127257722 mid year budget communication 2013

7/29/2019 127257722 Mid Year Budget Communication 2013

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COMMONWEALTHOFTHEBAHAMAS

2012/2013MID-YEARBUDGETSTATEMENTONTHESIXMONTHSENDING31stDECEMBER2012

PRUDENTSTEWARDSHIPPresentedtotheHonourableHouseofAssemblybyTheRt.Hon.PerryG.Christie,M.P.MinisterofFinanceonMonday,25thFebruary,2013


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INTRODUCTION

IhavethehonourtopresenttheMid-YearBudgetStatementforthesixmonthperiodendingDecember31,2012.InthisStatement,myGovernmentiscommittingitselftoacourseofprudentstewardshipofthenationseconomyandfiscalaffairs.Itincludesnoincreasesintaxes.IwouldliketobeginbyacknowledgingthechangeinleadershipthatwasrecentlyeffectedattheMinistryofFinance.IwanttoexpressmysincereappreciationtoMr.EhurdCunninghamforhismanyyearsofdedicatedservicetotheGovernment,thelastfourofwhichhavebeenasActingFinancialSecretary.IwelcomeMr.JohnRollewhoassumedtheresponsibilityofFinancialSecretaryonFebruary1stofthisyear.Mr.RollehasextensiveexperienceintheserviceofTheBahamaswithintheCentralBank.Duringthelastthreeyears,heservedasaSeniorAdvisortotheExecutiveDirectorwhorepresentsCanada,theCaribbeanandIrelandattheIMF.Inthatcapacity,hegainedinvaluableexposuretothefiscalchallengesconfrontingtheCaribbeanregionaswellasotherconstituencieswithintheIMF.HewillthereforebewellplacedtoleadtheMinistryofFinanceasitaddressestheimportantchallengesofthefuture.InourCharterforGovernanceandtheSpeechfromtheThrone,myGovernmentsetoutanaggressiveplantotransformtheBahamianeconomyandsocietyforthebenefitofallBahamians.Wearefirmlycommittedtothepursuitofthevariouscriticalcomponentsofthatplanby,amongotherthings:relentlesslyattackingthecrimeproblemwhichisvitaltocreatinganenvironmentpropitioustostronggrowthandjobcreation;strengtheningourkeytourismindustry;promotingadditionalforeigndirectinvestmentacrossthecountry,andparticularlyinGrandB

ahamaandtheFamilyIslands;exploringavenuesforfurtherdiversifyingoureconomy,especiallyintheagriculturalareathroughscienceandtechnologytoimproveour

competitivenessinfoodproduction.Twoinitiativeswillplayapivotalroleinthetransformativeprocess,namelyanAgricultureandMarineScienceInstituteon

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NorthAndrosanda20-yeardevelopmentplanthathasbeendevelopedforaninnovative,science-basedandtechnology-drivenAgriculturesector.

Wearealsocommittedtofurtherdiversifyingourfinancialservicessector;ftherdevelopmentandexpansionofouryachtingandshippingregistries;expandingourinvestmentsineducation;andstrengtheningnationaltrainingthroughtheestablishmentoftheNationalTrainingAgencytoestablishacompetencybasedtrainingandjobplacementsystemthatisflexibleandresponsivetotheactualrequirementsoftheworkplace.Wehave,sincetheelection,focusedourattentionontheseandtheothermajorareasofourchangeandgrowthagendaandwewillpersistinplanningandfurtherdevelopinginitiativesthatassuredlywillgetourcountrytowhereitshouldbeeconomicallyandfiscallygoingforward.Basedondevelopmentstothispoint,withthevirtual

completionofthetourismplantinNewProvidencewithAtlantisandBahaMar,aswellasnewdevelopmentsthatwearecurrentlyexamininginBimini,GrandBahama,SanSalvador,Abaco,EleutheraandCatIsland,Iharboragreatsenseofoptimismforthefuture.ThefiscalmeasuresthatIwillsetoutinthisplanareanintegralcomponentofourgrowthstrategyandwillensurethattheGovernmentwillbesoundlyplacedfinanciallytoimplementthefullcomplementofinitiativesthatcomprisethatstrategy.Assuch,itisdesirablethatwemovetoaddressthefiscalchallengesaspromptlyaspossible.Shortlyaftertheelection,inthe2012/13BudgetCommunication,IindicatedthatmyGovernmenthadinheritedaverydifficultfiscalsituationfromitspredecessorwhich,inadditiontoalarg

enegativeimbalancebetweenRecurrentExpenditureandRevenue,alsofeaturedsignificantcostoverrunsandcarryoverspendingintothecurrentfiscalyear.Asaresult,ourroomtomanoeuvrewasseverelyconstrainedaswedevelopedthe2012/13BudgetwithinaverytighttimeframeaftertheMay2012election.Inlightofthissituation,Istatedourfirmcommitmenttorestoringpublicfinancestoahealthierandmoresustainablepositionand,tothatend,Ioutlinedspecific

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andsignificantstructuralreformsthatwouldbeimplementedaspartofamedium-termfiscalconsolidationplan.Inparticular,Ilaidoutplanstoimplementafundamentalreformofourtaxsystemandtostrengthenoursystemoftaxadministration.Iwillshortlyprovideabriefupdateonthestatusofthesevariousinitiatives.However,economicandfiscaldevelopmentsinthefirsthalfofthe2012/13fiscalyearhavebeenlessfavourablethanhadbeenexpectedandtheGovernmenthashadtomakeoperationaladjustmentstoensurethatwedeliveronthefullfiscalyeartargets.Inthefirst-halfperiodtoDecember2012,wenotedthefollowing:weakerthanexpectedeconomicgrowth;andconsequentlylowerthanexpectedRecurrentRevenuecollections.

