 billion.

The Bahamas legalized the formation of Asset Protection Trusts in 1991. These trusts, used to place the financial assets of wealthy individuals beyond the reach of domestic courts in countries such as the United States, form a growing portion of Bahamian banking.

The Bahamas is an important jurisdiction for ship registry, under The Bahamas Maritime Authority. The number of ships on the Bahamian registry has remained relatively stable for the past few years at approximately 1,400, with the corresponding tonnage at 28 million.

Construction: According to the 1998 Central Bank Annual Report, the construction industry continued at a brisk pace during 1998 after a strong recovery in 1996-7, buoyed by large scale commercial projects such as Sun International's second phase expansion and significant residential investments, including the second homes market.

The number of building starts, a leading indicator of activity in the sector, declined by 12 percent to 971 in value in 1998 and by 69.7 percent to $127.3 million. Most of this decline is accounted for by the completion of Sun International's second phase expansion on Paradise Island whose contribution to commercial starts receded to $22.7 million from a $334.0 million peak in 1997 as the project reached completion. During 1998, the number of building completions decreased by 174 percent to 956 and the corresponding value by $125.1 million to $146 million. Prospective activity, as signaled by permits issued, suggests continued buoyancy in the construction sector through 1998.

Agriculture and Fisheries: The Bahamas imports over $250 million in foodstuffs per year, representing about 80 percent of its food consumption. The agriculture and fisheries sectors together account for five percent of GDP and employ about five percent of the work force full time. A larger portion of the workforce is employed on a temporary basis during the opening weeks of lobster (crawfish) season. The Government recognizes that in order to become self-sufficient in agriculture, new varieties of crops must be introduced and the quality of crops released on the market must improve. Therefore, the Bahamian Government welcomes foreign investment aimed at increasing agricultural production, particularly specialty food items. The Government officially lists food processing, mariculture, and agro-industries -- fruits and nuts, dairy production, winter vegetables -- as targeted areas for foreign investment.

Approximately 240,000 acres of uncultivated agricultural land and plentiful supplies of fresh water exist throughout the islands. Most agricultural production is on small-scale farms on the islands of Abaco, Andros, Eleuthera, and Grand Bahama. The Government insists that the agricultural sector should employ more Bahamians, but has been reluctant to grant work permits to foreign workers even in instances in which it is clear that they would not displace Bahamian workers. Applications for any substantial number of agricultural workers from other Western Hemisphere nations are almost automatically refused. These policies are unlikely to change.

Estimated agricultural output remained virtually unchanged in 1997 at $55.4 million. Crop production fell by $4.1 million (15.9%) to $21.6 million, due to lower market prices. Poultry production rose by 3.3 percent to $28.3 million. A may 1998 Government announcement of its intention to halve the existing 70% duty on imported chicken dismayed Bahamian poultry producers. Production of red meat rose by 23.1 percent to $1.2 million. Ornamental plant production is estimated at $6.0 million in value.

The Ministry of Agriculture and Fisheries and the Department of Fisheries have declared a renewed commitment to the sustainable and profitable use of Bahamian marine resources. One of the goals of the Department of Fisheries is to develop the commercial industry by promoting under-utilized seafood products of The Bahamas. The Ministry of Agriculture and Fisheries opened a shrimp hatchery in Nassau in 1993, and another shrimp farm is in operation on Grand Bahama Island.

In 1998, overall fisheries exports declined by 2.3 percent to $61.3 million as a result of a 1.4 percent reduction in average prices and a .9 percent decline in volume. Receipts of crawfish exports, which comprised 91.6 percent of total exports, contracted by 3.0 percent to $57.4 million. Legal restrictions on external sales continued to impact conch exports, which were valued 28.1 percent lower at $0.5 million. Sponge exports continued to register strong growth of 43.2 percent to $1.3 million, amid a 41.5 percent appreciation in average prices.

Government Role in the Economy

The Government and Government-owned corporations are the largest employers in the Bahamian economy, with a total work force of some 22,000. The Government also contributes strongly to the economy of the family islands, as well as Nassau, through its capital expenditures for infrastructure development. The Government Financial Statistics (GFS) deficit was observed to decline to $15.8 million for the period January-March 1998 compared to $40.8 million a year earlier. The overall deficit for FY 98 (July 1997 - June 1998) halved from $142.7 million in FY 96/97 to $71.3 million in FY 97/98. An 11.6 percent growth in revenue collections, improved tax administration and robust economic growth contributed to this decrease. The Government has budgeted for a $23 million deficit, 1.4 percent of GDP, for the 1999-2000 fiscal year.

