The Bahamas: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
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Publication Date:
07 Jul 2005
eISBN:
9781451804720
Language:
English
Keywords:
ISCR; CR; information sharing; price; insurance coverage; calamity fund; D. government response; IDB action plan; market insurance; Insurance; Infrastructure; Disaster aid; Caribbean
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This Selected Issues paper for The Bahamas reports that the largest portion of tourism expenditure in The Bahamas comes from stayover visitors, and total tourism spending has been stagnant. The Bahamas is a small open economy highly dependent on tourism and the offshore financial sector. Private consumption expenditure in the country or countries of origin is the most important determinant of tourism in The Bahamas.

Abstract

This Selected Issues paper for The Bahamas reports that the largest portion of tourism expenditure in The Bahamas comes from stayover visitors, and total tourism spending has been stagnant. The Bahamas is a small open economy highly dependent on tourism and the offshore financial sector. Private consumption expenditure in the country or countries of origin is the most important determinant of tourism in The Bahamas.

II. The Bahamas Experience With the 2004 Hurricanes1

1. Natural disasters have become more frequent in The Bahamas in the last two decades. This suggests a greater importance of policies to prepare for future hurricanes, including preparedness measures, insurance, and plans for post-hurricane response. Against this background, Section A of the paper assesses the magnitude and frequency of natural disasters in The Bahamas; Section B presents guidelines for effective disaster management; Section C describes the adverse impact of the 2004 hurricanes and provides a sectoral analysis; and Section E assesses the government response to the 2004 hurricanes.

A. Incidence of Natural Disasters

2. In the last few decades, natural disasters worldwide have become more common and damaging. From the 1970s to the 1990s, the number of disasters nearly doubled, and economic losses increased by over 450 percent (Kwon, 2005). Part of the observed increase may be due to better reporting, but the increased concentration of the population in high-risk areas may have contributed to this trend. Low-income countries and the poor are particularly at risk (Freeman, 2003 A).

3. The Caribbean countries are among the most disaster-prone in the world (Table 1). This is true when measuring the frequency of natural disasters in terms of size of land area or the size of the population and reflects the fact that islands in this region are located in areas that are prone to tropical cyclones and have relatively long coast lines.

Table II.1

Worldwide Incidence of Natural Disasters, 1970-2004 1/

article image
Sources: Centre for Research on the Epidemiology of Disasters (CRED), Emergency Disasters Database for data on disasters (EM-DAT); IMF, World Economic Outlook for GDP and population data; World Bank, World Development Indicators for land area data.

Sample composed of 153 countries after eliminating countries with no natural disaster for which a cost estimate is available. Country groupings are unweighted averages. Indices are based on the average for all countries.

Calculated as the number of persons affected (including deaths) divided by each country’s population for the year of the disaster, and then added overall years by country.

Cumulative damage is calculated as the sum over the period of the annual ratio of the damage reported in the EM-DAT database for a given year divided by the year’s GDP.

4. The frequency of hurricanes in The Bahamas has increased over the last 15 years. From 1926 to 2004 The Bahamas experienced 13 hurricanes, one flood and one tropical storm (Table 2). However in the last 15 years The Bahamas endured six hurricanes including three hurricanes included in the list of the 40 most costly natural disasters for the insurance industry (Swiss Re, 2005). Hurricane Andrew in 1992 caused insured losses of about 9.6 percent of GDP and Hurricane Floyd caused insured losses of about 5.3 percent of GDP (Axco 2005).

Table II.2.

Natural Disasters in The Bahamas

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Source: EM-DAT database.

5. The damage caused by the hurricanes is a source of policy concern in The Bahamas. The cumulative economic losses as a proportion of GDP is larger than the damage inflicted by natural disasters to the advanced economies although within the Caribbean region, the Eastern Caribbean Currency Union (ECCU) countries, the Dominican Republic, and Jamaica recorded larger economic losses than The Bahamas (Table 1).2 Despite the economic losses resulting from hurricanes in The Bahamas, the number of persons affected as a share of the population was lower than in the Caribbean region. This feature is consistent with the cross-country evidence reported by Rasmussen (2004), which suggests that the capacity of countries to mitigate the human cost of disasters improves as the income level increases.

B. Management of Disaster Risk

6. Based on country experience, the IDB has proposed a comprehensive framework to organize policy actions for natural disaster management (Table 3). The challenge facing policy makers is to create an effective national system that addresses both the pre- and post-disaster phases. The pre-disaster phase includes risk identification, mitigation, risk transfer, and preparedness. Mitigation policies cover a wide range of measures from engineering design to building codes, based on hazard assessment and physical and social vulnerability analysis. The post-disaster phase focuses on the emergency response and rehabilitation and reconstruction.

Table II.3.

Key Elements of Risk Management

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Source: Inter-American Development Bank, 2000, “Facing the Challenge of Natural Disasters in Latin America and the Caribbean. An IDB Action Plan.”

