The Economy of Bermuda - Research Paper Example

The Economy of Bermuda Bermuda consists of an archipelago of 138 coral islands off the west coast of USA. The economy is primarily based on international business and tourism. The tourism industry derives over 80 percent of visitors from the US and is the second source of foreign exchange. Several reinsurance companies have relocated to the island following Hurricane Katrina in 2005 and September 11 2001 terror attack. This involves providing financial services for international business and luxury facilities for tourists. USA is the main business partner and a key player in the island’s economy. The country has enjoyed steady economic superiority since the end of the Second World War, although it has been affected by recession since 2007 following the global recession. The country enjoys the fourth highest per capita income, which is 50 percent higher than that of the US. The industrial sector mainly focuses on construction, and there is little agriculture since only 20 percent of the island is arable. Bermuda has a robust financial regulatory system making it an important regional and global offshore financial center. International business is the major foreign exchange generating industry in the country (Anderson, 2011). Bermuda is a reinsurance center and an insurance region with firms writing significant business from USA and U.K. In 2010, 15,078 international companies were registered in the island, many of which are U.S owned (Reinsurance Association of America, 2011). These companies spent approximately $2 billion in the country in 2009, making them an important source of foreign exchange. This sector provided $1.5 billion in its total output corresponding to 26.1 percent of the total GDP. International business is also the third largest employer in the country. The sector had 4,287 jobs in 2010, a reduction from 4,431 in 2009. This reduction has made tourism the largest employer in Bermuda. Bermuda has little exports and manufacturing since most manufactured goods and foodstuffs are imported. The value of imports rose from $551 million in 1994 to 1.051 billion on 2009. USA is the primary trading partner for Bermuda, with $663 million coming from U.S imports (U.S. Bureau of Census, 2011). Other countries involved in the import chain are the UK, Canada, and Caribbean countries. Bermuda’s exports are mainly re-exports of pharmaceuticals. These exports are valued at $783 million and export partners include Spain, Germany, Denmark, and the UK. Duty on imports and exports is a major source of revenue for the government (Fabian, 2011). Duty rates in the country are high and are reflected in the consumer retail prices. High prices are countered by high wages that keep up with the cost of living and poverty is practically nonexistent. The government generates approximately 24 percent of its revenue base equivalent to $225.4 million from import and export duty. The government does not impose income, sales, or profit taxes, but levies real estate tax (Fabian, 2011). Bermuda’s tourism industry is the second largest employer with over 4,349 jobs in hotels and restaurants. The industry has been experiencing declining numbers of visitors, which currently stands at 585,266 visitors (Ministry of Finance, 2011). The decline can be attributed to the declining travel industry particularly the airline sector. The tourism industry generated approximately $383.9 million in 2011. The cruise and yacht front have reduced the gap created by the failing airline sector. The number of visitors arriving by air grew to 236,038 in 2011 and cruise visitors were 415,711. Three quarters of visitors to Bermuda are from the US, and the slowdown experienced in the country has significantly affected tourism (Government of Bermuda, 2011). Tourism sponsored events such as the Bermuda International Invitational Race Week increased the number of visitors to the island. Hotel occupancy rates have increased with large hotels enjoying the highest occupancy rates. The 2010 census recorded a 6 percent unemployment rate in the country as a result of the decrease in jobs from 38,097 in 2010 to 37,379 in 2011. This is equivalent to a 1.9 percent decline of jobs or loss of 718 jobs (Fabian, 2011). However, the rate of job losses decelerated when compared to 2010 where 3.6 percent jobs were lost. Job loss and unemployment originated from the global recession experienced in 2008-2009, and the island has lost 2,834 jobs since 2008. The construction sector is the largest victim of job loss. Employment in the sector fell from 3,042 in 2010 to 2,549 in 2011. International business sector has also experienced a 4.9 percent decline in jobs and the real estate sector recorded a 14.5 percent decline. The total number of jobs occupied by non-Bermudians declined by 700 jobs and