The Bahamas

The Bahamas is an island of the Caribbean. It is categorized as a middle-income developing country. As shown in the table below, its Gross Domestic Product real growth rate increases from 0% to 4% from 2004 to 2007. The immense increase may be due to tourism, since it makes up two-third of its GDP. Secondly offshore finance, including banking, insurance, stocks and bonds, and mutual funds, is the second largest industry, contributing 15% of its GDP3.  It has also several little minerals production sectors, such as minerals, cement, salt, sand, and gravel productions4. Nevertheless its construction industry continues to expand, as it is one of the main labour-intensive industries4. Its increase is one of the factor that results in a higher Human Development Index, since its increased by 0.845 and ranks on the 49^th place1.

In fact its Gross Domestic Product per capita produced an increase of 29.34% from 2004 to 2007, making it the third highest per capita income in the western hemisphere (after the United States and Canada) 1.

Although its GDP experienced growth, inflation decreases. Between 2003 and 2007 inflation has decreased by 50%[6]. This may be a result of a tightening monetary policy, in which a high interest rate is included; as interest rates reached 5.25% in March 2008[7]. Nevertheless in the medium and long term high interest rates may protect from a high inflation, but less spending and thus a lower aggregate demand occurs. As a result a  lower economic activity occurs, leading to lower economic growth, higher unemployment; hence lower income and a lower GDP occurs.

Even though its GDP has experienced an increase, 9.3% of its population is still below the poverty line.  This may be a result of increasing unemployment rate, since its unemployment rate experienced an increase of 47.82% between 2003 to 2007.

Nevertheless its current account balance deficit increases from -US$420 million in 2002 to –US$1390 million, although its goods and services exports increases (46.1% Of GDP in 2002 and 50.4% of GDP in 2006)[10]. This result may be an effect of an increased foreign investment, since they require some returns and depending on its currency value; returns may be very high especially when the Bahamas dollar depreciates. It may also be a result of its export base, as manufacturing only possesses a small amount of its GDP. Hence, it needs to import much and expensive products while exporting a low amount of goods.  A worsening current account deficit might discourage investor’s confidence and thus create a lower demand and value of the Bahamian Dollar. A depreciation would increase imported inflation and also foreign debts and services payments, creating a much higher current account deficit as well as a debt-trap-cycle ( a high deficit requires inflow of funds by foreign borrowing or selling its assets to foreigners, which requires return and thus again worsen its current account deficit). A more contractionary monetary policy might also occur, leading to lower aggregate demand, lower economic activity, growth, higher unemployment and a lower GDP as well.

 References:

[1] The Bahamas. [online], ‘cited 13.5.2008’

[2] Bahamas- The GDP-real growth rate.[online], http://www.indexmundi.com/the_bahamas/gdp_real_growth_rate.html, ‘cited 13.5.2008’

[3]Bahamas, The GDP – composition by sector .[online], http://www.indexmundi.com/the_bahamas/gdp_composition_by_sector.html, ‘cited 13.5.2008’

[4] The Bahamas Economic sectors.[online],  http://www.nationsencyclopedia.com/economies/Americas/The-Bahamas-ECONOMIC-SECTORS.html,

‘cited 13.5.2008’

[5] Bahamas, The GDP – per capita (PPP).[online], http://www.indexmundi.com/the_bahamas/gdp_per_capita_(ppp).html, ‘cited 13.5.2008’

[6] Bahamas, The Inflation rate (consumer prices).[online], http://www.indexmundi.com/the_bahamas/inflation_rate_(consumer_prices).html, ‘cited 13.5.2008’

[7] http://www.centralbankbahamas.com/.[online],‘cited 13.5.2008’

[8] Bahamas, The Population below poverty.[online], http://www.indexmundi.com/the_bahamas/population_below_poverty_line.html, ‘cited 13.5.2008’

[9]Bahamas, The Unemployment rate.[online],http://www.indexmundi.com/the_bahamas/unemployment_rate.html, ‘cited 13.5.2008’

[10] The Bahamas.[online], http://www.dfat.gov.au/geo/fs/baha.pdf, ‘cited 13.5.2008’