The Bahamas economic outlook
Recently, I had occasion to give a talk to a group of financial executives about the country’s economic outlook. My statement to them is what follows:
The Bahamas’ economic outlook is one of sputtering advancement if one looks at key economic indicators. Gross domestic product, which measures our national output, grew by 1.6 percent last year, short of the 2.2 percent forecasted by the government, and the 2.6 percent forecasted by the International Monetary Fund (IMF). I firmly believe that the recent increase in value-added tax (VAT) from 7.5 percent to 12 percent suppressed real growth of the economy, having pushed up inflation. I also believe that GDP growth will remain subdued at between the 1.6 percent to 2.5 percent; settling nearer to the lower end of this scale than the higher end, given that not much is likely to change in terms of our economic fortunes over the next 12 months. Tourism has had an impressive year and even with this, growth registered at 1.6 percent.
There is certainly room for growth in the tourism picture and if it materializes, growth could see an uptick but not likely enough to push economic growth above two percent.
If the projects the prime minister mentioned in his recent national address come about – the Sterling Hurricane Hole (a $250 million mixed-use development, to create 3,000 construction jobs); a proposed public-private-partnership for the management, upgrade and expansion of the Port of Nassau; the Andros development of the Blue Hole Marina and Lodge in Fresh Creek; the Disney Cruise project in Eleuthera; the Pinder’s Bay $5 million development in Long Island; and a new five-star eco-resort by Star Resort with 515 luxury residences; possible development in Grand Bahama by Royal Caribbean and Carnival Cruise Lines – growth for the medium term might fare much better. I say might, largely because there are growing sentiments that the U.S. economy will soften, fuelled by fears of traditional ebb and flow of the business cycle as well as the U.S. trade wars with China and now Mexico. Such could have a dampening effect on the global economy and, indeed, the Bahamian economy.
Unemployment is now near 10 percent, having been subdued by recent hiring done by Baha Mar, now fully open and performing reasonably well. It is likely to remain in the range of eight percent to 10 percent over the next 12 months, though some decline is possible beyond that period, as some of the projects mentioned before come on stream. Any employment gains over the medium term are likely to be predominantly in the construction area rather than solid, permanent jobs. Permanent jobs may be more pronounced two years out, as some of the projects mentioned materialize.
While inflation took an upward hit due to the VAT, it is likely to stabilize over the next months, provided that the U.S. tariff hikes on Chinese and Mexican products are not sustained. If these hikes endure, The Bahamas could import some of their inflationary effects.
The government has been quite aggressive in seeking to consolidate its fiscal affairs and has managed to reduce deficit spending to more manageable levels, with the prospects of even greater gains going forward. The GFS deficit is forecasted to reach about 1.8 percent this fiscal year and one percent in the next budget cycle. These gains would represent 20-year lows for the deficit. Of course, much of this has come at the expense of taxpayers, as there was a significant increase in VAT from 7.5 percent to 12 percent. There was also a tightening of spending of about 10 percent. These combined, I believe, softened the economy, and given the government’s stated position of more aggressively pursuing outstanding taxes and containing spending is likely to continue to squeeze growth a bit. Over the long term, should other initiatives to improve economic growth occur, these fiscal gains will benefit the country appreciably. If, however, done in the absence of such economic growth inducing initiatives, it will cause a drag on the economy.
In summary, what is the country’s economic outlook? In the short term, marginal; in medium-term, better but modestly optimistic; and long-term, uncertain. Consumers in The Bahamas will not likely experience much in the way of increase in their sense of prosperity in the short term. They may enjoy increasing fortunes over the mid term and thus better prospects for lending and spending. I might note here that one of the great challenges for this economy is the combination of less than optimal productivity, stagnant wages – which to some degree is related to the latter – and price squeezes on goods and services from almost every quarter. No economy can produce a sense of prosperity, much less actual prosperity, with such negatives prevailing. With limited relief in sight for any or all those issues, it is understandable why optimism about our short- to medium-term prospects remains cautious.
I might note here, as chief negotiator for The Bahamas WTO accession process, that the country’s long-term economic outlook could be greatly improved if it pursues reforms in line with WTO accession and as outlined in the recent Oxford Economics report on the impact of WTO accession on the Bahamian economy. For the most part, these reforms relate to best practices in business facilitation, trade liberalization and productivity improvements. It is possible that the WTO accession process could be completed this year and the country accepted into membership mid next year. This notwithstanding, however, any meaningful reforms would take at least three years to take hold after accession and several additional years to see the gains. This would, however, make the nation’s long-term prospects more predictable in my view.
What encourages me about our economic prospects is that many of the challenges to those prospects are self-inflicted. This means that since we are, in many ways, the reason for our difficulties, we are also the solution to them. We can improve productivity. We can enhance our business environment. We relieve controls on trade for economic growth. If, and when, we do these things, we will be, I believe, once again, one of the best places on the planet to do business.
• Zhivargo Laing is a Bahamian economic consultant and former Cabinet minister who represented the Marco City constituency in the House of Assembly.