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Economy of the Bahamas

The Bahamas is a stable, developing nation with an economy heavily dependent on tourism and offshore banking. Steady growth in tourism receipts and a boom in construction of new hotels, resorts, and residences had led to solid GDP growth in recent years, but the slowdown in the US economy and the attacks of 11 September 2001 held back growth in these sectors in 2001-03. Financial services constitute the second-most important sector of the Bahamian economy, accounting for about 15% of GDP. However, since December 2000, when the government enacted new regulations on the financial sector, many international businesses have left The Bahamas. Manufacturing and agriculture together contribute approximately a tenth of GDP and show little growth, despite government incentives aimed at those sectors. Overall growth prospects in the short run rest heavily on the fortunes of the tourism sector, which depends on growth in the US, the source of more than 80% of the visitors. In addition to tourism crayfish and banking, the government supports the development of a "third pillar", e-commerce.

Basic Ingredients of the Bahamian Economy

The Bahamian economy is almost entirely dependent on tourism and financial services to generate foreign exchange earnings. Tourism alone provides an estimated 60% of the gross domestic product (GDP) and employs about half the Bahamian work force. In 2004, over 5 million tourists visited The Bahamas, most of whom are from the United States.

A major contribution to the recent growth in the overall Bahamian economy is Kerzner International's Atlantis Resort and Casino, which took over the former Paradise Island Resort and has provided a much needed boost to the economy. In addition, the opening of Breezes Super Club and Sandals Resort also aided this turnaround. The Bahamian Government also has adopted a proactive approach to courting foreign investors and has conducted major investment missions to the Far East, Europe, Latin America, and Canada. The primary purpose of the trips was to restore the reputation of The Bahamas in these markets.

Financial services constitute the second-most important sector of the Bahamian economy, accounting for up to 15% of GDP, due to the country's status as a tax haven and offshore banking center. As of December 1998, the government had licensed 418 banks and trust companies in The Bahamas. The Bahamas promulgated the International Business Companies (IBC) Act in January 1990 to enhance the country's status as a leading financial center. The act served to simplify and reduce the cost of incorporating offshore companies in The Bahamas. Within 9 years, more than 84,000 IBC-type companies had been established. In February 1991, the government also legalized the establishment of Asset Protection Trusts in The Bahamas. In December 2000, partly as a response to appearing the plenary FATF Blacklist, the government enacted a legislative package to better regulate the financial sector, including creation of a Financial Intelligence Unit and enforcement of "know-your-customer" rules. Other initiatives include the enactment of the Foundations Act in 2004 and the planned introduction of legislation to regulate Private Trust Companies.

Agriculture and fisheries industry together account for 5% of GDP. The Bahamas exports lobster and some fish but does not raise these items commercially. There is no largescale agriculture, and most agricultural products are consumed domestically. The Bahamas imports more than $250 million in foodstuffs per year, representing about 80% of its food consumption. The government aims to expand food production to reduce imports and generate foreign exchange. It actively seeks foreign investment aimed at increasing agricultural exports, particularly specialty food items. The government officially lists beef and pork production and processing, fruits and nuts, dairy production, winter vegetables, and mariculture (shrimp farming) as the areas in which it wishes to encourage foreign investment.

The Bahamian Government maintains the value of the Bahamian dollar on a par with the U.S. dollar. The Bahamas is a beneficiary of the U.S.-Caribbean Basin Trade Partnership Act (CBTPA), Canada's CARIBCAN program, and the European Union's Lome IV Agreement. Although the Bahamas participates in the political aspects of the Caribbean Community (CARICOM), it has not entered into joint economic initiatives with other Caribbean states.

The Bahamas has a few notable industrial firms: the Freeport pharmaceutical firm, PFC Bahamas (formerly Syntex), which recently streamlined its production and was purchased by the Swiss pharmaceutical firm Roche; the BORCO oil facility, also in Freeport, which transships oil in the region; the Commonwealth Brewery in Nassau, which produces Heineken, Guinness, and Kalik beers; and Bacardi Corp., which distills rum in Nassau for shipment to the U.S. and European markets. Other industries include sun-dried sea salt in Great Inagua, a wet dock facility in Freeport for repair of cruise ships, and mining of aragonite--a type of limestone with several industrial uses-- from the sea floor at Ocean Cay.

The Hawksbill Creek Agreement established a duty-free zone in Freeport, The Bahamas' second-largest city, with a nearby industrial park to encourage foreign industrial investment. The Hong Kong-based firm, Hutchison Whampoa, has opened a container port in Freeport. The Bahamian Parliament approved legislation in 1993 that extended most Freeport tax and duty exemptions through 2054.

The Bahamas is largely an import, service economy. There are about 110 U.S.-affiliated businesses operating in The Bahamas, and most are associated with tourism and banking. With few domestic resources and little industry, The Bahamas imports nearly all its food and manufactured goods from the United States. American goods and services tend to be favored by Bahamians due to cultural similarities and heavy exposure to American advertising.

