Mr. Prime Minister, Ministers, Members of Parliament, Organizers of The Bahamas Business Outlook Forum, Distinguished Presenters, Ladies and Gentlemen.

 In January of last year when I had the privilege of addressing this forum, we were facing the prospects of a war between the U.S. and Iraq and, depending on the duration of the war, there was some speculation on the economic impact it would have on The Bahamas and the rest of the world.  Today, there is concern regarding labour unrest in the Tourism sector and the possibility of a strike which could have an adverse impact on economic growth.

 In this address, I would like to provide a brief overview of the performance of the Bahamian economy and the prospects for the near future on the assumption that there are no disruptions in the Tourism Sector.  Accordingly, we will examine our major economic sectors: as well as a selected number of the principal economic indicators which should ultimately, give us some idea of where we are and where we might be going.

 I should now wish to turn to our major Sector.
 

TOURISM
 Any serious review of our economy must begin with an examination of the tourism industry.  Prior to the war on Iraq, the tourism sector was experiencing low growth rates as a result of the sluggish performance of the U.S. economy.  Nevertheless, the sector was able to weather the affects of the war and experienced moderate growth with arrivals ending for the year at 3.7% above 2002.  We could expect more gains to our Tourism Sector in the near future if the trade and current account deficits in the U.S. continue to worsen.  Large U.S. deficits would mean a weaker U.S. dollar and The Bahamas and other parts of the Caribbean would be more attractive than Europe or Asia for U.S. vacationers.

 Given the recent turnaround in the U.S. economy which should result in an increase in disposable income by U.S. travelers, there are reasons for optimism in the outlook for our Tourism industry in 2004.

 We should be mindful however, of the ever-present threat of terrorism and the disruptive effects terrorist actions would have on our economy.

 Over the next year, there is likely to be an increase in the stock of hotel rooms, more diversity to the tourism product and more effective marketing of The Bahamas as the destination of choice for the value-conscious traveller.  In the absence of any natural or man-made disasters, we could look forward to healthy increases in both stopover and cruise-ship visitors.

MONEY AND CREDIT
 I should now wish to review our monetary indicators.  As a result of moderate increases in tourism activity together with the recent foreign currency borrowing by the Government our foreign exchange position has improved considerably over 2002.  At the end of November, 2003, the external reserves stood at approximately $506.9 million as compared with $357.7 million at the same point in time last year.  To the extent that we continue, as a matter of policy, to maintain the one-to-one exchange rate with the U.S. dollar that policy position has been strengthened by this increase in reserves.

 The proceeds from the Government’s foreign currency borrowing also improved liquidity in the system causing the weighted average deposit rate of commercial banks to fall from 3.95% to 3.81% in the third quarter of 2003.  On the other hand, the continued tight credit policy stance maintained by the Central Bank produced a moderately higher average lending rate, from 11.21% to 12.15%, during the third quarter of 2003.  In this same period, there was an increase in the average consumer loan rate to 13.89% from 13.07%.  Mortgage rates were also slightly higher at 8.90% as compared with 8.87% last year the same time.

 Over the past year, we have also noted encouraging movements in other monetary indicators.  By way of example, there has been a modest increase in credit to the private sector while at the same time, there has been a fall-off in net credit to Government, largely because of a recent Government stock issue.  I am especially pleased to report that the fiscal deficit for the first three months of fiscal year 2003/04 has narrowed to $39 million as compared with $76 million over the same period in 2002/03.  In other words, we have been able to contain the deficit up to now as a result of continued monetary and fiscal restraints.

 I should now wish to review another important sector of the economy.

CONSTRUCTION
 Construction activities have always made an important contribution to employment and output.  Available construction estimates suggest a stable trend reflecting a balance between increased investments in new projects and the conclusion of works carried over from 2002.

 Recent legislative initiatives by the Government which include stamp duty exemptions for the first home buyers; raising the level of exemption on real property taxes; and, duty-free imports for Family Island home construction are expected to provide additional stimulus for construction sector expansion and growth.  Added to this, we have the Kerzner International Phase Three; the Container Port expansion in Freeport, and a number of major tourism projects in Nassau and the Family Islands.  Taken together, we are likely to witness a renewed momentum in the construction sector during 2004.  It should be noted also that the demand for second homes by non-Bahamians in New Providence, Grand Bahama and the Family Islands is expected to strengthen during 2004.

 With respect to the domestic segment of construction, a recent Central Bank’s survey revealed that outstanding residential mortgages held at banks, insurance companies and the Bahamas Mortgage Corporation rose by $133 million or ten percent to $1.46 billion in the third quarter of 2003; that level of mortgages was supported by an average lending rate of 8.9%.

