The Rt. Hon. H.A. Ingraham, Prime Minister and Minister of Finance, presented the **2009/2010 Budget Communication** in Parliament today. He titled his presentation, **“The Global Crisis and The Bahamas”** – taking the opportunity to speak to the extraordinary forces behind the crisis and the impact on economies around the world. He said The Bahamas is deeply integrated into the global economy and cannot stand apart from world developments.
The 1.7% contraction of the Bahamian economy in 2008 is in sharp contrast to the forecast of a positive 2 per cent growth rate included in the 2008/09 Budget Communication and is indicative, said the Prime Minister, of the suddenness and severity of the current worldwide recession. In its April World Economic Outlook, the International Monetary Fund (IMF) projected global activity to fall by 1.3 per cent in 2009.
*“We have used our fiscal flexibility cautiously and prudently to soften the adverse impact of the global crisis on the lives of our fellow Bahamians,”* said Prime Minister Ingraham. This flexibility has enabled The Bahamas to sustain employment, maintain public services at acceptably required levels and bring forward major employment-generating capital works which will accelerate the recovery of the economy when the global deterioration reverses.
The Prime Minister acknowledged the vital importance of maximising existing revenues to finance expenditure on current services and limit the amount which has to be provided from borrowings to maintain living standards and essential services. This, he said, requires a two-pronged approach, viz. modernizing all aspects of revenue collection on the one hand, and enhancing the efficiency of all aspects of current expenditure. The Budget Communication focused on these two areas, including steps to reform and modernize the Department of Customs, modernize financial administration and public corporations, business licence rationalization, amendments to the Real Property Act, and further rationalization of tariff and excise rate structures.
##Overview of the Bahamian Economy – 2008##
The Bahamian economy was adversely affected in 2008 by the global economic downturn, resulting in the first decline in real activity since 2004. This significant weakness in economic activity reflected declines in tourism, foreign direct investments and related construction, business failures and or contraction, job losses and a consequent falloff in consumer spending.
Mirroring worldwide depression in tourism markets – it is estimated that travel globally is down by an average of 18% – tourism output in The Bahamas fell by 4.5% during 2008, with declines in both stopover and cruise activity. Prime Minister Ingraham said The Bahamas is moving to address the challenges and improve the attractiveness of the tourism product. The Ministry of Tourism is embarking on a plan to increase the number of airlines serving the country with reduced airfares for customers, and several major infrastructural projects being undertaking will also provide benefits to the tourism sector, by enabling better delivery of the kind of quality experience which consumers are seeking. Further, the Ministry of Tourism will undertake a broad spectrum of strategic marketing initiatives in key markets.
A 10% drop in output in the construction sector was due primarily to the tightening in foreign investment inflows; however, domestic residential and commercial developments provided positive contributions. Real estate purchases by international persons decreased by a third and a number of resort development projects stalled. The continuation of a number of upscale resort and residential developments, the inauguration of The Bahamas’ first off-shore medical school and the ground breaking for an important niche market resort on a Family Island provided a positive background to an otherwise “challenging foreign direct investment forecast”.
In terms of other economic indicators, the Prime Minister reported that Inflation rose to 4.5% in 2008; the unemployment rate continued to rise, exceeding 12.0% at year end-2008; and the growth of domestic credit moderated to 6.4% in 2008. Reductions in non-oil imports, combined with declines in dividend and interest outflows from the private sector and reduced payments for external construction services, contributed to a 23.2% contraction in the deficit in the Current Account of the Balance of Payments. The merchandise trade deficit narrowed by 1%, to $2.1 billion, as non-oil imports fell by 17.5% and offset the 44.7% increase in the fuel bill. As a result of a reduction in net private investment flows, the capital and financial account surplus fell by $59.4 million to $927.2 million.
External reserves grew by $108.7 million in 2008, to $562.9 million versus a contraction of $45.5 million in the previous year. This upward trend has continued, with external reserves at $647.7 million on May 20, as compared to $562.9 million at year end-2008.
In line with its forecast for U.S. activity, the IMF has revised downward its projection for growth in The Bahamas in 2009, and now forecasts a decline of around 3.9 per cent. A further, more modest decline of 0.5 per cent is anticipated in 2010, with positive real growth projected thereafter. The Prime Minister indicated that these projections were adopted for the purpose of fiscal planning in the 2009/2010 Budget.