Earlyinthe2012/13fiscalyear,theGovernmentwasalsoobligedtoreduceitslevelofshort-termbankfinancing,whichhadaccumulatedduetotheconsistentshortfallsintheprojectedrevenuesoverthelastthreefiscalyears,2009/10to2011/12.TheshorttermfinancingwasprovidedbytheCentralBank,throughadvancesandthepurchaseofTreasuryBills,andbytheRoyalBankofCanadathroughanincreaseinthethenGovernmentsoverdraftfacilityto$200millionfromthenormal$100million.Whenwecametooffice,wealsofacedsome$100millionincarry-overexpendituresfromthe2011/12fiscalperiod.This$100millionexpenditureincludedthefollowingobligations:Unpaidchequesandwiretransfers$63.14million;52-weekJobProgramme$23.0million;and

Teachers/PublicServiceUnionlumpsumpayments$10.86million.

OntopoffacingtheseunpaidbillstheGovernmenthasproceededtoreducetheoverdraftfacilityinkeepingwithourdebtmanagementreformexercise,whichwasforeshadowedduringthedebateontheamendmenttotheFinancialAdministrationandAuditActwhichtookplaceinNovember2012.Thebenefitofthisreductionofthe

overdraftfacilityisthatitwillsubstantiallyreduceouroverallcostoffinancing.Nevertheless,thesebillsmustbepaid.Withtheseadjustmentsinshort-termfinancingfacilitiesitisnecessarytosettletheseobligationsthroughlonger-termborrowing.

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InDecemberof2012,Moodysannouncedadowngradeinourcountryscreditratingalongwithanegativeoutlook.TounderpinitsStatement,MoodyscitedasignificantdeteriorationoftheGovernmentsbalancesheetsince2007,whichwasexacerbatedbyalowrevenuebase,andahighandrisingdebtlevel.InSeptember2012,StandardandPoorsdowngradedtheoutlookforourcreditratingtonegativeoversimilarconcernsaboutourdebtdynamicsandthestrengthofourcommitmenttofiscalreforms.ThelatestIMFArticleIVstaffconsultationreportthatwaspresentedtotheExecutiveBoardoftheFundonFebruary4thofthisyear,alsocallsfortheimplementationofamedium-termframeworkforbroad-basedfiscalconsolidationtoaddress,initswords,theimperativeofalowerdebtburden.Iwanttostressatthispointandinthestrongesttermspossible,thatthesearenotmerelyacademicmattersoflittleinteresttotheaverageBahamian.AsIwillexplainshortly,thefiscalstraitsinwhichtheGovernmentfindsitselfhaveadirectandsignificantbearingonboththeaffairsofGovernmentandthedailylivesofourcitizens.Aswell,wefacetheprospectsofhigherratesofinterestonanyfutureborrowingsatatimewhenourannualinterestexpensesalreadyexceed$200millionandconsumeroughlyoneoutofeverysevenRevenuedollars.ThatismoneythatissimplysiphonedawayfromthevaluableprogrammesandservicesthattheGovernmentcouldbeprovidingtothepubliceachandeveryyear.Moreover,theadditionalfinancingneedsofGovernmentthataremetinthedomesticmarketdivertcreditthatcouldotherwisebeavailabletoBahamianbusinessesandthegeneralpublic.Thus,wenowstandatacriticaljuncturethatcallsforimmediateandresoluteaction.Bybothaddressingthenear-termfiscalpressuresthatwefaceand

pursuingtheimplementationofaconcreteandcrediblemedium-termfiscalconsolidationplan,wewillreturnthepublicfinancestoamoredesirableandsustainableposition.Confidencewilltherebyberestoredandstrengthenedand,inturn,thiswillunderpinstrongereconomicgrowthandjobopportunitiesgoingforward.InthisMid-YearBudgetStatement,Iwilllayoutthespecificsofbothourshort-termandmedium-termfiscalactionplans.Letmequicklyprovidesomecontextonrecenteconomicdevelopments,theoutlookfortheeconomyandasynopsisofthefiscalperformanceduringtheperiodofJuly

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toDecember2012.IinviteyoutoperusetheanalysisprovidedbytheCentralBankoftheBahamasinAnnexAformoreofthesedetails.

THEECONOMICCONTEXTAsfortheeconomiccontext,thenear-termperformanceof,andprospectsfor,theworldeconomyhavebeensomewhatmoremodestthanhadbeenexpectedatthetimeofthe2012/13Budget.Moreimportantly,theU.S.economyisnowestimatedtohavegrownbyamodest2.3percentin2012butitmayachieveresultsslightlybelowthisestimatein2013.TheBahamianeconomyhascontinuedtorecoverfromtheglobaleconomicandfinancialcrisis.Themaindriversare,ontheonehand,amodestthoughongoingreboundintourism.Ontheotherhand,thelargepublicandprivatesectorinvestmentprojectsthatareunderwayaresustainingaggregatedemandandalsoenhancingourtourismproductivecapacitygoingforward.TheIMFestimatesthattheeconomygrewby2.5percentinrealtermsin2012,aswasprojectedinthe2012/13Budget.Asforeconomicprospectsgoingforward,theIMFsforecastisthattheBahamianeconomywillgrowby2.7percentinrealtermsin2013,ashadbeenpresentedatthetimeofthe2012/13Budget.Beyondthisyear,giventheemergingdevelopmentsthatIhaveoutlinedabove,IamconfidentthattheBahamianeconomycanachievesignificantlystrongergrowth,withtheattendantcreationofadditionalemploymentopportunities.Permitmenowtoaddressthefiscalsituation.

BUDGETPERFORMANCEIN2012/13RecurrentRevenueTheevolutionofRecurrentRevenuesinthefirstsixmonthsofthe2012/13fiscalyearreflectedtheeconomicdevelopmentsduringthatperiod.Ourintakewasnotasstrongasexpectedbecause

thegrowthoftheeconomyincurrentdollarterms,whichisoureffectivetaxbase,hasnotbeenasrobustasanticipated.Atighterreinonexpendituresis

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thereforenecessarytoensurethatwedeliveronourdeficittargetof6.5percentofGDP,towhichwecommittedourselvesatthestartofthisfiscalyear.