BALANCE OF PAYMENTS
 As regards the Balance of Payments statistics which summarize trade and investment transactions between The Bahamas and the rest of the world.  A review of those accounts permits us to observe trends in the importation of goods as well as inferences regarding import duty collections by the Government.  The accounts also measure the amount of foreign exchange usage by the domestic economy and allows us to examine net foreign investment and capital flows into the local economy.

 Given the low level of local production, The Bahamas has always been a net importer of goods and services and therefore we have always had a merchandise trade deficit.   That deficit increased moderately by 8% in the third quarter of 2003 from $21.2 million to $28.2 million.

 As always, proceeds from Tourism inflows provided the largest offset to the deficit; however, shortfalls in other transactions resulted in an overall increase in current deficit from $68.9 million to $107.8 million.

 As regards foreign direct investment, during the third quarter of 2003, net private direct investment slowed to $23.6 million from $30.4 million.  By way of contrast, direct equity inflows increased to $22.1 million from $16.8 million.  Although the external demand for real estate in The Bahamas decreased considerably to $l.5 million in 2003 from $13.6 million in 2002 and net private loan inflows also slowed to $6.8 million from $25.1 million; the surpluses on the services and capital accounts resulted in an overall balance of $50.4 million versus an overall deficit of $53.9 million in the same period a year ago.

 The sum total of those statistics which I just cited means simply that the local economy has stabilized  over the past year,  moderate growth has occurred and we may be on a path of sustainable economic development.  This optimism is supported by the turn-around in the U.S. economy and the continued low inflation rate of about 2.5% in The Bahamas.

 We are hopeful that the many pending applications before The Bahamas Investment Authority and National Economic Council would soon be converted to concrete investment projects giving rise to increased employment opportunities for all Bahamian residents.

FINANCIAL SERVICES
 Since December, 2000, our second largest economic sector, Financial Services, has been transformed because of a series of laws which were passed to remove The Bahamas from the FATF’s “blacklist”.  The new laws provided for more transparency and accountability in the conduct of financial services from this jurisdiction.

 Indeed, The Bahamas is now committed to adhering to international standards to prevent the use of the financial services industry for the purposes of money laundering or terrorist financing.  The country has also agreed to subject itself to periodic review by international agencies to assess its anti-money laundering regime.

 Earlier this month, the Parliament of The Bahamas passed enabling legislation to give expression to a Tax Information Exchange Agreement with the United States’ Treasury Department.  A few years ago, that type of activity would have been regarded as something representing treason.

 Nevertheless, the slowdown in activity of the Sector because of the new laws has been arrested.  The Sector has repositioned itself to compete effectively in the new environment of expanded regulatory and supervisory standards.  In the near future, it is expected that new series of products and services would be offered by the sector.  New legislation for the establishment of foundations, special purposes trusts, protected cells among other things should be introduced into Parliament over the next few months.

 At the end of the day, this sector is expected to resume growth on an upward path and continue to provide high-level job opportunities for qualified Bahamians.

TRADE
Looking ahead, any future prospects for The Bahamas must necessarily be examined within the context of globalization issues.  More particularly, the extent to which the local economy would have to be adjusted to reflect its participation in regional, hemispheric or world trade arrangements.

It would seem to me that at some point in time, possibly this year, The Bahamas will have to decide on its future relationship with the CSME, that is, the Caribbean Single Market and Economy.  It is clear that the majority of Bahamians are not at this time in support of certain provisions of the CSME such as the free movement of people.  If that is indeed the case, then it would seem to me that the logical approach to the CSME would be to seek derogations or exemptions from those parts of the agreement which are deemed to be unpalatable.

By January, 2005, The Bahamas will have to decide whether and on what terms it would wish to join the Free Trade Area of the Americas (FTAA) arrangements.  If we acknowledge that it is important to participate in international trade in a systematic manner so long as the arrangements are fair to all parties, then we should be in a position to join the FTAA on our own terms and at our own pace in accordance with the recent decisions taken at the Ministerial Meeting in Miami in December last year.

As regards the World Trade Organization (WTO), the relevant documentation on The Bahamas would have been submitted by the end of the first quarter and negotiations for entry into the WTO should begin sometime later in the year.