With expectations that GDP in current dollars will be lower than the previous year by some $78 million, the Government has pledged to redouble efforts in 2009/10 to collect the maximum amount of revenues that are rightfully due. It is estimated that **recurrent revenue** will come in at $1.389 billion, or 18.8 per cent of GDP.
To further strengthen fiscal discipline in the current difficult environment, the Government will hold the line on **recurrent expenditure** in 2009/10. While endeavouring to maintain employment levels and other priorities, it will move firmly to eliminate expenditures which, in present circumstances, are of low priority. Estimated recurrent expenditure is $1.53 billion. This combination of revenue enhancements and expenditure restraint will result in a lower **recurrent deficit** in 2009/10 as compared to 2008/09: $141 million vs. $186 million. When combined with **capital expenditure** of $255 million and **debt redemption** of $88 million, this is expected to produce a GFS deficit of $286 million, or 3.9 per cent of GDP in 2009/10, down by 0.8 per cent from the 4.7 per cent ($352 million) projected outturn for 2008/09.
The Government remains steadfast in its commitment to fiscal discipline in order to return public finances to more acceptable levels of public debt relative to the size of the economy. The multi-year fiscal projections presented in the Communication illustrates the projected evolution of public finances over the next 3 years based on the continuation of the targeted fiscal strategy and on assumptions about the macroeconomic environment as set out by the IMF. *”On the basis of these projections or indications, we should be in position, desirably, to reduce the GFS Deficits in the next three years,”* said Prime Minister Ingraham, continuing, *”In light of the magnitude of the fiscal challenges that we face, that in and of itself will be a notable achievement. Then, as GDP grows the effect will be to reduce the ratio of Government Debt to GDP.”*
Speaking specifically to the number two industry, the Prime Minister said, *“It is the success and competence of the financial services sector that sets the Bahamian economy apart from other Caribbean economies. Without that sector, The Bahamas would be just another high-quality Caribbean tourism destination, excellent in itself, but not providing the high salaries and benefits which arise directly and indirectly from financial services.”* The Prime Minister said it is recognition of this fact that led the Government to move with urgency to safeguard the financial services industry, embarking on negotiation of appropriate information exchange agreements with other countries, commencing with the Government of Canada.
*“Our aim is to ensure that the financial services sector of The Bahamas fully complies, as it has hitherto, with the enhanced norms now being demanded. In meeting these enhanced norms, hopefully, opportunities for further growth and diversification will be opened up,”* he said.
Skilled employees will be required for financial services – and other sectors of the economy – in order to strengthen their competitive positions. In this connection, the Government remains committed to increasing access to excellent university education in The Bahamas. The competitiveness and innovation required to secure a prosperous future for the Commonwealth of The Bahamas will depend on an ever-increasing pool of well-educated Bahamians. *”To this end, efforts will continue to be deployed to transform the College of The Bahamas into the University of The Bahamas as promptly and effectively as possible.”*
The Prime Minister also spoke to ongoing negotiations with the World Trade Organization and Canada. On the former, he noted that the WTO had accepted the Memorandum of Foreign Trade Regime submitted by The Bahamas, with negotiations for the formal accession expected to conclude within three years.
To further advance export trade, The Bahamas – along with other CARICOM countries – has entered into discussions with Canada for a new trade agreement to replace the CARIBCAN agreement which will terminate next year. He said the new agreement is expected to establish more comprehensive and reciprocal trade rules between CARICOM and Canada to mutual advantage.
Also announced was that The Bahamas and the European Union will sign a Schengen Visa Waiver Agreement tomorrow (May 28) – effectively removing the visa requirement for short term visits (up to 3 months) by Bahamian citizens to each of the European Union countries that are party to the Schengen Visa Agreement.
The Budget Communication also covered issues such as the introduction of unemployment benefits in May, the pending introduction of a National Training and Retraining Programme, in conjunction with the Bahamas Technical and Vocational Institute (BTVI) and the College of The Bahamas.
The Prime Minister emphasised the Government’s desire *“to frame the short-term measures that we are adopting to support the economy squarely within the context of a sound medium-term fiscal strategy.”* It is just such a strategy that will return The Bahamas to the sustainable fiscal position that is so vitally important to its future prosperity, he concluded.