RecurrentExpenditureOntheexpenditureside,recurrentspendingduringthefirsthalfofthefiscalyearhasbeenbroadlyinlinewiththebudget,andtheGovernmenthadexecutedabout45percentofitsplannedexpenditure.

CapitalExpenditureCapitalExpenditureduringthefirsthalfofthefiscalyearamountedtosome36percentoftheprojectedlevelforthefullyearpresentedinthelastBudgetCommunication.

FISCALPLANOFACTIONIN2012/13ANDBEYOND

FiscalActionin2012/13Atthemid-year,theGovernmentismakinginternaladjustmentstoensurethatwemeettheGFSDeficittargetof6.5percentofGDPthatwaspresentedinthelastBudgetCommunication.Moreover,wearebeginningtolaythefoundationformore

comprehensivereformstodeliveronamedium-termconsolidationofpublicfinances.HonourableMembersmayexpectamoredetailedelaborationofpolicyactionstoachieveourobjectivesintheforthcoming2013/2014BudgetCommunication.AsforRecurrentExpenditure,theMinistryofFinanceisusingtraditionalmethodsatitsdisposaltocontaintheexpendituresofGovernmentMinistriesandDepartmentsovertheremainderofthecurrentfiscalyear.Aswell,theGovernmentexpe

ctsthat,inthenormalcourseofourcapacitytoexecuteonpublicsectorinvestmentsandsomereprioritization,wewillmoderatethepaceofCapitalExpendituresbelowtheamountsbudgeted.Whatismoreimportantthougharethestructuralenhancementswearemakingtoimproverevenueperformanceandtightenexpenditurecontrolsoverthe

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medium-term.Beyondthemeasuressetoutbelow,IwouldsignalthattheGovernmentwillengage,overthecomingmonthsleadinguptothe2013/14BudgetCommunication,inacomprehensivereviewandassessmentofallrevenueareaswithaviewtoseekingmeansofenhancingtheGovernmentsrevenuecollectionsgoingforward.Today,IamannouncingselectmeasurestoenhanceRecurrentRevenuein2012/13andbeyond.MeasureswillbetakentoimprovetheinfrastructureofCustomselectronicsubmissions,therebystrengtheningrevenuecontrolsandreducingCustomspersonnelcosts.ThereviewofCustomsfeesispartofouroverallreassessmenttobringfeesmoreinlinewiththecostofprovidingGovernmentservices.Governmentfeesareanareathatwewillreviewmorecomprehensivelyinthe2013/2014BudgetCommunication.MyGovernmentisnowmovingtofurtherstrengthenrealpropertytaxadministration.TheGovernmentwillpresentinthenextBudgetCommunicationa

comprehensiveprogrammetoreformtherealpropertytaxadministration,whichwillincludenewlegislation,softwareandoperatingprocedures.Intheinterim,toproviderelieftotaxpayers,weareannouncinganewamnestyprogrammeinrespectofrealpropertytaxes,alsoeffectiveonMarch1st2013,thatwillincentivizeincreasedpayments.Therearefourcomponentstothisprogramme,namely:toencourageself-registration,ownersofresidentialpropertiesabovethe$250,000exemptionthreshold,andownersofcommercialproperties,whohaveneverreceivedapropertytaxbillwillbeencouragedtoregistertheirpropertieswiththeChiefValuationOfficerbyJune30,2013.Fortheseregistrants,theGovernmentwillwaiveallbacktaxesifany.toencourageregisteredpropertyownerswitha

rrearstobecomecurrentwiththeirtaxpayments,thegovernmentwillprovidewaiversasfollows:wherenomorethanthreeyearsofpaymentarrearsexist,50percentofthetotalowedinbothassessmentandsurcharges,providedpaymentismadebyJune30,2013;whereaccumulatedarrearsformorethanthreeyearsexist,100percentofsurchargesonly,providedpaymentismadebyDecember31,2013.

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torewardresidentialpropertytaxpayerswhoarecurrentwiththeirassessments,thegovernmentwillrebate5percentoftheannualrealpropertytaxassessment,providedtheownersremaincurrentwiththeirpaymentsoverthenextthreeyears.

TomakeRealPropertyTaxmoreclient-focused,wehaveintroducedaprocesstoautomaticallyreviewallinstancesofyear-on-yearvariationsinresidentialpropertytaxassessmentsofmorethan15percentorwheretheaverageyearlyincreasebetweenrevaluationsexceeds10percent.

Theseeffortsarebeingtakentocleanuptherealpropertytaxregisterandmodernizetheadministrativeinfrastructuresothat,goingforward,theGovernmentcantakeafirmerstanceinenforcingcompliance.

Inordertoprovideenhancedassistancetosmallbusinessoperatorsandpromotegrowthandjobcreation,IamannouncingthattherateofExciseTaxontruckslessthan20tonsisbeingreducedfrom85percenttoitspreviouslevelof65percent.ThatisalsoexpectedtogenerateincreasedrevenueforGovernmentthro

ughincreasedpurchasesoftrucks.IwouldflagatthispointthattheGovernmentwill,aswedevelopthenextBudgetCommunication,alsothoroughlyreviewtheentirestructureofExciseTaxratesonallmotorvehicles,whilebearinginmindthetrafficandenvironmentalimplications.TheseimmediatefiscalactionsinrespectofRecurrentExpenditure,CapitalExpenditureandRecurrentRevenuewillhelpussecurethe2012/13GFSDeficittargetthatwaspresentedinthelastBudgetCommunication,namely6.5percentofGDPbut,morefundamentallysetthetoneforbroaderreformswhichwewillunveilinthenear-term.However,asindicatedpreviously,wehavetofinancethisyearsome$100millionincarry-overexpendituresfrom2011/12.TheGovernmentwillbeseeking

authorizationforadditionalborrowingintheamountof$100millionin2012/13.