TAX REGIME
 If The Bahamas participates in any of the trading arrangements mentioned earlier, it would be obliged to restructure its existing tax base.  Indeed, even if we opt not to join any of the trading groups, there is still a need for tax reform in this country.  Our current tax structure relies on customs and stamp duties for the majority of Government revenue.  Customs duties or import tariffs are said to be discriminatory and regressive and ought therefore to be reduced and or eliminated over time to be replaced by some other form of taxation.  In the context of The Bahamas, taxes on income are not considered to be an option and therefore we are being advised to look closely at some form of sales or value-added tax.  Over the next few years, the matter of restructuring our tax regime would be carefully studied with the assistance of international tax experts.  At the end of the day, if we do decide to change, the new regime would have to be broadly acceptable to the public, it should be equitable and it should be administratively easy to collect.

 In addition to restructuring the tax regime, the government will expand its use of information technology to bring more efficiency to tax collection and other government services.

E-COMMERCE
 You may recall that in early 2003, the Government released for public consumption, its Electronic Commerce Policy Statement.  That policy statement attempts to articulate the Government’s strategy for transforming the Bahamian economy to a digital one.  The policy is intended to set the foundation for the Bahamian Digital Agenda and underscores our commitment to be globally competitive and put in place the necessary information and communications infrastructure to sustain electronic business activity.

 We are convinced that a digital economy could reduce the cost of delivering public services while at the same time, improving transparency and efficiencies in our day-to-day activities.  In order to given concrete expression to this policy, consideration is being given to establishing an E-business Development Office within the Ministry of Finance, which will have the responsibility for implementing IT strategy.  In support of this initiative, a series of E-commerce legislation has recently been enacted.  The new legislation addresses such as rules for commercial transactions; protection of intellectual property rights; security: interconnectivity of information systems; privacy and confidentiality of consumer information.  In the not too distant future, the Government intends to establish an effective clearing and settlement system for E-commerce transactions.

 These activities to broaden the country’s information technology base were expected to be complemented by the completion of the privatization of the Bahamas Telecommunications Company Limited.  That exercise has not been successful to date however, the process ought not to be abandoned since a privatized BTC would not only provide additional funds to Government for debt reduction in 2004, but should also provide increased capacity for expanding information technology including the high speed data transmission capabilities which are essential to the e-commerce development effort.

Government Debt
 Speaking of Government debt reduction, I should wish to comment briefly on the matter of Government Debt.

 During the third quarter if 2003, Government debt rose by $186.1 million to $1.93 billion.  That increase is explained in part by the $200 million bond issue last summer when, for the first time, Bahamian Government debt instruments were issued to publicly list and trade on international markets.  The Markets were quite favorable to The Bahamas’ Bond Issue and we were able to capitalize on the Moody A2 rating for Bahamas Debt.  More recently, the Ministry of Finance has arranged for a similar rating by Standard and Poor (S&P).  The significance of international listings of debt is that it imposes additional discipline on the conduct of fiscal affairs in The Bahamas.

 The foreign currency debt of the public sector, that is, of both Government and the public corporations, recorded increases in 2003.  The public sector’s total foreign currency debt increased by $34.1 million to $559.2 million or by 6.5% during the third quarter,  2003. About half of the increase we the Central Government and the remainder , the public corporations.

 It should be noted, however, that by regional and international standards our foreign currency debt remains relatively low.  Debt service, which comprises principal and interest payments is also low at 2.9% of total export of goods and services.  In other words, we can still comfortably service our foreign exchange obligations.

 Government’s Macro Objectives
 The Government recognizes and accepts the need for thoughtful and prudent economic management of The Bahamian economy over the next few years.  Its policies and programs must be designed to foster economic growth and development.  In this connection, a medium term strategy is currently being developed which will focus on the following four broad areas:

1. Sustaining economic growth by promoting further private sector development;

2. Promoting social development and equity particularly in the low-income areas of the country;

3. More emphasis on environmental management and natural resources conservation; and,

4. Implementation of a public sector reform program.

It is expected that more than $100 million would be allocated to implement these projects over the period and if successful, could set the foundation for sustainable economic development of The Bahamas for the rest of this decade.

Ladies and Gentlemen, let me conclude by restating that the economic outlook for The Bahamas in 2004 and beyond is heavily dependent on the performance of the U.S. economy on one hand and the absence of any global catastrophes and natural disasters on the other.  Our major macro-economic indicators over the past year are for the most part, on favourable positive trends.  Major foreign direct investment projects are in various stages of implementation and if fully realized, we could expect expanded opportunities for growth and employment in the local economy.  Lastly, we believe firmly that we have the appropriate mix of policies and programs to place The Bahamas on a sustainable path of development well into the future.

THANK YOU

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