Overall, the national debt rose by $65.3 million in 1998, to stand at $1.75 billion. Foreign currency debt decreased by $39.7 mil (10.2%) to $348.7 mil. Most of The Bahamas' foreign currency debt (47.8%) is owed to multilateral institutions. Ninety-five percent of the foreign currency debt is denominated in U.S. dollars.

In the 1999/2000, $1.02 billion budget for fiscal year ending June 30, 2000, Government outlays for education, health, social benefits and services, housing and other social services accounted for the majority of the Government's total expenditure. Education received $171.7 million or 19.1 percent of the recurrent budget. Law enforcement funding - a majority of which goes to the fight against drug trafficking - received $140.3 million - 15.6 percent of the FY 99/2000 budget, followed by the health care sector which received $132.5 million or 14.8 percent of the recurrent expenditures. Debt service accounted for a substantial portion, $113.5 million or 12.6 percent of the recurrent expenditure.

In April 1998, the Government launched The Bahamas Financial Services Board, to promote The Bahamas as a financial services center. Work continues on the establishment of a stock market for The Bahamas.

Since 1992, the Government has sold all but one of the formerly Government-owned major hotels in The Bahamas. Plans to privatize the Government-owned telecommunications monopoly, Batelco, and to establish an independent public utilities regulatory body, are well under way. Possible divestment of The Bahamas Electricity Corporation (BEC) and Bahamasair has been discussed but no action has yet been taken.

The Bahamas' primary monetary strategy is to maintain stability and expand foreign exchange reserves to purchase essential imports, maintain the parity of Bahamian and American dollars, and finance repatriation of corporate profits. Exchange controls are one tool the Government uses to maintain reserves of foreign exchange. In 1998, concerned about increasing consumer debt, mostly for purchase of imported consumer goods, the Government encouraged commercial banks to increase down payment requirements and limit paycheck deductions for loan repayment.

The Bahamas obtains more than 60 percent of its operating revenues from import duties. There are no taxes on incomes of individuals or corporations. Overall, taxes amount to about 20 percent of national income, a relatively low level of taxation in comparison to many other countries. Incentives and subsidies to domestic and foreign businesses usually take the form of concessions on duties levied on imported goods and materials. The beginning of negotiations for a Free Trade Area of the Americas (FTAA), which is intended to reduce and eventually eliminate import duties and other barriers to trade among the countries of the Americas, has induced the Government to examine other forms of taxation, such as value added or sales taxes. However, the Government is adamant in refusing to consider the imposition of any taxes on income.

Balance of Payments and Trade

The Bahamas has an import-oriented economy and relies heavily on tourism for foreign exchange. Lower world oil prices helped to moderate increases in The Bahamas total bill for merchandise imports in 1998, which declined by 2.8 percent to $1.37 billion. A 5.5 percent increase in exports led to a $55.4 million decrease in the trade deficit, which stood at $1.06 billion at the end of 1998. The estimated surplus on the services account, which includes tourism earnings, declined by $133.8 million to $623.1 million due to increased payments for foreign construction expertise amidst booming hotel expansion activities. As a result, the current account deficit rose to $592.7 million from $472.1 million in 1997.

Strong foreign direct investment in the hotel sector increased the surplus on the capital and financial account to $490.8 million from $399.1 million in 1997. The Bahamas also saw record net foreign investment inflows in 1998, up 21.9 percent to $502.5 million.

Infrastructure

The Bahamas provides good basic infrastructure for businesses. However, utility rates are considered high compared to the U.S. Privatization of BEC and Batelco - and eventual competition in these markets - may eventually reduce rates. Since 1992, the Government has improved some major roads both in Nassau and on the Family Islands, implemented changes to alleviate severe traffic congestion in Nassau, provided electricity and improved airports on most Family Islands, and has constructed a second bridge between Nassau and Paradise Island. Major improvements in water supplies to Nassau are underway and plans are being finalized for improvements to water systems on the Family Islands. Generally, there is regular air and sea transportation between the major developed islands and the United States. Telecommunication service is generally adequate but delays in service installation and maintenance are common. There are three Internet service providers in Nassau. Mail service is slow both on the islands and between other countries, however, the islands are serviced by several international overnight delivery services.

With a large, computer-dependent financial services industry, The Bahamas has begun to prepare for computer problems brought on by the advent of the year 2000 (Y2K). The Government has appointed a Y2K coordinator in the Ministry of Finance to oversee compliance efforts by Government entities, and has promised that the public sector will be Y2K-ready by the third quarter of 1999. Several seminars have been held in Nassau by private industry to highlight the problem, and local firms - particularly in the financial services sector - have invested heavily in equipment upgrades. Still, many companies and Government entities have been late to plan for the millennium bug, and the issue of non-compliant embedded chips and effective contingency planning does not appear to have been fully addressed.