The
Development Planning Unit
Government of the British Virgin Islands

THE BRITISH VIRGIN ISLANDS MACRO ECONOMY

1. Introduction
"Macroeconomics is concerned with the behavior of the economy as a whole – with booms and recessions, the economy’s total output of goods and services and the growth of output, the rates of inflation and unemployment, the balance of payments, and exchange rates" (Dornbusch and Fischer 3). Macroeconomics, therefore, deals with the major economic issues and problems of the day. In fact, "[m]acroeconomics focuses on the economic behavior and policies that affect consumption and investment…the trade balance, the determinants of wages and prices, monetary and fiscal policies, the money stock, the…budget, interest rates and the national debt" (Dornbusch and Fischer 3). To this end, the marcoeconomy of the British Virgin Islands (BVI) is, to say the least, critical.

The aim of this paper is to provide its readers with an overview of the macroeconomy of the BVI. This will be accomplished by reviewing the history of the BVI’s macroeconomy; analysing the development of the BVI’s macroeconomy with respect to economic, social, legal, and management dimensions; identifying problems, constraints, issues and needs; identifying policies, strategies and measures in conjunction with stated goals, objectives and outcomes; and describing proposed programmes and projects with respect to the logical framework, justification, cost, financing, expected outcomes, implementation schedule and associated risks.

2. Background
As stated above, macroeconomics is concerned with the performance of the economy as a whole. To understand the BVI’s macroeconomy, this paper will detail with the history of economic development in the BVI. In order to analyse the economic development of the BVI, a detailed critique of the factors affecting economic development will be undertaken. This paper will also look at the various measurements of economic development and analyze the BVI’s macroeconomic performance over the study period.

Over the last 50 years, the British Virgin Islands’ (BVI) economy has evolved from one that was primarily agricultural based to one that was tourism dependent and presently to a tourism and financial services driven economy. Before the 1950s, the BVI economy was primarily dependent on agriculture. With limited capacity to import, and the absence of investment, the populous depended on agriculture and fishing as a means for survival. During this period, the main means by which goods were traded was the barter system – a system where people exchange one good directly for another. For example, people traded fish for provisions. Throughout history, this type of system was prevalent in economies with limited monetary systems. The BVI, being no different from any other economy, also experienced the barter system.

As stated above, there was a limited capacity to import. To understand this, one will have to look at the situation prevalent in the British Virgin Island before the 1950s. With limited development occurring in the BVI before the 1950s, there were limited employment opportunities in the BVI. The breadwinners, therefore, traveled to the United States Virgin Islands (USVI) to work. At the end of each month, they returned with goods and their monthly earnings. This situation fueled the development of the monetary system as well as economic development. "In a system of monetary exchange, people trade money for goods when they purchase something and trade goods for money when they sell something; but they do not trade goods directly for other goods" (Baumol and Blinder 251).

The first bank in the BVI was established in the late 1950s, with origins in the USVI, to facilitate the transfer of funds between the BVI and USVI as well as to provide a means where BVIslanders could save their funds. This resulted from the fact that people started to see money as a store of value, a way to store wealth from one point in time to another.

During this period money’s prominence as a unit of account, the standard unit of quoting prices, and a medium of exchange, the standard object used in exchanging goods and services, was developed. With the development of the monetary system and the increasing money supply (savings accounts) of the BVI, investors invested in stores and shops. The BVI’s money supply, therefore, became an important determinant of the demand.

An increased money supply leads to increased demand. Supply, therefore, has to be increased to meet this increased demand. This is what transpired in the BVI in the 1950s with the creation of stores and shops. These stores and shops also aided the economic development of the BVI through the generation of employment.

The BVI’s industrial development and tourism investments also aided the development of a monetary system in the BVI. The Hotel Aid Ordinance, which was passed in 1953, offered incentives to potential investors and nurtured the development of the tourist industry. Incentives included income tax holidays and investment deductions to the licensee to construct and equip a newly erected hotel or an extension to a hotel. Investors, capitalizing on the growth in international travel, incentives, and the natural environment of the BVI to attract tourists, contributed tremendously to the development of the BVI’s economy.

