Growth in the Bahamian economy slowed in 2013 to 0.7 per cent from 1.0 per cent in 2012. Growth was dampened by a decline in the high-value stopover tourism. This offset relatively dynamic FDI inflows for resort construction and buoyant activity in the offshore financial services sector. Inflation (December-December) increased marginally from 0.7 per cent in 2012 to 0.8 per cent in 2013 due to higher prices of food, health and other services that offset lower fuel prices. The labour market situation improved in 2013, with the rate of unemployment declining by 0.8 percentage points to 15.4 per cent between May and November.
Economic policymaking remains challenged by the decline in stopover arrivals, increasing government debt and opposition by the public to the introduction of the proposed 15 per cent VAT (value-added tax), which the Government deems necessary to achieve sustainable public finances. The Government has postponed the implementation of the VAT and the rate is expected to be lowered. The Government is moving to diversify source markets for tourism with a focus on emerging markets in Latin America and other regions. Nevertheless, there is a need to explore diversification in other sectors as its tourism continues to face intense competition from other source markets.
The fiscal situation remains a critical challenge for the authorities. The deficit worsened from 5.6 per cent of GDP in fiscal year 2011/12 to 6.6 per cent of GDP in fiscal year 2012/13. This stemmed from an increase in expenditure and a decline in revenue. However, in the first half of fiscal year 2013/14, a reduction in capital spending offset the marginal fall in total revenue. Monetary developments were marked by tepid growth in credit amid weak private sector activity, due to the narrowness of the recovery in activity. This meant that for three years liquidity has been above trend levels. As a result, interest rates on deposits fell, but the average loan rate increased, leading to a widening of interest rate spreads.
The economy is projected to further strengthen in 2014, with growth of 2.3 per cent. Growth is expected to be bolstered by a rebound in tourism based on recovery in the United States economy. Hotel occupancy levels and spending are expected to increase and will be bolstered by the construction of resorts. Employment is expected to increase, especially in the tourism and construction sectors, boosting domestic consumption. The current account deficit is expected to widen in 2014 as the growth in imports from an increase in activity is expected to offset an increase in stopover visitor arrivals and visitor expenditure.