The Bahamas could be headed into a recession.
That is according to Fidelity Forum, a regular economic review by the Fidelity Group of Companies.
According to the review, unofficial statistics suggest that the Bahamian economy grew by about one percent in 2001, after heady growth rates in 1999 and 2000 of 5.9 percent and 4.5 percent respectively.
The review further stated that it is likely that growth in 2002 may be negative.
“We could be in a recession,” said Alfred Stewart, executive director at Fidelity. “We need to act now to head off this deep recession,” he insisted.
And, in order to pull The Bahamas out of this state, Mr. Stewart suggested that the prime rate be dropped by two percent, increase Government capital project spending, and lower tariffs on construction materials.
“We need to act now in order to head off a deep recession,” Mr. Stewart said. “This is particularly important in light of an impending new Gulf war. Doing nothing or business as usual is not an option.”
The state of the Bahamian economy was discussed earlier this month by Governor of the Central Bank of The Bahamas Julian Francis, who confirmed that the economy grew by one percent in 2001.
This was due to the recession in the United States, because of the September 11 terrorist attacks on that country, he had said on the ZNS talk show Immediate Response.
“Our economy, which depends very heavily on what happens in the United States continues, consequently, to not be supported by any recovery of the United States economy,” Mr. Francis said.
The American economy in 2000 grew by about 4.1 percent, and in 2001, grows by about 1.2 percent on average.
Financial experts saw no immediate recovery in sight.
“The reasons are clear,” said Mr. Stewart. “Hotel revenues are down and so are employee earnings. There has been a sharp decline in foreign direct investment. Bahamians are consuming less, resulting in lower imports and lower merchants sales. Lower imports have reduced government revenue from import stamp duties and the government’s fiscal deficit is approaching $200 million.”
The financial services sector is retrenching in the wake of a more costly regulatory environment, Mr. Stewart said. In addition, the huge drop in global equity markets has reduced assets under management by offshore banks by as much as 20 percent if not more.
Since a significant portion of offshore banking revenue is linked to assets under management, Mr. Stewart observed that there are signs that many Bahamian based institutions are reducing their overhead and at least one major bank has decided to exit. And, given this scenario, it is expected that employment levels will decrease.
Approximately 1000 Bahamians are employed in the offshore industry with an average salary of in excess of $58,000. In 2001, the offshore industry spent close to $180 million on salaries, rents, licenses, capital expenditure and a retrenching is likely to be felt immediately, Mr. Stewart stated.
He further pointed out that when it comes right down to it, there are only two ways to fight a recession – changing the monetary policy and or fiscal policy – doing nothing is not an option.
It said that monetary fiscal policy involves the regulation of interest rates or the money supply in order to influence the economy. In the United States, monetary policy is determined by the Federal Reserve System, which has dropped interest rates 15 times since the U.S. recession started in 2000.
In The Bahamas, monetary policy is influenced by the Central Bank, which has managed domestic money supply and therefore the ability of banks to lend. It has also from time to time adjusted interest rates. The last time Bahamian interest rates changed was in 1999 when the prime rate dropped to six percent from 6.75 percent.
Fiscal policy, Mr. Stewart said, has nothing to do with how much money the government spends and how much money it collects in taxes, which ultimately influences the economy.
In recent recession fighting history in the United States, he noted that monetary policy has meant lowering interest rates while fiscal policy has meant lowering taxes.
Both tools, (U.S. monetary and fiscal policy) have helped get the U.S. economy moving quicker in the short term.
“However, in appears that locally, except for borrowing to bridge the fiscal deficit, no particular policy is being pursued despite a slowing economy,” Mr. Stewart said.
In the absence of any public pronouncements, he offered the following suggestions in an attempt to find a prescription for the country’s ailment.
* monetary stimulus – The Central Bank should drop the prime rate by as much as two percent immediately. This could save Bahamian borrowers as much as $50 million per year in interest cost alone.
* Fiscal Stimulus – Government capital projects.
A – Create new accelerate the commencement of planned public capital projects, particularly those that have a high labour component.
B- Lower tariffs on construction materials – a reduction on building supplies will lower the cost of construction and boost the industry.
By Lindsay Thompson, The Nassau Guardian