AMedium-TermFiscalConsolidationPlanAtthisstage,theGovernmentissettingitssightsonamedium-termstrategythat,barringunforeseendevelopments,willconsolidatethepublicfinancesandachieve

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significantandsustainablereductionsintheGovernmentdebtburdenovertime.Forthesakeofprudence,theplanwillbemonitoredcloselyand,onthebasisofevolvingdevelopments,willbeadjustedasnecessaryaswemoveforward.Asthekeycomponentsofourmedium-termfiscalplan,IamannouncingthatactionwillbepursuedinrespectofRecurrentExpenditure,RecurrentRevenueandCapitalExpenditureinordertobotheliminatetheprimarydeficitandgetthedebt-to-GDPratiotolowerlevels.Theprimarydeficitexcludesinterestchargesonthedebtanddebtrepaymentsandrepresentsthekeyindicatorofdebtsustainability.OntheRecurrentExpenditurefront,wewillimplementasteadydeclineinitsratiotoGDPbyonehalfofapercentage(0.5%)ofGDPperyear,beginningin2013/14andonthrough2016/17.AssuchweintendtoreducetheratioofRecurrentExpendituretoGDPfromtheprojected21.1%overthecourseofthisfiscalyearto19.1%ofGDPby2016/17.OntheCapitalside,webelievethatasustainablemedium-termtargetis3%ofGDP,whichintodaysleveltranslatesintoannualinvestmentsintheareaof$250million.WewillmovetowardthattargetbyrestrictingCapitalExpenditureto3.5percentofGDPin2013/14.Finallywearetargetingstructuralreformsthatwouldimprovetherevenueyieldoverthemedium-termbyalmost4percentofGDP,to21.5%ofGDPin2016/17from17.6%in2012/13.Thesuccessfulimplementationofthisplanoverthemedium-termisprojectedtoresultin:areturntosurplusesonRecurrentAccountby2015/16;primarysurplusesby2014/15;andaturnaroundintheGFSBalancefromadeficittoGDPratioof6.5%ofGDPthisyeartoasmallsurplusby2016/17.

Insum,throughtheseefforts,weexpecttobeabletoarrestthegrowthinthe

debttoGDPratioby2014/15andtobeginagradualreductionintheratiotojustover50%ofGDPby2016/17.

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Letmeprovideabriefoverviewoftheinitialpolicyactionswhichwillallowustoachievetheseobjectives.RecurrentRevenuewillbesignificantlyandstructurallyenhancedthroughawiderangeofmeasures,including:theestablishmentofaCentralRevenueAgencytostrengthentheefficiencyandeffectivenessofrevenuecollectionacrossanumberofmajortaxes.AssetoutintheWhitePaperonTaxReform,theGovernmentisimplementingabroadtaxreformpackagethatincludestheintroductionofaValueAddedTax(VAT)inJuly2014.Whilethatisanambitioustimeframe,IwouldnotethatwehavehadthebenefitofdetailedstudiesofthefeasibilityofaVATinTheBahamas.TheWhitePapercontainsafullyarticulatedpolicyframeworkforVAT.Followingthepublicconsultationprocess,theGovernmentwillpresentarefinedproposal,andadvancelegislationtobringtheVATintoeffect.OurtargetistocirculatethedraftlegislationforVATbythesecondquarterofthenextfiscalyear.WiththeintroductionofVAT,alongwiththereductionsinothertaxessetoutintheWhitePaper,weexpectanet2.2percentagepointsofGDPimprovementinRecurrentRevenueannually.TheGovernmentiscommittedtowide-rangingreformsofthepropertytaxadministrativesystemthatwilladd1%ofGDPtoRecurrentRevenuesby2016/17;WeareundertakingacomprehensiveCustomsreformandmodernizationprogramme,assistedbytheIDBthatwilladdrevenuesequivalentto0.5%ofGDP.ThenewCustomsManagementActwillbebroughtintoforcebyJuly1st2013,providingamodernlegislativeframeworkforCustomsoperations.Weareintroducingexcisestampsontobaccoproductsthatwillsharplyenhancecomplianceandadd0.2%ofGDPtorevenues.ThedraftBillhasalreadybeentabledinParliament.ThisregimewillbecomeoperationalearlyinthenextFiscalYear.Alltold,thesemeasureswillcontribut

etoboostingtherevenueyieldofourtaxsystembyalmost4pointsofGDPby2016/17.Thatwillbringouryieldsomewhat

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closerintolinewiththatgenerallyfoundelsewhereintheCaribbean,thoughstillatthelowerendoftherange.Ontheexpenditureside,theoverallframeworkforstrengthenedpublicfinancialmanagementwilltakeplacewithinthescopeofthenewFinancialAdministrationandAuditAct(FAAA),whichwillbebroughtfullyintoforcebyJuly1st2013.TheMinistryofFinance,inadeterminedfashion,willenforceexpendituredisciplineandaccountabilityacrossallGovernmentMinistries,Departmentandpubliccorporations.Inthisregard,theGovernmentisfirmlycommittedtoafundamentalreviewofitsoperationsaswellasitsexpenditureandrevenuecontrolmechanisms,seekingtoinstillbestpracticeswhereverfeasible.TheMinistryofFinance,inparticular,willbe

restructuredandstrengthenedinordertoenhanceitscapacitytomoreeffectivelymonitortheoperationsandexpendituresofGovernmentMinistries,Departmentsandpubliccorporations.Wewillvigorouslystriveforhigherlevelsofaccountabilityand

transparency.Inparticular,theMinistryofFinancewillundertakeurgentandspecificactionstodealwithelectricityconsumption,communicationscostsandthemanagementofGovernmentassets,andmotorvehiclesspecifically,acrossallareasofGovernment.Asregardspubliccorporations,theMinistryofFinancewillexertmoredirectandgreateroversightoftheirfinancialaffairstoensurethattheystriveforgreaterlevelsofefficiencyandeffectivenessandthattheyaresubjecttogreateraccountabilitytotheGovernment.Thiswillallowourbudgetingprocesstobemorecomprehensively

informedbythebudgetsofpubliccorporations,andsothatatrulycomprehensiveapproachtofiscaldisciplineisachieved.AsMemberswouldbeaware,theGovernmenthasalreadyaskedsubsidydependentcorporationstobetteraligntheirexpenditureplanswiththeresourcesthatareavailablefromGovernment.Aswell,theplanningfunctionoftheMinistryofFinancewillbestrengthenedsuchthatnewinvestmentsandprojectsarereviewedinaneconomicallyandfinanciallysoundandeffectivemanner.AlsoundertheFinancialAdministrationandAuditAct,thegovernmentwillintroducenewPublicSectorProcurementRegulationsbySeptember1st2013,whichwillimposegreatercontrolsandgreaterefficiencyonpublicspendingforgoodsandservicesforallpublicentitiesincludingpubliccorporations.

