The
Development Planning Unit
Government of the British Virgin Islands

Recent Economic Developments

Basic Data

Overview

Continuing the trend started in 1988, national output in the British Virgin Islands expanded at an annual average rate of 11.9 percent in 1992-1996, assisted by a strong and sustained USA economic recovery, on which our tourism sector depends on heavily, and by substantial public sector investment in supportive social and economic infrastructure. The recoveries in tourism following the Gulf War and the hurricanes of 1995 were important, as the primary pillar, with financial services adding to expansion. However, retail price inflation accelerated somewhat in 1995-1996, rising to over 4.33 percent in 1996 in response to import price inflation and general economic expansion. A rising level of economic activities in tourism and financial services, in addition to extraordinary public sector investment, maintained full employment and kept the economy operating near production capacity.

Buoyant revenues from the financial sector and the recovery in tourist activities pushed the overall public sector surplus to 3.21 percent of GDP in 1996 compared with the 1.8 percent witnessed in 1995. A 9.5 percent wage hike throughout the public sector was insufficient to prevent an overall public sector surplus. During the period 1992-1994 the public sector overall surplus averaged 1.0 percent of GDP as a result of contrasting phenomena such as wages hikes of 11.9 percent. Toward the end of the review period, a sharp reduction in capital expenditure associated with lumpiness in the Public Sector Investment Programme (PSIP) and bottlenecks in implementation were responsible for a further drop in capital expenditure and the consequential rise in the surplus to 3.21 percent of GDP. As part of this improvement in public finances, there were improved performances in the operations of the National Insurance Fund (the British Virgin Islands Social Security Board) and in the financial positions of public corporations. Earlier in the decade, the NIF current surpluses amounted annually to 2.0 percent of GDP; recently they have been slightly less that 2.7 percent of GDP. Similarly, the position of public enterprizes strengthened from an overall surplus (after transfers from the Central Government) of nearly 0.3 percent of GDP in 1992 to a surplus of 1.3 percent of GDP in 1996.

After mixed results during 1992-1994, the external current account surplus widened in 1995 as consequence of strong growth in tourism and financial services. Thus, although the Capital and Financial account surplus were restrained by a fall in external borrowing and private transfers, the overall balance of payments was in surplus for the fourth consecutive year. However, with an expansion in imports and a stable level of exports, the huge deficit on the merchandise account continued, amounting to 27.3 percent of GDP. The strong contribution of financial services and the recovery of tourism, in combination as export earners, boosted the Services Account surplus to 41.8 percent of GDP, and contributed to the growth in the current account surplus to 11.2 percent of GDP. As a reflection of increased external borrowing at the end of the review period, public and government guaranteed external debt increased from 5 percent of GDP in 1992 to 7.2 percent in 1996, and debt service payments rose correspondingly from 0.2 to 0.8 percent of domestic exports.

During 1992-1996, the banking system expanded credit much faster than growth in its deposits. Boosted by increasing demand for credit for home construction, consumer durable purchases and regular consumer credit, overall credit in the economy amounted to 65.7 percent of domestic deposits. Slightly rising interest rates were insufficient to retard this expansion of commercial, consumer and mortgage credit.

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