Monthly Economic and Financial Developments (MEFD) May 2021

Published: Monday June 28th, 2021

Domestic Economic Developments

Overview

Developments in the domestic economy continued to be driven by the Novel Coronavirus (COVID-19) pandemic during the month of May. Globally imposed travel restrictions continued to impede tourism sector activity, although the sector is showing some signs of recovery due to vaccination efforts. Nevertheless, the high value-added air component remained at historic lows and the sea segment largely offline. In contrast, ongoing foreign investment-led projects and post-hurricane rebuilding works supported activity in the construction sector. On the monetary front, bank liquidity expanded, as the growth in the deposit base contrasted with the reduction in domestic credit. Further, external reserves increased, largely attributed to the Government’s external borrowing activities.

Real Sector

Tourism

Tourism metrics for the month of May indicated that the sector’s output remained depressed, as internationally imposed travel restrictions to curtail the spread of the virus kept arrivals at significantly depressed levels—although with some onset of hotel sector recovery, domestic demand provided some support in the vacation rental market.

Official data provided by the Ministry of Tourism (MOT) revealed that total foreign arrivals by first port of entry recovered to 68,582 during the month of April, from just 43 visitors during the same period last year, when the closure of international borders and lockdowns were initially imposed. In the underlying developments, air traffic totalled 60,305 compared to only 11 visitors in the previous year, albeit representing just 35.2% of the arrivals recorded in 2019, reflective of the reopening—although with restrictions—of international borders to travellers. Meanwhile, sea traffic amounted to 8,277 in comparison to 32 visitors in 2020.

A breakdown by major port of entry showed that arrivals to New Providence recovered to 41,358 from just 43 in the comparative period of the preceding year. Contributing to this outturn, air traffic reached 40,183 from 11 in the previous year, while sea passengers totalled 1,175 versus 32 visitors in 2020. Further, visitors to Grand Bahama amounted to 2,481 following the virtual absence of tourists in the same period last year. Underpinning this outcome, both air and sea arrivals totalled 1,390 and 1,091, respectively, relative to no visitors in the prior year. In addition, visitors to the Family Islands recovered to 24,743, from no recorded activity in 2020, as both the air and sea segments posted respective gains of 18,732 and 6,011 vis-à-vis nil tourists last year.

During the four months to April, the reduction in total arrivals extended to 89.2% from 35.9% in the same period in 2020, which had included robust first quarter activity, ahead of the pandemic. Contributing to this development, was a 98.4% contraction in sea passengers, exceeding the 32.3% decline a year earlier. Similarly, air arrivals fell by 53.1%, vis-à-vis a 46.9% decrease in 2020. Table 1 shows a slight improvement in air arrivals to the Family Islands (6.2%), when compared to the same period in the previous year.

Data from the Nassau Airport Development Company Limited (NAD) showed that total departures—net of domestic passengers—resumed at 55,662 in May from just 238 in the comparable period of the preceding year, when the country closed its borders to curb the spread of the virus. Specifically, the dominant U.S. component increased to 54,362 from just 205 in the prior year. In addition, non-U.S. departures recovered to 1,300 from a mere 33 passengers in the corresponding period of the previous year. On a year-to-date basis, outward bound traffic declined by 53.0%, surpassing the 49.1% falloff in 2020. Reflecting this outturn, non-U.S. departures reduced by 87.0%, exceeding the 44.8% decrease last year. In contrast, the reduction in U.S. departures slowed to 46.3% from 49.9% a year earlier.

As it relates to the vacation rental market, data provided by AirDNA revealed some modest improvements during the month of May, largely supported by gains in domestic demand. In particular, the reduction in total room nights sold moderated to 14.2% from 26.0% in the preceding year. Contributing to this outcome, the declines in bookings for entire place listings and hotel comparable listings tapered to 15.1% and 6.3% from 27.7% and 11.0%, respectively. Conversely, the average daily room rate (ADR) for hotel comparable and entire place listings increased by 2.9% and by 2.0%, to $177.45 and $491.07, respectively.

On a year-to-date basis, total room nights sold grew by 3.0%, underpinned by a 4.8% rise in bookings for entire place listings, which offset the 10.4% falloff in private room listings. Pricing data revealed that the ADR for both entire place and hotel comparable listings rose by 16.1% and by 4.9%, to $468.35 and $165.70, respectively.

Fiscal

2021/2022 Budget Communications Highlights

The Government’s Budget Communication for FY2021/2022, entitled “The Accelerated Bahamas Recovery Plan”, which was presented in Parliament on May 26, 2021, had the overarching objective of stimulating the domestic economy, in order to advance the country’s recovery, following the adverse impact of the COVID-19 pandemic. The Government’s policies are focused on encouraging economic activity, while expanding support related to COVID-19 and facilitating the digitization of public and private services.

In the 2021/22 Budget, the Government plans to provide economic support through new and ongoing tax relief measures, combined with limited new revenue collection measures. In this regard, the Government anticipates a revenue intake of $2.2 billion in FY2021/22, an increase of $588.3 million (35.5%) from the projected revenue for FY2020/21.

Tax measures featured in the Budget were largely geared towards small business development. Measures include duty free concessions, by application, on startup and expansion costs. Duty is also set to be reduced by 20.0%-25.0% on building supplies. In addition, the Government announced the launch of the ‘Employment Incentive Program’, which allots $40.0 million in tax concessions to businesses, allowing them to apply for a VAT tax credit of up to $400.00 per week per employee, to cover the salaries of up to ten new employees. Specific to the southern Bahamas, the Government announced tax-free special economic zones for eleven Family Islands over the next two years, providing residents, businesses and investors with customs duty and VAT concessions on construction materials and on inputs needed to start or expand businesses. In addition, VAT exemptions proposed on real estate transactions valued under $500,000. Further, in line with the digitization initiatives in the public and private services, the Government proposed duty elimination on digital transformation hardware, software and services. Meanwhile, tax relief measures related to COVID-19 support, were foreshadowed to include the removal of duty on personal protective equipment and disinfectants.

The Government announced the continuation of the Special Economic Recovery Zone provisions to support the ongoing reconstruction of Abaco and Grand Bahama islands impacted by Hurricane Dorian. These islands will continue to receive VAT and duty exemptions on construction and related supplies and activities, until the end of the year.

To partially offset the tax relief measures, new revenue enhancement methods included planned collection of VAT payments on vacation rental marketplaces on rentals and commissions. The Government also announced its intention to raise the VAT rate to 12.0% on the portion of realty transactions valued over $2.0 million.

Regarding expenditure, capital spending is expected to amount to $372.4 million, lower than the $515.5 million budgeted in FY2020/21, while recurrent outlays are projected at $2.8 billion, an increase of $270.1 million (10.6%) over last year’s revised budgeted outcome. In terms of major expenditure measures, the Government committed to $250.0 million in small business support over the next five years, starting with the $35.0 million allotted in the current budget. In addition, the Government allocated $100.0 million to improve hospital infrastructure, with additional allocations for infrastructure outlays ($31.0 million), COVID-19 support ($17.8 million), social spending and digitization efforts. As it relates to the Government’s digitization efforts, allocations were made for the digitization projects of the Ministry of Education ($7.5 million), upgrades in the healthcare sector’s IT infrastructure ($6.0 million) and to the Department of Transformation and Digitization, to create a telemedicine initiative ($1.0 million).

Based on the current economic outlook, the Government projects a fiscal deficit of $951.8 million, or 7.7% of GDP for FY2021/22. However, this is below the projected deficit of $1.3 billion for FY2020/21.

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