Positive outlook for BVI despite 20% drop in Revenue from Financial Services Sector

Earlier in 2004 the CDB (Caribbean Development Bank) published its annual economic review for the year of 2003. In this review the regional financial institution stated that the outlook for the BVI over the medium term is positive notwithstanding its small size, geographic dispersion, and dependence on tourism and financial services.

Recent efforts at enhancing tourism marketing not only within the US, but also in Europe have begun to reap benefits, and will continue to do so barring further geopolitical tensions or other adverse shocks. Planned hotel investments in the territory  are also expected to boost activity in the sector and should also benefit the economy.

The Financial Services Sector has performed relatively well and constitutes a main source of national income and government revenue.

Real economic activity in the British Virgin Islands (BVI) is likely to have increased in 2003, reflecting the improvement in the global economy and in particular that of the US, its major trading partner, CDB stated.

The rise in real output occurred as a result of heightened tourism activity and was supported by continued growth in the Financial Services Sector. Growth was however constrained by seven days of torrential rains. In the public sector, containment of expenditures, particularly on capital items offset revenue shortfalls and led to a small improvement in the Central Government's overall fiscal position.

Unemployment in the BVI is generally low, (estimated to be in single-digits), and it is likely that with rising economic activity, more persons may have found employment, particularly in the services industries as these sectors account for nearly 75% of employment, CDB reported.

There was a modest improvement in the overall fiscal position of the Central Government in 2003. Available information to mid-December suggests that the current account surplus was reduced during the year on account of revenue shortfalls, but sharp curtailment in capital expenditures resulted in an improvement in the overall deficit from $38mn in 2002 to $30.9mn in 2003.

Recurrent revenue is estimated to have fallen by 18.8% and was mainly due to a reduction in licence fees collected from offshore entities. This fall estimated to be in excess of 20%, is linked to the lower number of incorporations during the year.

Investment income, import duties and company income taxes also contracted during the period, as domestic demand seems not to have recovered. On the expenditure side, while current spending contracted by 2.8%, capital spending was cut by more than half to around $34.2mn, mainly reflecting declines in health and infrastructural spending.

Fiscal pressures are likely to rise in the near term with the increase in the personal income tax threshold. Weaknesses in the budgetary process will however need to be addressed as a matter of urgency to improve efficiency in the public sector, particularly in light of reducing foreign assistance, if the BVI is to fully take advantage of opportunities.