The following is a summary of an interview with James Smith, Minister of State in the Ministry of Finance, with ZNS TV in The Bahamas.
Mr. Smith indicated that he did not expect the appointment, was honoured by the invitation from the new Prime Minister, and also humbled that this appointment was one of the first official acts of Prime Minister Christie.
He felt that he was well prepared for the task ahead, given his previous roles as Governor of the Central Bank of the Bahamas, Permanent Secretary in the Ministry of Finance, and Ambassador for Trade. Taking each of these in turn, he pointed out that as Governor of the Central Bank he had responsibility for monetary policy on behalf of the Government of The Bahamas, working closely with the banking system and banks, and with how the economy works and is influenced by direction from the Central Bank. He said his previous tenure with the Ministry of Finance also well prepared him for the current role. In terms of trade issues, he pointed out that he was the primary figure for The Bahamas in the “free trade” area, also serving as Chairman of the Services Group in the FTAA negotiating process.
Minister Smith indicated that his initial work will be that of a fact finding mission. The Ministry is well established, with work in progress. He will be undertaking a thorough briefing on all work in progress as well as that planned, and does not anticipate any major changes – at least initially – in policy direction within the Ministry.
In answer to query about the state of the economy and the reported increase in debt, Minister Smith indicated that election campaign remarks made by the PM were intended to convey the fact that the country is facing increasing debt — both domestic and external — and that there are some pressures on the country’s finances. Specifically, the gap between revenue and expenditures is growing. Two scenarios present themselves in terms of how the Government can tackle this — (i) increase revenue coming in; or (ii) reduce/contain expenditure.
Immediate steps for the Government will entail determining how big the deficit is, before determining ways and means of containing its growth. The Government has to look at the situation in the context of the wider (macro) economy, particularly as there is not much room for further taxation, and certain expenditures are fixed (salaries, capital projects already underway). There is a challenging task ahead.
The PLP has no plans for new taxes. Mr. Smith pointed to the Plan 2002 which clearly states that there will be no direct taxes introduced (income, inheritance or capital gains). There will be tax reductions — i.e. in real property tax on certain categories of houses.
A Commission will be established to come to terms with the impact of the WTO/FTAA on The Bahamas from the viewpoint of taxation. This suggests that there will be an early survey on taxation, with the Government re-examining its tax regime since provisions in the Agreements relate to specific guidelines on removing barriers to trade. This means The Bahamas will have to review the level of customs duties — and look at ways of replacing lost revenue. Minister Smith anticipates that this review will be done within the next 2 years.
Financial Services Legislation
Minister Smith said the new Government has been quite clear in its Plan. It recognises the need to meet international standards in terms of regulating the financial services sector; however, it will be looking at the manner in which this is done — which has been cumbersome and costly. Specifically, it will look to reducing the red tape. The Ministry of Finance has noted the inordinate amount of time and resources already put into this exercise.
In response to query as to whether any of the new laws will be reviewed, Minister Smith indicated that in the near term some laws will be reviewed for conformity with the Bahamas Constitution, and referenced the challenges already underway.
Concerning IBCs, Minister Smith noted that, like The Bahamas, other financial services centres have been hard hit as well.
The Government intends to come up with a new game plan — recognising that it cannot continue to promote/develop the Bahamas financial sector in the old fashion. It will have to look at it from the new international regulatory framework, and internationally accepted regulations. There must be improvement in the infrastructure — the cost of doing business in The Bahamas. To this end, it is critical to form partnerships with the financial services community. The Prime Minister has committed to increased consultation in this regard. The Government will seek to determine from industry practitioners what needs to be done. The role of Government is to facilitate the environment in which industry practitioners can flourish. Government and the industry must jointly develop this new game plan.
There seems to be a degree of uncertainty within offshore centres generally. The intent of the OECD is still unknown, with mixed feelings as to whether the intention is to eliminate OFCs altogether, or work towards a scenario where OFCs can play a more meaningful role in international financial services, i.e. assisting in tracing proceeds of drug trafficking, terrorism, etc.
In terms of how the PLP will address further overtures from the OECD, given its criticism that the former government acted too quickly, Minister Smith advised that it will be important to look at where the OECD is going with its threats and even more importantly, to look at the competition. If The Bahamas has “to do” other things, it will be critical to look not only at how it should move, but the timing of such moves. The Bahamas has been a leader in offshore financial services in the Western Hemisphere. It
has more to lose if it moves in the wrong sequence.
Again, consultation with the industry should assist in getting the sequence right.
The Government as outlined in its Plan is extremely investor friendly. The Plan specifically addresses this, for the simple reason that with any change in government, investors — both existing and new — look at these policies very clearly to see the impact on their ROI.
The new Government has outlined very clearly that it will reduce red tape, improve the environment for investors, provide certain guarantees and, by and large, lay out the red carpet for investors.
The Bahamas has a long and good track record of dealing with investors. It is a well known quantity in the world. It has a strong, democratic system of government, an independent judiciary, and very strong laws. Minister Smith does not see any investor being concerned with the new government.
He acknowledged that the problems previously experienced and which must be addressed are administrative — i.e. lengthy turn around times. The new Government has pledged to increase the speed in dealing with investors.
In terms of new incentives for attracting investment, Minister Smith said the Government will have to assess where the country is now, and determine the areas of focus. Tourism and agriculture & fisheries are two obvious areas. The Government will work with the larger community — and will gather, collectively, ideas for encouraging both international and domestic investment. In its Plan, a clear statement has been made with regard to increasing domestic savings, which in turn will lead to domestic investment. Policies and programmes will be developed towards this end.
There will be dialogue with local businessmen and with relevant institutions such as the Bahamas Development Bank. The BDB will be encouraged to channel resources to first time business people (new entrepreneurs) at reasonable costs. Minister Smith indicated that the Government will set the necessary policy and the BDB will be asked to develop plans of action to address this.
The Minister recapped events since The Bahamas joined the FTAA process in 1994, with the idea of some agreement being concluded by 2005. The Bahamas has been part of the CARICOM negotiating team.
He did not predict any impediments to making the 2005 deadline. In coming years, The Bahamas will be looking at all aspects of the Agreement, including which sectors should be liberalised, and which should not. It is a work in progress.
Although there is a choice, it would be difficult to have countries throughout the Hemisphere participating in an Agreement in which The Bahamas does not — this will run the risk of isolation. Minister Smith felt the negotiations have been going well, and that whatever decision is made will be done so in the best interests of the Bahamas.
In terms of the impact the FTAA will have on the Bahamian economy, Minister Smith pointed to the positive implications of having access to a market of 800 million people particularly in terms of financial services. Within this market is a percentage of high net worth individuals who can be targeted for wealth and asset management services offered by The Bahamas. The FTAA will eliminate restrictions currently in place prohibiting individuals in some countries from doing business with OFCs. In terms of trade, an FTAA would provide more access to more goods and inputs.
He noted that in trade liberalisation there are always winners and losers, with smaller, less efficient operations requiring protection. The FTAA process addresses the needs of smaller economies — with provisions planed for adjustment periods. He sees no adverse affect in the long term, either for The Bahamas or the rest of the region.