Third Quarter 2011
The Bahamas: Tough times now, better prospects ahead
Sir Ronald Sanders
Following a slowdown resulting from the global financial crisis, economic hopes in the Bahamas are now pinned on a revival of tourism through the development of a massive new project funded by China
The economy of the Bahamas is experiencing tough times and its recovery is strategically reliant on the success of a massive Chinese-funded tourism project that broke ground in February. Developers of the $3-billion project say it will bring 430,000 new visitors to the Bahamas annually, create 8,000 permanent jobs and contribute $1 billion to the economy in new spending in 2015.
The new project, known as Baha Mar, will need to deliver on all its promises to lift the Bahamas economy out of the doldrums into which it sunk in the wake of the 2008-09 global financial crisis that hit it harder than the many hurricanes the chain of islands has suffered over the years. The project itself is also mired in controversy because of the government’s agreement to allow the majority of the construction workers to come from China as a condition of the $2.4 billion in funding from the Export-Import Bank of China.
Measured against their neighbouring Caribbean countries, the people of the Bahamas are well off, with an annual per capita income of $18,932. Yet unemployment rates rose dramatically to 14 percent in 2009, up from 9 percent in 2008, as the two main legs of the economy collapsed. Tourism, which contributes more than 40 percent of the country’s GDP, declined by 10 percent in 2009, and the financial services sector also took a beating, primarily from the demands of the OECD. Foreign direct investment also fell by a significant 30 percent, causing a sharp contraction in domestic activity.
Meanwhile, central government debt as a percentage of the country’s GDP has been growing steadily since 2006. The government had hoped to bring the figure down, but a fall in revenues following the global financial crisis prompted increased borrowing, and debt had risen to 47 percent of GDP by the end of June 2010. The International Monetary Fund (IMF) has expressed concern that unless the government institutes new revenue measures and sells some state-owned enterprises, the debt-to-GDP ratio could reach 55 percent by 2015.
Introducing new revenue measures is easier said than done, however. At the last general elections in 2007, the Free National Movement of Prime Minister Hubert Ingraham, with 49.86 percent of the popular vote, only narrowly beat the Progressive Liberal Party (PLP) with 47.02 percent. Popular discontent has grown with the economic decline over the past three years. Now that Ingraham faces a general election (due by May 2012), he would be signing his own political death warrant if he introduced new taxes on the population at this time. The Bahamas has never had personal income tax or value added tax (VAT), since successive governments have studiously avoided them. Undoubtedly, the PLP opposition would exploit popular emotion by opposing the introduction of these taxes, both of which the IMF has recommended.
Compared with their Caribbean neighbours, Bahamians are quite well off, and yet unemployment rose dramatically in 2009 after the collapse of both tourism and financial services
This is why, in February, the Bahamas government turned to the unpopular sale of 51 percent of the state-owned Bahamas Telecommunication Corporation (BTC) to the British conglomerate, Cable & Wireless (C&W), which owns telecommunications companies in several Caribbean countries. Ingraham said in December that C&W had “the economies of scale and the purchasing power to give strong support to BTC in an aggressive competitive environment”.
Compared to the introduction of direct taxes on the population, selling a controlling interest in BTC for $210 million was the lesser of two evils. The government said the proceeds of the sale would be used to pay part of the national debt. While this would comply with the urgings of the IMF, the sale offended national pride, since BTC has been owned by the state and managed by Bahamians for over 45 years. The PLP said that it “cried shame” on the government for “giving the most valued public asset away for pennies”.
There have also been angry public demonstrations not witnessed in recent times. The government has been clearly rattled by the protests, particularly when the union representing BTC employees joined the demonstrations claiming that 30 percent of local workers would be sacked by the new C&W management.
The claim of dismissals at BTC coincided with the government’s agreement to allow 79 percent of the workers on the Baha Mar tourism project to come from China at a time when Bahamian unemployment has reached levels not seen for decades. And yet, with foreign investment having collapsed, the Chinese funding was a godsend, particularly as China State Construction and Engineering Corp., the largest construction company in China, is investing $150 million of its own money in the enterprise. It is reported that some $400 million in contracts has been set aside for Bahamian firms and more than $50 million worth has already been awarded to Bahamian companies for work on a Baha Mar commercial village.
But any revenues to the government from this project – which is owned substantially by the Sudan-born Sarkis Izmirlian, whose company has substantial holdings in the Bahamas – will not flow significantly until 2015. Meanwhile, the country’s fiscal position remains problematic, leading Ingraham to reduce his overall salary as prime minister and to cut the pay packages of cabinet ministers and members of parliament. Cuts of 2.6 percent have also been made to the budgets of government departments and agencies, and the government has tightened up on revenue collection with the hope of garnering more income without applying additional taxes.
Unless the government succeeds in attracting large-scale investment and expanding tourism, tax reform will force itself up the government’s priorities whoever wins the election
At present, the government’s revenues are heavily dependent on taxes on international trade. After some reluctance, the Bahamas is joining the World Trade Organization (WTO), but this will require it to lower import tariffs which will significantly reduce tax receipts. In this context, unless the government succeeds in attracting large-scale investment and expanding tourism, tax reform will force itself up the government’s priorities whichever political party wins the next election. It can be reasonably assumed that this matter will not be addressed before 2012.
Regarding its financial services, the country has been forced to deal with its image as a ‘tax haven’, which has made it a target of both the OECD and the US government. Though the Bahamas government has complied with the OECD requirement that it signs at least 20 tax information exchange agreements, especially with OECD countries, it is still under pressure to strengthen the regulation and supervision of the financial sector. This strengthening is taking place but the government has yet to find the money to set up new regulatory agencies. In short, the country’s income from financial services has declined in recent years and this situation is unlikely to improve against a determined effort by the OECD to see an end to off-shore financial centres.
The next few years will be tough for the Bahamas as it tries to improve its prospects, but it has an open attitude to foreign investment and the skilled workforce needed to secure a better future. Reform, particularly in taxation, will be required and necessity might make that bitter pill easier to swallow.
(Sir Ronald Sanders is a consultant and former Caribbean Ambassador to the World Trade Organization)