$Unique_ID{COW00283} $Pretitle{233C} $Title{Bahamas, the Chapter 2B. Economy} $Subtitle{} $Author{Mark P. Sullivan} $Affiliation{HQ, Department of the Army} $Subject{bahamas percent sector 1980s government million bank public central total} $Date{1987} $Log{} Country: Bahamas, the Book: Caribbean Community, An Area Study: The Bahamas Author: Mark P. Sullivan Affiliation: HQ, Department of the Army Date: 1987 Chapter 2B. Economy Banking and Finance The second most important Bahamian economic activity in the late 1980s was banking and finance. The nation's proximity to Miami and its location in the same time zone as New York City enhanced these activities. A large number of trust and finance companies and investment firms were established in the 1950s, following the imposition of restrictive finance laws in many industrialized countries. Enactment of regulations in the Bahamas in 1965, however, provided for the licensing and supervision of the banking industry, cutting back drastically the number of financial institutions. Steady growth took place after 1967, the only setback occurring in the mid-1970s following the formation of the Central Bank of the Bahamas. The new Central Bank increased its monitoring of the industry. By the end of 1985, there were 374 banking and trust institutions registered in the Bahamas. Of these, 270 were permitted to deal with the public; 96 were restricted to dealing with or on behalf of certain people or companies; and 8 held nonactive licenses. Of these 270 public financial institutions, 134 were Eurocurrency (see Glossary) branches of banks in Western Europe, Hong Kong, the United States, or South America; 84 were subsidiaries of finance institutions based outside the Bahamas; 33 were Bahamas-based banks or trust companies; 10 were officially designated to deal in gold and in Bahamian and foreign currencies; and only 9 were trust companies designated to act as custodians and dealers in foreign securities. The proliferation of financial institutions encouraged the development of ancillary services such as accounting, computing, and law. It also required the installation of an advanced telecommunications system, a development that benefited other economic sectors as well. Several factors combined to make the Bahamas a significant center of finance in the late 1980s. First, the country had tax-haven status: no taxes on income, profits, capital gains, or inheritance. Second, the Bahamas offered liberal legal provisions for the registration and licensing of financial institutions and bank secrecy laws. Third, the Bahamas benefited from its stable political climate. Finally, it offered investors the convenience of geographic proximity to the United States. In January 1985, the financial sector was strengthened by the adoption of a code of conduct that gave the Central Bank a more supervisory role over the banking system. The main purpose of the code was to prevent money laundering. Large cash transactions were prohibited, unless they were made by well-established customers. Lawyers and accountants could no longer sign over accounts of offshore customers without approval of the Central Bank. Following the example of the banking and finance sector, other offshore activities also gained importance in the mid-1980s. Although liberal legislation for ship registration was passed in 1976, the Bahamas did not attract a major shipping industry until the 1980s. By December 1985, a total of 370 ships were registered, representing 5 million gross tons; in 1987 the Bahamas was the third largest flag-of-convenience nation behind Liberia and Panama. An even younger Bahamian industry was offshore insurance and reinsurance. Legislation was passed in 1983 to remove all taxes on premiums and restrictions on investments for this activity. Industrial Sector In the late 1980s, the Bahamian industrial sector consisted of several large-scale activities (chemicals, pharmaceuticals, and oil) and a variety of small-scale industries (food processing, paints, purified water, rum and other alcoholic beverages, salt, and soft drinks). The large-scale activities were located on Grand Bahama, whereas small-scale industries were concentrated in both Grand Bahama and New Providence. The industrial sector experienced setbacks in the early 1980s, when declining demand caused steel and cement plants to close. In mid-1985 the Bahamas Oil Refining Company (BORCO), the fourth largest refinery in the world, shut down its refining operations in response to the oil glut on the world market. BORCO continued its oil transshipment operations, however, importing large quantities of oil from the Middle East and Africa for transshipment and for domestic use. In the Bahamas, oil exploration by several international companies began in the early 1980s; marine geologists believed vast deposits of oil and natural gas might be found. Chemical and pharmaceutical plants fared well in the early 1980s. Exports of chemical products increased by over 100 percent in the 1980- 84 period. Several large chemical and pharmaceutical industries were located in Grand Bahama. Light industrial activities experienced slight growth in the early 1980s. Salt was mined on Great Inagua, and small amounts of aragonite sand were mined near the Bimini Islands for export. The rum industry grew. Bacardi operated a major distillery in New Providence. In 1986 construction began on a brewery sponsored by a consortium made up of Bacardi, Guinness, and Heineken to produce a new beer with a Bahamian name. Since the 1950s, the government had consistently encouraged efforts to diversify the economy. Industrial incentive legislation, however, dated back to the 1950s, when the Hawksbill Creek Agreement allowed the Grand Bahama Port Authority to develop industry on that island. In 1970 the Industries Encouragement Act provided incentives for manufacturers of approved products. Incentives included the duty-free importation of machinery and raw materials and tax exemptions. In 1971 the Agriculture Manufacturers Act provided similar incentives for that industry. In 1981 the Bahamas Agricultural and Industrial Corporation was established as a central agency for potential investors seeking advice and assistance. Finally, in 1984 legislation created a free-trade zone in New Providence similar to the one in Grand Bahama established by the Hawksbill Creek Agreement. Aside from a