Like the monetary system, the fiscal development occurred during relatively the same period. With the fiscal development came fiscal policies. "The government’s fiscal policy is its plan for spending and taxation. It is designed to steer aggregate demand in some desired direction" (Baumol and Blinder 221). This regards the level of government purchases, the level of transfers, and the tax structure. To gain an appreciation for the BVI’s fiscal policies this paper will look at the BVI’s fiscal development, including the evolution of the history of the ministerial system.

"The first and most significant stirring of the local political reform came in 1949 with the great freedom march which resulted in the restoration of the Constitution and Legislative Council of 1950. In 1952 a ‘Committee System’ had been introduced to place some emphasis on economic development…" (Romney 37). Under this "Committee System," "…the ‘Public Works and Communications’ and the ‘Trade and Production’ committees were formed, each headed an elected member serving on the Executive Council" (Pickering 33). This is of paramount importance for the Public Works and Communications Committees, especially, played a significant role in the formulation of the Public Sector Investment Programme (PSIP) and the expansion of the BVI’s economy. "…the stimulation of tourism was considered the optimal means by which most of the other development objects could be attained. Private initiative and private investment were deemed essential; but Government was charged with providing ‘certain basic facilities such as harbors, airports, roads, communications and utilities…" (O’Neal and Maurer 48).

The local economy was in the doldrums with subsistence farming playing a major role; nevertheless the Gross Domestic Product (GDP) had doubled between 1957 to 1962 (from an estimated $ 1,000,000 in 1957 to $2,161,000 in 1962). This was mainly due to increased public sector spending which in turn reflected on the private sector where construction was witnessing a positive phases. The word ‘development’ was beginning to become a household term with tourism seen as the only way out from an other wise aid-dependent and dormant economy (Romney 37).

The political system continued to evolve and in 1967, "[a] full Ministerial System designed to give BVI Islanders the right to administer their own internal affairs" was enacted and the first Chief Minister Hon. H. Lavity Stoutt was elected. Government’s emphasis was on developing an infrastructure commensurate with the slow expanding tourist industry. A number of measures, therefore, were undertaken by government to make the territory more attractive in the eyes of foreign investors. Over the past 30 years, BVI Government has continued to invest tremendously in infrastructure and human resources to meet the changing needs of the economy. Government has also modified its policies to attract a cross section of foreign investors. This is evident when one looks at the BVI’s international trade’s growth over the last 50 years. International trade results from linkages among open economies. "Any economy is linked to the rest of the world through two broad channels trade (in goods and services) and finance. The trade linkages arises from the fact that some of a country’s production is exported to foreign countries, while some goods that are consumed or invested at home are produced abroad and imported" (Dornbusch and Fischer 175). Like trade, finance has strong international links. BVI residents hold assets in the BVI or in foreign countries and vice versa. In addition, "international investors seeking the best return on their assets link asset markets" (Dornbusch and Fischer 176).

Over the last 50 years, international trade has evolved from a subsistence farming economy to an economy that exports tourism and financial services. In fact, the BVI is the number one sailing destination in the world and is attractive for its natural beauty. The BVI is also becoming one the leading offshore centers in the world. There are nearly 250,000 International Business Companies (IBC) registered in the BVI to date. The BVI’s financial service sector is also diversifying and growing in other areas. One such area is mutual funds. There are presently 2000 mutual funds with an asset value of $55 billion.

The contributions of tourism and more recently the financial services sector to the development of the BVI’s economy over the past 50 years have been momentous, to say the least. Looking at some current figures with respect to these sectors will give an idea of the significance of tourism and financial services. In 1996, taxes on international trade accounted for 63% of government revenue. 78% of the taxes on international trade was accounted for by tourism and financial services. Another point of importance is that inflows from international services, namely financial services, was 62% of total domestic spending. The above, therefore, shows the importance of tourism and financial services to the BVI economy.