jobs occupied by Bermudians fell by 9.7 percent (Fabian, 2011). The consumer price index increased at an average annual rate of 2.7 up to 2011. Health, rent, fuel, power and food sectors have the largest price increases. This inflation rate is lower than that of the two main trading partners; UK (4.8%) and US (3.0%) (Bermuda Monetary Authority, 2011). Price increases in health and personal care have the highest contribution to the inflation rate. This sector has an average rate of 7.5 percent price increase. This can be attributed to the price of increase in health insurance premiums. Prescribed medicines and medical supplies also increased in price. The rent sector increased its payments due to increased payments for controlled and non-rent controlled properties. An average 11.2 percent price increase rate was recorded in the oil sector due to the Fuel Adjustment Clause (Economist Intelligence Unit, 2011). The clause enables the government to adjust fuel prices depending on the international fuel prices. The movement in money supply reflects the economic climate and the level of intermediation by local banks. The money supply contracted by 2.1 percent during the first three quarters of 2011 (Gonzalez and Schipke, 2011). This was driven by low inflation, decrease in customer deposit liabilities, and reduction of leverage in the Bermuda dollar by banks. The recent contraction of money supply can also be attributed to the increasing share of domestic financial intermediation in US dollars. The banking sector increased its assets by 3.1 percent in 2011. Total loans and advances increased by $634.7 million in 2011 while customer deposit liabilities grew by $900.1 million (Bermuda Chamber of Commerce, 2010). The aggregate risk asset ratio is above 23 percent, almost three times the international standard of 8.0 percent. Banks have solid capital buffers and are resilient to the current market stresses affecting the valuation of their foreign and sovereign debts. Bank debts are modestly affected by the uncertainty in sustainability of fiscal balances in Europe. Agriculture was a major industry in 1920, but the fertile land for cultivation is currently a rare commodity. Agriculture still exists in small forms and involves bananas, flowers, citrus, dairy products, honey, and vegetables. Agricultural land has declined due to the growing population and demand for residential places (Bermuda Chamber of Commerce, 2010). The agricultural sector has also been overtaken by tourism and other sectors in the country. This has greatly affected the economic contribution from agriculture, and it is mainly practiced for subsistence use. Most of Bermuda islands are inhabited, which has increased pressure on the available land. Industrial growth has attracted majority people depriving agricultural sector labor. Bermuda has enjoyed economic growth due to trading activities from USA, Canada, and UK. The proximity to USA has made it convenient for U.S business people to invest in the island. Several US companies have also relocated to the island, expanding its international business activities. The island is a major tourist center and receives several visitors from North America. The large number of visitors has expanded other sectors such as cruise services, hotel and restaurant sector, and airline travel sector. The country has a low unemployment rate, and the industrial sector is the largest employer. Employees enjoy high wages that counter price inflation and high living conditions caused by high the imposition of high import duties. Bermuda has the third largest per capita income due to the expansion of tourism and industrial business sectors. References Anderson, T. (2011). U.S. Affiliates of foreign Companies: Survey of Current Business. Washington DC: U.S. Bureau of Economic Analysis. Bermuda Chamber of Commerce. (2010). No Quick Fix: Bermuda’s Economy and Business. Outlook Chamber of Commerce Economic Series Part I September, 2010. Bermuda Monetary Authority. (2011). Regulatory Update. Hamilton: Bermuda. Economist Intelligence Unit. (2011).Bermuda, Country Report. London: United Kingdom. Fabian, B. (2011). Country Report: Bermuda. Rabobank Economic Research Department. Gonzalez, M. and Schipke, A. (2011). Bankers on the Beach, Finance and Development. IMF: Washington DC. Government of Bermuda. (2011). National Economic Report of Bermuda. Ministry of Finance. Ministry of Finance. (2011). Budget Statement. In support of the Estimates of Revenue and Expenditure 2011–2012. Government of Bermuda. From www.royalgazette.com/assets/pdf/RG81683218.pdf. [Accessed on 23 November, 2012]. Reinsurance Association of America. (2011). Offshore Reinsurance in the U.S. Market: 2010 Data. Washington DC. U.S. Bureau of Census. (2011). U.S. Exports to and Imports from Bermuda, 2003 to 2010.Washington DC. Read More