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Publicsectorpensionreformisalsoonouragenda.Aspartofthisexercise,wearereviewinghowtheadministrativeandactuarialcostsofexistingplanssponsoredbypublicsectoragenciesandcorporationscanbereducedandmanagedinamorecomprehensivefashion,withminimalimpactonexistingpublicsectoremployees.Throughthismedium-termfiscalconsolidationplan,wewillarresttheriseintheGovernmentdebt-to-GDPratioandputitonasteadydownwardpath.Thereareadditionalpolicyactionstobeelaborated,includingtheestablishmentofaCouncilofEconomicAdvisorswhich,asIexplained,willbeunveiledduringthe2013/2014BudgetCommunication.CONCLUSIONMr.Speaker,throughthisStatement,Ihaveprovidedamid-courseupdateonmyGovernmentsongoingcarefulmanagementofpublicfinances.ThatstanceissolidlyanchoredinourfundamentalfiscalanchorsandisdesignedtoreturnustomoreprudentandsustainablelevelsofGovernmentDebtovertime.AsIsignaledinmyaddresstotheBahamasBusinessOutlookConferencelastmonth,thereareclearindicationsthattheeconomyhasturnedthecornerandthat,despitetherisksthatarepresent,wecanlookforwardtobetterdaysahead.Toreiterate,becauseofthenewdevelopmentsthattheGovernmentisnowconsidering,Iremainoptimisticthataperiodofrenewedgrowthandjobcreationisaheadofus.IdrawtheattentionofHonourableMemberstotheTableonpublicfinancesinAnnexBtotheStatement.IhavetheHonourtopresenttheMid-YearBudgetStatement.

25thFebruary,2013

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ANNEXAECONOMICBACKGROUND

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ECONOMICBACKGROUND1INTRODUCTIONIndicationsarethattheongoingrecoveryinthedomesticeconomywassustainedduring2012,underpinnedbycontinuedgainsintourismsectoroutput,alongsideincreasedforeigninvestment-ledconstructionactivity.TheInternationalMonetaryFundestimatesthatRealGDPgrewby2.5%2duringtheyear,followingexpansionsof0.2%and1.6%in2010and2011,respectively.Thefollowingsectionshighlightthemaininternationaleconomicdevelopmentsin2012,followedbyananalysisofdomesticconditionsandaforecastoftheeconomyin2013.

INTERNATIONALECONOMICOUTLOOKTheglobaleconomysustaineditsmodestgrowthin2012,supportedbyrobustexpansionsinemergingmarketsandmoremutedgainsintheUnitedStateseconomy;however,withmostofEuropemiredinrecession,theIMFloweringitsforecastforgrowthworldwideto3.2%3in2012from3.9%ayearearlier.Facedwitharelativelyweakrecovery,mostmajorcentralbankseithermaintainedorincreasedthelevelofmonetaryaccommodationintheireconomies.Severalcentralbanks,includingtheFederalReserve,theBankofEnglandandtheBankofJapan,increasedthesizeoftheirassetpurchaseprogrammesduringtheyearinanefforttokeeplendingrateslow,andstimulateeconomicactivity.TheBankofChinaalsoattemptedtoachievethesameoutcomebyreducingitsreserverequirementby50basispointsandcuttingitsbenchmarkdepositandlendingratesto3.0%and6.0%,respectively.ThefiscalcrisisintheeurozonepromptedthemostsignificantpolicyresponsebytheEuropeanCentralBank(ECB),astheBanksuppliedapproximately530.0milliontobanksandcutinterestratesby25basispointsduringthefirsthalfoftheyear,andinSeptember,itannou

ncedaseriesofmeasurestosupportmemberswhosefiscaldeficitsanddebtshaddeterioratedtounsustainablelevels,termedtheOutrightMonetaryTransactionsprogramme.12

ThisAnnexisbaseonmaterialprovidedbytheCentralBankofTheBahamas.See:InternationalMonetaryFund(IMF)WorldEconomicOutlookOctober2012.3See:InternationalMonetaryFund(IMF)WorldEconomicOutlookUpdateJanuary2013.

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Despiteexperiencinga0.1%contractioninthefourthquarter,indicationsarethattheUnitedStateseconomyfirmedby2.3%in2012,extendingthegrowthof1.8%notedayearearlier.Underpinningthisoutturnwasareboundinresidentialhousing,amoderationinimportgrowthandasmallerdeclineinstate&localgovernmentspending.Witheconomicconditionsimprovingmodestly,approximately2.4millionjobswerecreatedduringtheyear,resultingintheunemploymentratedecreasingby0.7ofapercentagepointto7.8%.Occasionedmainlybyacontractioninenergycostsandloweraccretionstofoodprices,annualinflationsoftenedto1.7%in2012fromthe3.0%advanceintheprioryear.Withregardstotheothermajoreconomies,realGDPintheUnitedKingdomisexpectedtoremainrelativelyunchangedin2012,asanincreaseinoutputinthethirdquarter,duetothehostingoftheOlympics,wasnegatedbydeclinesinotherquarters.Expectationsarethattheeuroareaseconomycontractedduringtheyear,owingtoongoingweaknessinseveralsouthernstates.Incontrast,Chinaseconomyrosebyanestimated7.8%overtheyear,buoyedbytheGovernmentsstimulusmeasures.Movementsincommoditypricesweremixedin2012,astheaveragepriceofcrudeoilfellmarginallyby0.3%to$111.38perbarrel,vis--visa39.1%surgeintheprioryear.Withregardtopreciousmetals,theaveragecostofgoldmovedhigherby6.5%to$1,676.24pertroyounce,aslowdownfrom2011s27.1%gain,whilesilverpricesdeclinedby11.8%to$31.38pertroyounce,aturnaroundfromthe39.1%expansioninthepriorperiod.