3. Situation Analysis
As stated above, the BVI economy has evolved from one that was primarily agricultural based to one that was tourism dependent and presently to a tourism and financial services driven economy over the past 50 years. Along with tourism and financial services, a number of other sectors, which are overshadowed by these sectors, have contributed tremendously to the development of the BVI’s economy. Looking at GDP (at market prices) figures for 1993-1996, Table 4, one can see that there were six sectors, which contributed 89% of the GDP in 1996. These sectors were financial intermediation, wholesale and retail trade, real estate, renting and business activities, hotel and restaurants, public administration, and construction. A further analysis of the GDP for the stated period, 1993-1996, reveals that hotel and restaurants, financial intermediation, and real estate renting and business activities sector experienced continuous growth throughout the period, with average annual growth rates of 17.2%, 64.4%, and 5.7% respectively. Wholesale and retail trade and public administration and social security growth rates fluctuated during the period; however, their growth rates for the period, 1993 –1996, were positive, 8.1% and 4.9% respectively. The construction sectors contribution to GDP was relatively constant at $16,400,000 for the stated period.

The strength and diversification of the BVI’s economy can be seen by looking at the economy’s performance during this decade. The BVI’s economy has continued to grow despite adverse effects of hurricanes and recessions in the USA and Europe, major tourist markets. In fact, the economy has expanded at an annual average rate of 3.1% for the period 1991-1996. The BVI’s economy, thus, has a solid base that absorbs adverse external factors, eliminating the possibility of unbridled changes.

The strong economic performance of the BVI’s economy during the above stated period, when many countries experienced recessions and the BVI experienced its own adverse effects from hurricanes, was attributed to continued public sector investment, a stable political system, and the relatively lower cost of the BVI as an up scale tourist destination when compared with Europe, Hawaii, and the other caribbean islands. In addition, the BVI is the "sailing capital of the world."

For the period 1991 to 1995, government capital expenditure or its PSIP averaged $19,160,260, with a low of $14,568,455 in 1995 and a high of $25,876,447 in 1992, See Table 1. This continued public sector investment has served as a buffer for the economy when external factor have threatened. The stable political situation along with low incorporation fees have resulted in sustained growth in IBC incorporation. In addition, as stated above, the relatively lower cost of the BVI as a tourism destination has enabled the tourism to grow during the review period, 1991-1996.

When one looks at the four measures, government’s fiscal situation, inflation, employment and growth, that are used to monitor the macroeconomic performance of the BVI, the strength of the BVI’s economy becomes even more obvious. First of all, the government’s fiscal situation, which is partly responsible for fueling the economy, has been, to say the least, spectacular. Between 1986 and 1996, government revenue increased 402.1%, from $22.3 million in 1986 to $112.0 million in 1996. This calculates to an average annual increase of 40.2%. This tremendous increase in government revenue was accountable for by the increase in taxes received from financial services sector. Between 1986 and 1996, tax revenue from financial service increased 3,110.4%.

Like revenue, government expenditure also increased, although not as significant. For the stated period, government expenditure increased 313.0%, from $22.9 million to $94.9 million. It must be noted that the government’s recurrent budget maintained a surplus from 1987-1996. This is a major point because expenditure was kept "in bounds" in the presence of increasing revenue without stagnating the economy. This was a result of government’s prudent fiscal policies of expenditure control.

As of December 31, 1996, the total Public Sector Debt was $71,000,000 with an estimated debt service obligation for 1996 of $4,477,500, a debt service ratio of just 6.3%. Central Government Debt was $34,767,000 or 49% of the total Public Sector Debt. Government guaranteed debt accounted for the remaining 51% or $36,233,000.

Public Sector Debt can also be looked at in terms of domestic debt and external debt. In 1996, external debt accounted for 50.4% or 35,807,000 while domestic debt accounted for 49.6% or $35,193,000. For the period 1991 to 1996, the BVI’s external debt, government and government guaranteed foreign liabilities, increased from $29,000,000 to $35,807,000, an increase of 23.5% or an annual average increase of 4.7%. The low average annual increase in the BVI’s external debt resulted from the fact that government used its revenue surpluses to finance projects; hence, the need to take on debt was reduced.