Secondary industries

Manufacturing

In 1999, the small industrial sector of the Bahamas only made up about 5 percent of the nation's GDP and 5 percent of employment. Government infrastructure projects and private construction provide the main industrial activity. The 1 shipyard in the Bahamas is at Freeport and it specializes in the repair of passenger or cruise ships. There is limited production of minerals. Sand is dredged off the Bahamas Bank and used for limestone and the production of commercial sand, which supply the local construction industry. There is also limited production of salt for export to the United States. Large-scale oil refining began in 1967 with the installation of a large refinery on Grand Bahama with a daily capacity of 500,000 barrels, but by 2000 no oil was being refined.

The pharmaceutical company, PFC Bahamas, produces a small quantity of products for export and the oil company, BORCO, has a refinery in the islands, but these are individual enterprises and do not represent any large industrial presence. There is a substantial brewing industry. Companies such as Bacardi, Inc., distill rum and other spirits in the islands, while other international breweries such as Commonwealth Brewery, produce different beers including the Heineken, Guinness, and Kalik brands.

Construction

The construction industry seemed to peak in 1998 with the completion of several new resorts. By 1999, new construction projects had fallen by 15.9 percent, with 817 continuing commercial projects valued at US$123 million. However, private housing completions were up by 18.3 percent with a value of US$112.1 million. This reflects an increasing demand for more upscale housing in the nation.

Tertiary industries

Tourism

Tourism dominates the Bahamian economy. In 1999, 3.65 million people visited the islands, with 2.2 million of them arriving by cruise ship. Revenue from tourism made up 60 percent of the nation's GDP. The average tourist spent US$958 while vacationing in the Bahamas, and tourist spending overall amounted to US$1.5 billion. In 2000, there were about 81,700 people employed in the tourist industry. Most visitors are from the United States (83 percent in 1999). However, in recent years the number of European tourists has increased by 9 percent.

The largest resort in the island is the 2,340 room mega-resort Atlantis, which is owned by Sun International. It employs 5,500 people and is the second largest employer in the nation after the government. Other major resorts in the islands include Club Med (popular with the French), Sandals (attracting the British), and Holiday Inn. The Grand Bahama Development Company plans to spend US$50 million upgrading airport and cruise ship facilities to accommodate an additional 555,000 visitors per year.

Although the majority of the tourist industry in the Bahamas has been driven by private enterprise, the Bahamian government did own 20 percent of the hotel accommodations in 1992. Privatization programs since that time have reduced the government holdings to 5 percent.

All major cruise lines operate services to the Bahamas. To extend the stay of passengers, the government has enacted legislation that allows ships to open their casinos and stores only if they remain in port for more than 18 hours.

Financial services

The financial services sector is the second chief component of the Bahamian economy. In 1998, this sector added US$300 million to the economy and employed 4,000 people, accounting for some 15 percent of the GDP. Government legislation has also encouraged the formation of international companies known as shell corporations, which are established to hide or protect their assets from national taxes at home by incorporating themselves in a foreign nation. As a result there are over 100,000 such corporations. Although many of these firms employ Bahamians, they add little to the nation's economy since they essentially act as conduits for transferring money.

Retail

Thanks to the tourist trade, retail companies prosper in the Bahamas. There is a strong preference for recognizable name-brand products, and major American brands do well in the islands. However, the government requires that retail and wholesale businesses be Bahamian-owned.

Business environment

The Bahamas offers attractive features to the potential investor: a stable democratic environment, relief from personal and corporate income taxes, timely repatriation of corporate profits, proximity to the U.S. with extensive air and telecommunications links, and a good pool of skilled professional workers. The Government of The Bahamas welcomes foreign investment in tourism and banking and has declared an interest in agricultural and industrial investments to generate local employment, particularly in white-collar or skilled jobs. Despite its interest in foreign investment to diversify the economy, the Bahamian Government responds to local concerns about foreign competition and tends to protect Bahamian business and labor interests. As a result of domestic resistance to foreign investment and high labor costs, growth can stagnate in sectors which the government wishes to diversify.

The country's infrastructure is best developed in the principal cities of Nassau and Freeport, where there are relatively good paved roads and international airports. Electricity is generally reliable, although many businesses have their own backup generators. In Nassau, there are two daily newspapers, three weeklies, and several international newspapers available for sale. There also are eight radio stations. Both Nassau and Freeport have a television station. Cable TV also is available locally and provides most American programs with some Canadian and European channels.

Areas of opportunity

The best U.S. export opportunities remain in the traditional areas of foodstuffs and manufactured goods: vehicles and automobile parts; hotel, restaurant, and medical supplies; and computers and electronics. Bahamian tastes in consumer products roughly parallel those in the U.S. With approximately 85% of the population of primarily African descent, there is a large and growing market in the Bahamas for "ethnic" personal care products. Merchants in southern Florida have found it profitable to advertise in Bahamian publications. Most imports in this sector are subject to high but nondiscriminatory tariffs.