DOMESTICECONOMICDEVELOPMENTSDomesticeconomicactivitywassupportedbyanexpansioninthetourismsector,astheongoingrecoveryinthemainsourcemarket

s,combinedwithseveralprivate/publicsectorincentiveprogrammes,ledtofurthergainsinthehighvalue-addedgroupsegment.Similarly,thegrowthinconstructionsectoroutputreflectedmainlyforeigninvestment-relatedprojectactivityparticularlytheBahaMardevelopmentandtoalesserextent,Governmentsongoinginfrastructuralworksprogrammes.Despitetheimprovementintwoofthemainsectors,theabsenceofamoreboard-basedrecoveryresultedinemploymentconditionsremainingchallenging,whileinflationroseslightly,duetoamodestuptickininternationalfoodandfuelprices.

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DevelopmentsinthemonetarysectorweredominatedbyGovernmentsfinancingrequirementsandweakprivatesectorcreditconditions,whichledtomodestgrowthinbankingsectorliquidity.Incontrast,increaseddemandforforeigncurrencytofacilitatecurrentpaymentsandfuelimports,alongwithmutednetinflowsfromtherealsector,resultedinamodestcontractioninexternalreservesovertheyear.Withregardstothefiscalsector,theNationalDebtexpandedduringtheyear,duemainlytoincreaselong-termfinancingforthedeficitintheformofGovernmentsecuritiesandanexternalbond.Externalsectortrendsfeaturedcontinuedgrowthinthecapitalandfinancialaccountsurplusovertheninemonthsoftheyear,buoyedbynetinflowsrelatedtoforeigninvestmentactivity;however,amidincreasedimportsandhigheroutflowsforconstructionservices,thecurrentaccountdeficitdeteriorated.TOURISMIndicationsarethattheunfoldingrecoveryintourismoutputwassustainedin2012,astotalvisitorarrivalsfirmedovertheJanuarytoNovemberperiodby6.3%to5.3million,extendingthe4.6%gainrecordedduringthesameperiodoftheprioryear.Underlyingthisoutturnwasan8.0%advanceinthehighvalue-addedaircomponent,areversalfroma3.0%reductioninthecomparative2011period.Similarly,thelargerseasegmentadvancedby5.8%;althoughlowerthanthe7.1%expansionnotedayearearlier.Disaggregatedbyportofentry,arrivalstoNewProvidenceroseby10.0%,comparedtoamarginal0.9%increaseayearago,ledbya10.2%riseinseatrafficanda9.6%reboundinairarrivals.Similarly,inGrandBahama,totalvisitorsgrewby1.9%,aslowdownfromthe4.4%advancein2011,astheincreaseinthedominantseasegmenttaperedto1.2%,whileairpassengersstrengthenedby7.3%.Similarly,gainsinFamilyIslandvisitorswerereducedto2.1%from11.7%ayear-earl

ier,astheriseinbothairandseaarrivalsmoderatedto0.7%and2.3%,respectively.Fortheyear,preliminaryinformationfromasampleofNewProvidenceandParadiseIslandhotelsrevealedthattotalroomrevenueadvancedby4.0%,astheoccupancyratefirmedby4.3percentagepointsto68.3%;however,amidincreasedcompetitionfromotherdestinations,theaveragedailyroomrate(ADR)declinedby3.0%to$229.24.

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CONSTRUCTIONConstructionsectoroutputcontinuedtobedrivenbyongoingforeigninvestmentprojectsinthetourismsector,suchasBahaMarandAlbanyinNewProvidence,andseveralsmallerdevelopmentsontheFamilyIslands,whilethepublicsectorscapitalworksprogrammesalsoprovidedsomeimpetustothesector.Incontrast,domesticprivatesectoractivitywassubdued,asborrowersremainedchallengedinmeetingtheirexistingmortgageobligations.Reflectingtheweaknessinthedomesticsector,totalmortgagedisbursementsfornewconstructionandrepairsfellby22.8%to$82.4millionovertheninemonthstoSeptember,asthemainresidentialcomponentcontractedby23.3%to$78.7millionandthesmallercommercialsegmentfellby12.5%to$3.7million.Similarly,mortgagecommitmentsfornewconstructionandrepairstoexistingstructuresamoreforwardlookingindicatorofactivityfellby15.2%to$75.5millioninvalueandby42.7%innumberto402.Theresidentialcomponent,whichconstitutedthemajority(97.8%),declinedby14.9%to$73.8million,whilecommercialcommitmentscontractedby24.5%to$1.6million.Duringthereviewperiod,totalmortgagesoutstandingrosebyamodest1.3%to$3,275.2millionbyend-September,withtheresidentialsegmentwhichaccountedfor93.7%oftheaggregateincreasingby1.0%andthecommercialcomponentby4.5%.Intermsofinterestrates,thecostofcommercialloansfirmedby0.3ofapercentagepointyear-on-yearto8.7%,whiletheaverageresidentialratesteadiedat8.2%.INFLATIONDomesticinflationasmeasuredbythechangeintheRetailPriceIndexincreasedmarginallyoverthetwelvemonthstoAugust2012to2.63%from2.55%ayearearlier.Thisoutturnreflectednotablepricegainsfortransport(3.87%)whicharedirectlyaffectedbyfuelpricesandfurniture&householdoperation(3.54%).Moremutedcostincreaseswererecordedforhousing

,water,gas,electricity&otherfuelsthemostheavilyweightedcomponentoftheindexby3.23%,food&beverage,by3.17%,education,by2.51%andrestaurant&hotels,by2.42%.Themajorityoftheothercategoriesregisteredaveragepriceincreasesofunder2.0%,withtheexceptionofcommunicationcosts,whichdecreasedmarginallyby0.18%.