weak external market for oil products, the industrial sector faced several other difficulties. The Bahamas had a very limited market size. Wage rates tended to be high, and skilled workers were lacking. Capital-intensive industries developed despite the government's desire to locate labor-intensive industries there, especially in New Providence. This development underscored the growing problem of structural unemployment. A 1986 report by the Inter-American Development Bank (IDB) indicated that a major task for the government would be to provide 3,000 to 3,500 jobs annually in the late 1980s and early 1990s for graduating youths. Agricultural Sector In the late 1980s, the agricultural sector consisted mainly of small farms producing poultry, fruit, and vegetables for the local market and exporting some citrus fruits and seasonal vegetables. Government policy focused on reducing food imports, expanding and diversifying agricultural exports, and increasing linkages between the agricultural sector and tourism. The government emphasized the promotion of foreign investment, including joint ventures, and the development of farming among young Bahamians. Investments in research and extension and marketing facilities led to continued growth in winter vegetables and fruit and poultry products. The BAIC promoted employment creation through joint ventures offering access to modern marketing, management, technology, and venture capital, all in short supply in the Bahamas. Inherent problems in developing the agricultural sector, however, were the scarcity and expense of local labor. A considerable capacity existed for expansion of the agricultural sector. In 1986 the World Bank estimated that only 10 percent (16,200 hectares) of cultivable land was being farmed. Potential products included citrus crops for export, edible oils, peanuts, avocados, cut flowers, and hot peppers. Agricultural production statistics made clear the need to tap this poorly utilized economic sector. In 1985 the IDB estimated that Bahamian farmers produced just 20 percent of the food consumed on the islands, requiring the importation of millions of dollars worth of food annually; the food import bill for that year amounted to about US$200 million. According to international agencies, the nation's food bill could be met by developing suitable land on Great Abaco Island, Andros Island, and Grand Bahama. Considerable potential also existed in the small fisheries sector. The first commercial harvest of shrimp occurred in 1984, but this barely scratched the surface of fisheries potential. In 1985 crawfish were the most valuable domestic export, with exports valued at US$18.6 million. The nation's fishing fleet was expanding, and shallow water fisheries were being developed. Economic Policy and Management Although government policy was overtly capitalist, state ownership was significant in the economy. In addition to the central government, the public sector also consisted of the National Insurance Board, which was responsible for administering the country's social insurance program, and six nonfinancial corporations: four in public utilities (Bahamas Electricity Corporation, Bahamas Water and Sewer Corporation, Bahamas Telecommunications Corporation, and the Broadcasting Corporation of the Bahamas) and two tourism-related firms (Bahamasair and the Hotel Corporation of the Bahamas). According to the World Bank, these public corporations performed well in the early 1980s; significant financial improvements occurred in 1983 and 1984 and were responsible in part for improvement of the overall financial position of the public sector. In particular, the electricity and hotel corporations registered operating balance surpluses by 1984 after several years of large capital expenditures. Central government revenue increased steadily in the first half of the 1980s, from US$261 million in 1980 to US$350.3 million in 1984; estimates for revenue in 1985 and 1986 were US$424 and US$458 million, respectively. Expenditures also increased during the same period, from US$258.9 million in 1980 to an estimated US$458 million in 1986. During most of the period, the government recorded a fiscal deficit on its public accounts; a low of US$81.2 million was recorded in 1983 and was primarily the result of capital expenditures in the hotel sector of the tourist industry. In 1984 capital expenditures decreased and brought the fiscal deficit down to US$15.9 million. Projections for 1985 and 1986 were for small surpluses in the public accounts (see table 7, Appendix A). The income tax structure in the late 1980s was relatively inelastic because the Bahamas had no personal or corporate income taxes. Revenue was tied to indirect taxation on international trade, in the form of import, export, and stamp duties, and to direct taxes on tourist items, such as hotel rooms and casino gambling. Other direct taxes included a property tax, a motor vehicle tax, and a stamp tax. International trade taxes contributed the most to revenues, accounting for 70 percent of all tax revenues and 55 percent of total government revenues in 1984. In the first half of the 1980s, total tax revenue constituted up to 80 percent of total government revenues. Nontax revenue included administrative fees and charges, income from government property, interest and dividends, and reimbursements. The largest of these were administrative fees and charges, which almost doubled in 1980; in 1984 they accounted for 40 percent of all nontax revenue and almost 9 percent of total revenue. Also in 1984, property revenue increased when the government signed a ten-year US$100 million agreement with the United States to lease submarine testing facilities on Andros Island. In the first half of the 1980s, nontax revenue generally accounted for approximately 20 to 27 percent of total revenue. In the early 1980s, over 40 percent of government expenditures went to wages and salaries for public employees. Increases in capital expenditures in the 1981-83 period were responsible for much of the growth in total expenditures. In 1984, however, capital expenditures declined after completion of a major hotel, convention, and casino project. Much of the increase for this year went to current costs, principally salary increases. In the 1985 and 1986 budgets, the emphasis was on education, health, and police services. A significant portion of