Table 1
Government Expenditure 1991 to 1996, and 1994 Wages (US$)
US $ (000’s)

Secondly, Inflation in the BVI, which is the increase in the general level of prices during a given period, has remained relatively stable throughout its recorded history without any major fluctuations. Over the years, the rate of inflation in the BVI has mirrored the rate of inflation in the United States. This positive correlation exists because of two reasons. A significant proportion of goods consumed in the BVI are imported from the U.S. mainland and the BVI’s monetary policy is indirectly determined by the United States Central Bank (the Federal Reserve); since there is no local central bank and the BVI’s monetary system is liberal. It has very little regulations and is opened. As illustrated in Table 2, the average annual rate of inflation between 1991 and 1996 was 4.3%, with minimum and maximum values of 6.6% and 2.7% in 1991 and 1993 respectively. This is a good sign since inflation usually rises with growth and increases in aggregate demand for goods after natural disasters like hurricanes, situations present during the period under review.

Next, the situation in the BVI with respect to employment has been categorized by high growth, a hope for many societies, for the past 20 years. The development of the tourism sector, the financial services sector, public capital spending, and private construction projects have been the impetus for employment generation. Thus, the unemployment rate in the BVI is very low. In fact, the situation in the BVI is unique since labour demanded exceeds the local supply. Consequently, foreign labour has to be acquired. There is minimal unemployment since by law a person should not be in the country more than six months with out a job.

Table 2
Monthly and Annual Average Rates of Inflation (%), 1985 – 1996
(March 1985 = 100)

For the period 1990 – 1994, employment has steadily increased. In fact, the labour force increased from 9,077 employees in 1990 to 10,869 employees in 1994, an increase of 19.7 %. The annual average increase in the labour force for the period was 4.9%. Sectors mainly responsible for the increase in employment were public administration and social security; hotel and restaurants; wholesale and retail trade; financial intermediation; real estate, renting and business activities; and private households with employed persons which increased 31.3%, 15.4%, 25.9%, 39.7%, 14.2%, and 50.7% respectively. The main employment sectors were hotel and restaurants, public administration and social security, wholesale and retail trade, and construction which employed 23.4%, 21.3%, 13.5%, and 10% respectively of the labour force.

For the same period, the gross earning of employees increased 40.1%, from $84,663,841 in 1990 to $118,638,953 in 1994. Major increases were seen in public administration and social security, hotel and restaurants, financial intermediations, wholesale and retail trade, real estate, renting and business activities, construction, and private households with employed persons. These sectors increased 50.5%, 36.8%, 82.9%, 42.4%, 49.4%, 15.9%, and 84.7% respectively for the period.

Table 3
Number of Employee by Sector, 1992 to 1994, and 1994 Wages (US$)

The number of work permits issued from 1990 to 1993 increased from 3,846 to 4,127 or 7.3%. Looking at table 4, one can see that the 1993 figure was slightly lower than the 1992 figure. The preliminary figures for work permits issued in 1995 exceeds 5,000. A further analysis of work permits issued, table 4, shows that the majority of permits were issued for occupations in service, production, construction, and transport sectors. In fact, in 1993 these sectors accounted for 71.6% of the work permits issued. Preliminary figures for 1995 show the same trend as in previous years.

Table 4: Work Permits Issued by Occupation, 1990 to 1993

Finally, the BVI economy, as stated above, has expanded on an average of 3.1% for the period 1991-1996 despite adverse effects of recessions in the USA and Europe and numerous hurricanes. This is measured by the GDP, which is the value of final goods produced within the BVI. Table 5, below, shows GDP, at market prices, contributions by industry. This table reveals the diversity of the BVI’s economy. In 1992, the main sectors with respect to GDP contributions were wholesale and retail trade; real estate, renting and business activities; financial intermediation; hotel and restaurants; and transport, storage and communications contributing 32.9%, 14.9%, 13.3%, 11.8%, and 6.7% respectively. This economy, thus, has a solid base that absorbs adverse external factors thus eliminating the possibility of unbridled changes.

Table 5: GDP Contribution by Industry 1993 to 1996

Preliminary figures for the period 1993 to 1996, illustrated in Table 6, reveal that the four sectors which made significant contributions to GDP from 1990 to 1992, maintained these top positions thru 1996.