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Further,reflectingtheupwardtrajectoryininternationaloilprices,averagedomesticenergycostsincreasedin2012,astheaverageretailpriceforbothgasolineanddieseladvancedby5.5%to$5.46pergallonandby6.2%to$5.20pergallon,respectively.Similarly,theBahamasElectricityCorporationsaveragefuelchargeroseby15.3%to26.68perkilowatthour(kWh).

FOREIGNINVESTMENTANDTHEBALANCEOFPAYMENTSProvisionalbalanceofpaymentsdatafortheninemonthsof2012showedadeteriorationinthecurrentaccountdeficitbyapproximately$268.7million(36.1%)to$1,012.7million.Thisoutturnreflectedawideninginthemerchandisetradedeficitbyanestimated$228.0million(15.0%)to$1,751.1million,extendingthe9.9%($136.7million)increaseinthesameperiodof2011,asthegrowthinforeigninvestmentactivitycontributedtothefirminginnon-oilmerchandiseimports,by$198.3million(17.4%)to$1,336.4million.Similarly,comparativelyhigherimportvolumesledtoanincreaseinfuelimportsto$737.3millionfrom$612.9millionin2011.Inaddition,theservicesaccountsurplusdeterioratedby$61.7million(6.3%)to$914.5million,attributedtoan$89.9million(83.8%)gaininnetoutflowsforconstructionservices,whichovershadowedthe$58.8million(3.9%)expansioninnettravelreceipts.Further,netoutflowsfortransportationservicesadvancedto$203.7millionfrom$136.0millioninthepriorperiod.

Thecapitalandfinancialaccountsurplusexpandedbyanestimated$34.8millionto$863.1million,reflectingamorethantwo-foldriseinothermiscellaneousinvestmentsto$547.4million.Underpinningthisoutturnwasanincreaseinnetpu

blicsectorcapitalinflowswhichbenefittedfromtheissuanceofsecurednotesbyapublicentityandariseindomesticbanksnetinflows.Incontrast,netdirectinvestmentinflowsdeclinedsharplyby$263.5millionto$349.6million,asnetequityinvestmentscontractedby$214.8million,aftera$133.3millionsurgeayearearlier,relatedtoGovernmentssaleofitscontrollinginterestintheBahamasTelecommunicationsCompanyLtd.(BTC).

MONETARY&CREDITDEVELOPMENTS

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Monetarydevelopmentsfeaturedamodestbuild-upinbankingsystemliquidity,relativeto2011,owingmainlytoGovernmentsborrowingactivitiesandanemicprivatesectorcreditdemand.Inparticular,excessreservesgrewby$15.2millionto$450.0million,followinga$45.4millionaccumulationlastyear.Similarly,excessliquidassetsroseby$74.3millionto$971.5million,afteran$83.6millionadvanceinthepriorperiod.Bahamiandollarcreditfirmedby$132.2millionduringtheyear,althoughslowingfromthe$222.4millionadvancenotedin2011.Underlyingthisoutcome,privatesectorcreditcontractedby$39.7million,vis--visa$114.3millionexpansionayearearlier,asbothconsumercreditandcommerciallendingdecreasedby$25.8millionand$30.3million,respectively,outstrippingthe$16.5millionincreaseinmortgages.Conversely,buoyedbytwoissuesofBahamasGovernmentRegisteredStocktotaling$300.0million,netcredittotheGovernmentfirmedby$155.9million,followinga$118.8millionbuild-upayearearlier.Similarly,claimsonthepubliccorporationsroseby$15.4million,areversalfroma$10.5milliondecreaseinthepreviousyear.Domesticforeigncurrencycreditexpandedby$26.2millionin2012,incontrasttoa$92.0millionfalloffayearago,asprivatesectorcreditmovedhigherby$41.7million,vis--visa$40.6milliondecreaseinthepriorperiod.NetcredittotheGovernmentedgedupby$0.5million,areversalfrom2011whentherepaymentofashort-termloanledtoa$68.3milliondeclineinoutstandingclaims.Incontrast,credittotherestofthepublicsectorcontractedby$15.9million,comparedtoa$17.0millionexpansionin2011.DespitethereceiptofproceedsfromGovernments$180millionexternalbondissueinDecember,externalreservesdeclinedby$79.9millionto$812.1million,areversalfrom2011,wheninflowsfromthedivestm

entofGovernmentscontrollinginterestintheBTC,supportedamodest$30.9millionexpansion.Thecontractioninexternalbalanceswasduemainlytosubduedinflowsfromrealsectoractivityparticularlyinthefirsthalfoftheyearalongsideincreasedforeigncurrencydemandforcurrentpayments,banksprofitrepatriationsandfuelpurchases.Withregardstointerestrates,theweightedaverageinterestratespreadwidenedby51basispointsto8.9percentagepoints,asthe10basispointsofteningintheloanrateto10.88%,wasoutweighedbythe61basispointscontractioninthecorrespondingdepositrateto2.02%.