total government outlays in the mid-1980s was devoted to servicing the public debt. Debt servicing accounted for 18 percent of total expenditures in 1984; it was projected to reach 25 percent in 1985 before dropping to 23 percent in 1986. Ironically, the debt problem was a direct result of the high per capita income in the Bahamas. Income levels precluded the nation from obtaining soft loans from international financial institutions, including the World Bank; as a consequence, the government was forced to rely on Bahamian banks for credit. Outstanding public sector external debt increased by almost US$130 million in 1981-82 as a result of two loans that financed projects for the hotel corporation. The total external debt of the public sector reached a high of US$237.9 million in 1983 but had dropped to US$209.3 million by late 1984. The decline was brought about by the completion of the hotel project and also by the significant principal repayments made by the public corporations, most notably the electricity corporation, which repaid US$15 million of principal ahead of schedule. Traditionally, the external debt service ratio of the public sector has been low, fluctuating between 3 and 6 percent of exports of goods and services and 8 and 10 percent of government revenues. These figures remained unchanged despite the large loans in 1981 and 1982. They were unlikely to increase because the government had concluded a 1986 refinancing package with a commercial bank syndicate to lengthen the amortization schedule of the original hotel corporation loan. The country's central financial institution was the Central Bank of the Bahamas. Established in 1974, it was charged with safeguarding the value of the Bahamian dollar, regulating credit and note issue, administering exchange control regulations, managing bank and trust legislation, and compiling financial statistics. The government's adoption of a code of conduct for the banking and finance industry in 1985 increased the Central Bank's supervisory role over that industry. The Central Bank adhered to a policy of strict discipline to create monetary stability and a strong balance of payments. The Bahamian dollar has been kept at par with the United States dollar since 1973. The Central Bank maintained an informal policy on interest rates, generally keeping local rates in line with movements in the United States. In April 1986 the Central Bank lowered its discount rate to 7.5 percent; commercial banks followed and cut their prime lending rate to 9 percent. Although the Central Bank had encouraged commercial banks to lend to productive sectors of the economy rather than to consumers, banks were reluctant to adhere to that recommendation. Indeed, the percentage of private sector loans devoted to personal consumer use increased from 42.4 percent in 1977 to 61 percent in 1984. In the mid-1980s, the Bahamas generally enjoyed a favorable balance of payments position. Large negative trade balances were counteracted by large inflows in the net services account. Despite these large inflows, however, the current account ran a deficit from 1981 through 1985. The net capital account registered surpluses in 1981-82 but went into deficit after 1983-85 in response to a reduction in public sector inflows following the completion of the hotel corporation's hotel and casino project. Net international reserves continually registered surpluses in the early 1980s; in 1984 especially, net reserves improved substantially to US$38 million and were expected to register a US$31 million surplus in 1985 (see table 8, Appendix A). In the 1980s, the country's major nonpetroleum exports were pharmaceuticals, chemicals, rum, crawfish, salt, and aragonite. Major imports, including oil for domestic consumption, were foodstuffs, tobacco, beverages, machinery and transport equipment, automobiles, and finished manufactured goods, including furniture, clothing, footwear, toys, and jewelry. The United States was the most important trading partner in both exports and imports. Transportation infrastructure on the islands was good. There were 3,350 kilometers of roads, of which 1,350 kilometers were paved and 1,250 were gravel. New Providence and Grand Bahama were the islands with the most extensive road systems, but good roads also were found on Cat Island, Long Island, Eleuthera, and on sections of Andros Island, Great Abaco Island, and Great Exuma Island. In 1985 there were 67,848 motor vehicles registered, 70 percent of which were concentrated in New Providence. Of the total number of vehicles, approximately 77 percent were private automobiles. The urban centers of Nassau and Freeport did not have major public transportation systems, relying instead on a plentiful supply of metered taxis; New Providence had a system of small minibuses known as jitneys. No railroads or inland waterway systems existed on the islands. Interisland transportation was served by charter, commercial, and private aircraft. The country had forty-nine government-run or private airfields, including two international airports (Nassau and Freeport) and one airfield run by the United States Air Force (Grand Bahama); nineteen of the airfields served as official ports of entry. Interisland travel was also covered by private boats and by a government mailboat system; approximately twenty mailboats departed Nassau for the Family Islands each week. The country had twenty-three ports, including the main harbors at Nassau and Freeport. For a developing nation, the Bahamas possessed advanced telecommunications and international communications systems. An automatic telephone system provided service to 62,000 telephones. Both Nassau and Freeport had twenty-four-hour international telephone and telegraph service, whereas the Family Islands were generally served by only daytime service. The system was aided by a tropospheric scatter link station in Nassau and a Bahamas-Florida submarine cable that provided excellent reception and eliminated problems of atmospheric interference. Radio and television broadcasting was operated by the Broadcasting Corporation of the Bahamas. It ran three radio stations; ZNS-1 and ZNS-2 operated from Nassau, and ZNS-3 operated in Freeport to serve the northern islands. One color television station, ZNS-13, operated out of Nassau. It opened officially in 1977 and served an area within a 209-kilometer radius of Nassau.