According to Table 5, during 1993 wholesale and retail trade, real estate, renting and business activities, financial intermediation, and hotels and restaurants accounted for 33.6%, 15.4% 14.2% and 11.4% of GDP respectively. During 1994, financial intermediation was the most productive sector accounting for 30.8% of GDP. Wholesale and retail trade was second contributing 22.4%; real estate, renting and business activities was third with 13.3%; and hotels and restaurants followed with 13.02%.

From 1995 to 1996, wholesale and retail trade’s contribution to GDP decreased from 27.2% to 26.2%; financial intermediation increased from 26.7% to 30%; real estate, renting and business activities decreased from 13.6% to 13%; and hotels and restaurants increased slightly from 12.3% to 12.5% of GDP. The important development to note here is that by 1996 financial intermediation emerged as the most productive economic sector in the BVI economy, surpassing the previously dominant wholesale and retail trade sector.

Illustrated in Table 6, is a summary of macroeconomic indicators on the BVI economy from 1992 to 1996. According to Table 6, inflows from International Trade recorded a growth rate of approximately 121.8% for the review period, from $260,800,000 in 1992 to $578,550,000 in 1996. Outflows, on the other hand, increased by 54.9% for the same period, from $308,900,000 to $478,000,000. International trade, therefore, improved the BVI’s current account position and thus its balance of payments. Government’s revenue from international trade increased 102.1% between 1992 and 1996, from 37,446,000 to $75,666,000. Also of importance in this illustration, is the 64.3% and 46.3% growth in government recurrent revenue and GDP respectively. The most significant observation, however, is the 139.9% increase in the GDP of firms in international trade, from 127,471,000 in 1992 to 305,795,000 in 1996. Total spending was up 7.5% to $925,900,000 1996, over 1995’s $860.9m.

Table 6
Selected Macroeconomic Indicators (US$’000), 1992 –1996

Similar to the depiction above is Table 7, which illustrates growth rates for the respective indicators between 1992 and 1996. According to Table 7, firms in international trade’s contributions to GDP realized an average growth rate of 23.2% between 1992 and 1996. Inflows from international trade, government revenue from international trade, and government current revenue also realized high average growth rates, 22%, 19.4%, and 14.4% respectively.

Table 7
Growth Rates of Selected Macroeconomic Indicators, 1992-1996

The importance of tables above is that they relate certain critical macroeconomic variables to international trade. These tables demonstrate clearly, that there is a significant positive correlation between growth in the BVI economy and the willingness and ability of BVIslanders to exchange commodities in the international marketplace. This point is illustrated most clearly in Table 8 below.

Table 8
Shares of Selected Macroeconomic Indicators (US$’000), 1992-1996

According to Table 8, international trade has been the major contributor to the BVI government’s revenue. As illustrated, during 1996 taxes on international trade accounted for 63% of government revenue. International trade also accounted for 61% of the BVI’s GDP in 1996. These two indicators show the ‘globalization’ of the BVI marketplace.

Also of importance, is the fact that more than 50% of total spending in the BVI economy is paid overseas to providers of goods and services. This statistic is an indication of the extent to which the BVI economy is import dependent and identifies an important ‘leakage’ in the economy. In addition, during 1996 inflows from international services accounted for 62% of total domestic spending. This highlights the importance of tourism and financial services to the BVI economy.

Despite the important role of international trade in economic development, Table 8 also indicates that, on aggregate, the BVI trades in goods and services which are not labor intensive. This is illustrated by the indicator earnings from employment in international trade as a share of earnings from employment. The data reveals that in 1996 earnings from employment in international trade accounted for only 38% of total earnings from employment while the GDP from international trade was 61% of the BVI’s GDP. This is due to the fact that labor intensive production is directly related to an economy that produces goods rather than services. Hence, the BVI is a service producing economy.

Table 9, which gives a detailed breakdown of taxes derived from international trade, clearly shows that offshore financial services is government’s main revenue source via company license fees and registration fees.

Table 9: Taxes on International Trade (US$’000), 1992 – 1996

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