CREDITQUALITY

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Reflectingsubduedeconomicactivityandelevatedunemploymentlevels,bankscreditqualityindicatorsdeterioratedin2012,albeitataslowerpacethatthepreviousyear.Aggregateprivatesectordelinquenciesgrewby$42.4million(3.5%)to$1,250.5million,aftera$69.1million(6.1%)increasein2011,astheratioofarrearstototalprivatesectorloansfirmedby0.8ofapercentagepointto20.0%.Astheaverageageofloandelinquenciescontinuedtoincrease,non-performingloansarrearsinexcessof90daysandonwhichbanksarenolongeraccruinginterestexpandedby$51.5million(6.3%)to$867.6million,resultingintheaccompanyingratioadvancingby88basispoints13.9%.Incontrast,shorttermarrears(31-90daysoverdue),declinedby$9.1million(2.3%)to$382.9millionandcorrespondedwitha12basispointsofteningintherelevantratioto6.1%.Thegrowthindelinquenciesreflectedmainlyanincreaseinthemortgagecomponentby$49.4million(7.6%)to$699.5million,asthenon-performingsegmentfirmedby$47.3million(10.5%)and31-90dayarrearsadvancedbyamoremodest$2.1million(1.1%).Inaddition,consumerloandelinquenciesgrewby$8.9million(3.3%)to$280.2million,asthe$12.2million(7.3%)growthinnon-performingloansovershadoweda$3.4million(3.2%)reductionintheshort-termsegment.Inamodestoffset,commercialarrearsfellby$15.9million(5.5%)to$270.8million,duetobroad-baseddeclinesinboththenon-accrualand31-90daycomponentsby$8.1million(4.0%)and$7.8million(8.9%),respectively.Giventhemodestdeteriorationinbankscreditqualityindicatorsin2012,institutionsraisedtheirtotalprovisionsforloanlossesby$73.0million(24.3%)to$373.5million,resultinginthecorrespondingratiosoftotalprovisionstoarrearsandnon-performingloansfirmingby5.0and6.2percentagepointsto29.9%and43.1%,respecti

vely.NATIONALDEBTDuringthenine-monthperiod,theDirectChargeonGovernmentadvancedbyanestimated$368.1million(9.7%)to$4,172.8millionatend-September2012,relativetoa$6.3million(0.2%)declineto$3,714.1millioninthecorrespondingperiodayearearlier.Bahamiandollarclaims,whichconstitutedthebulk(80.1%)ofthetotal,roseby11.2%,whiletotalforeigncurrencydebtfirmedby4.0%.Similarly,Governmentscontingentliabilitiesroseby$38.2million(6.9%)tostandatapproximately$558.9million,vis--visa$7.9million(1.4%)contractionto$556.7millionin

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2011.ThisoutturnreflectedmainlyariseintheguaranteeddebtoftheBahamasElectricityCorporationandtheBahamasMortgageCorporation.Asaresultofthesedevelopments,theNationalDebtrosebyanestimated$406.3million(9.3%)to$4,761.6millionatend-September2012,vis--visa$14.2million(0.3%)expansionayearearlier.ECONOMICOUTLOOKFOR2013Improvementsindomesticeconomicactivityareprojectedtobesustainedin2013,benefittingfromcontinuedglobalgrowthparticularlyintheUnitedStatesmarketwhichshouldspurfurthergainsinthehighvalue-addedgroupsegmentofthetouristmarket,whileongoinglarge-scaleforeigninvestmentdevelopments,andtoalesserextentpublicsectorprogrammes,shouldsustainthegrowthinconstructionsectoractivity.However,untiltherecoverybroadenstoabsorbtheexcesscapacityintheeconomy,unemploymentlevelsareexpectedtoremainelevated.Inflationisforecastedtostayatrelativelylowlevels,althoughdomesticenergypriceswillcontinuetobeaffectedbythevolatilityintheinternationaloilmarkets.Intermsofthemonetarysector,expectationsarethatbankliquiditywillremainatelevatedlevelsoverthenear-term,reflectingtheweaknessinconsumerdemandandcontinuedgrowthinholdingsofGovernmentdebt.Further,theoutlookforexternalreserveswillcontinuetodependonthestrengthofforeigncurrencyinflowsfromrealsectoractivitiesandthelevelofdemandbythepublicforfundstofacilitatecurrentpaymentsandfuelpurchases.

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ANNEXBFISCALTABLE

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2006/07

2007/08

2008/09

2009/10

1.RecurrentExpenditure2.RecurrentRevenue3.RecurrentBalance(2.minus1.)4.CapitalExpenditure5.CapitalRevenue6.CapitalBalance(5.minus4.)7.TotalDeficit(3.plus6.)8.DebtRedemption9.GFSDeficit(7.minus8.)10.GDP(CurrentPrices)11.GFSDeficitas%ofGDP

14151354-612357-228-289106-1838143-2.2

142114452423110-221-19762-1358283-1.6

14991331-1682620-262-43067-3637982-4.5

15291292-2372510-251-48889-3997744-5.2

MINISTRYOFFINANCEMEDIUM-TERMFISCALCONSOLIDATIONPLANB$millions2010/112011/122012/132012/32012/13JulyDec.ProjectedBudget2012Outturn16421632182181417201452143215506331430-190263210-53-24377-1667779-2.1-20

039587-308-50863-4457914-5.6-2714000-400-671121-5508454-6.5-1811420-142-32355-268N/AN/A-2903630-363-653121-5328179-6.5

2013/14

2014/15

2015/16

2016/17

Projection17551580-1753000-300-47584-3918500-4.6

Projection17891740-492700-270-319102-2178883-2.4

Projection182519521272800-280-153152-192950.0

Projection186020902302950-295-651458097260.8

MemoItems:3.91.7-3.6-3.00.51.7GrowthRate(currentprices)2441267930853401355339064456GovernmentDebt(endJune)30.032.338.643.945.749.452.7GovernmentDebt(%ofGDP)RecurrentExpend.(%of17.417.218.819.721.120.621.5GDP)RecurrentRevenue(%of16.617.416.716.718.718.118.3GDP)2.92.83.33.23.45.04.7CapitalExpenditure(%GDP)-568-209-22045-261-343PrimaryBalance($)-0.70.1-2.6-2.80.6-3.3-4.1PrimaryBalance(%ofGDP)*GDPestimatesthrough2011arefromtheDepartmentofStatistics;thereafte

rfromtheIMFWorldEconomicOutlook

3.3443854.321.017.54.4-325-4.0

3.9482956.820.618.63.5-152-1.8

4.5504656.820.119.63.0330.4

4.6504754.319.621.03.02492.7


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4.6496751.119.121.53.03263.4


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127257722 mid year budget communication 2013

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