7. Insurance is the primary risk transfer tool to linking the various components of a national disaster management system. Market insurance and re-insurance provide replacement coverage for private and public assets. However, Gurenko and Lester (2004) point out that in many developing countries insurance markets are not well developed, and coverage for natural disasters is limited. In addition, Freeman (2003 A) indicates that government-owned buildings in most developing countries are typically not insured.

8. Some countries seek self-insurance to cope with natural disasters through the establishment of disaster funds. Calamity funds are commonly funded through annual budgetary allocations and are used for expenditure on emergency relief and related needs after natural disasters occur. An alternative instrument for financial planning by disaster prone countries would be a contingent credit line. Contingent credit arrangements are similar to insurance policies in that they also guarantee access to funds immediately after a disaster. However, such arrangements do not transfer risk, as they only postpone and spread the financial burden of a natural disaster. An alternative tool to cope with natural disasters is a catastrophe bond, i.e., a high-yield bond on which interest or principal may be lost in the event of a specified catastrophe.3

C. Economic Impact of 2004 Hurricanes

9. The Caribbean basin was severely affected by a series of hurricanes that repeatedly battered the region during the 2004 hurricane season. Hurricane Frances, a category 4 hurricane in the Saffir-Simpson scale, and Jeanne (category 3) hit The Bahamas within a short interval in September 2004. Despite their strength, only two casualties were reported, even though 9 percent of the population was affected (Economic Commission for Latin America and the Caribbean (ECLAC), 2004). The entire Bahamian archipelago was hit, but economic damage was concentrated in the Grand Bahama island.

10. The total damage inflicted on The Bahamas by the 2004 hurricanes amounted to about 6.7 percent of GDP, according to the preliminary estimate done by ECLAC (Table 4). About 4 percent of GDP was in direct damages, including 1.3 percent of GDP in damages to the mostly uninsured public infrastructure in the transportation, education, and health (TEH) sectors, with business foregone in the tourism, agriculture, and fisheries sectors accounting for most of the indirect losses. The authorities’ more detailed assessment put the estimate of direct damage in the TEH sectors at only about 0.4 percent of GDP; the preliminary estimates may have included damage from previous storms. Damages to the public telecommunications and electricity sectors, both insured, amounted to 0.7 percent of GDP.

Table II.4.

The Bahamas: Summary of Damage and Losses Caused by Hurricanes France and Jeanne

(As percentage of GDP)

article image
Source: Economic Commission for Latin America and the Caribbean (ECLAC), 2004, “Hurricanes Frances and Jeanne in 2004: Their Impact in the Commonwealth of The Bahamas.”

Estimated impact on the balance of payments.

11. The total damage inflicted by the hurricanes to The Bahamas was in the middle range of damages caused by hurricanes elsewhere in the Caribbean in 2004. According to ECLAC, hurricane Jeanne caused estimated damages to the Dominican Republic amounting to 1.7 percent of GDP while Hurricane Ivan caused total damages in Jamaica estimated at 8 percent of GDP and over 200 percent of GDP in Grenada (U.S. Government, 2004). The U.S. Agency for International Development launched a $100 million hurricane recovery program focused on Haiti and Grenada, with The Bahamas receiving less than $2.5 million.

12. Staff estimates that the 2004 hurricanes lowered GDP in The Bahamas by close to 1 percent through their adverse impact on tourism. Post-hurricane repairs were financed by donations (0.1 percent of GDP) and through budget reallocations and although the storms lowered tax revenues by 0.2 percent of GDP,4 the FY 2004/05 government deficit narrowed to 2½ percent of GDP, slightly better than the budget projection. Foreign insurance payments to The Bahamas amounted to 3.5 percent of GDP, most of which went to the private sector.

13. Direct damages to private sector property were concentrated in the housing and hotel sectors, with estimated costs of about 1.3 percent and 0.5 percent of GDP, respectively. Extensive insurance coverage in both sectors helped to minimize financial distress. According to insurance industry analysts (Axco, 2005), 80 percent of the homeowners are insured (including contents), which is often required by banks’ mortgage policies. The available information suggests that nonlife insurance coverage is broader in The Bahamas than in some of the neighboring islands. Local insurance companies typically rely on overseas reinsurance to avoid the bankruptcy risk (Axco, 2005). An important factor that mitigates risk is the mandatory building code and its enforcement in the main islands of The Bahamas, which follows the South Florida Building Code standards and helps moderate hurricane damage.

Non-Life Insurance Coverage in Selected Caribbean Countries in 2001

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Source: Axco 2005, The Bahamas: Non-life Insurance Market Report BHS: The Bahamas; TT: Trinidad and Tobago; DR: Dominican Republic

14. Most of the hotels are insured, including for business interruption, with large hotels insured abroad (Axco, 2005). However, large increases in insurance premiums and higher deductibles introduced by the international insurance industry since 2001 have exerted pressure on the cost structure of hotels (Tourism and Hospitality Network, 2005 A). In addition, some hotels experienced losses in the 2004 hurricane season as a result of being underinsured or a lack of coverage for wind and flood damages (Tourism and Hospitality Network, 2005 B).

15. Agriculture and fisheries also experienced substantial damage from the 2004 hurricanes mainly because of business forgone. As is the case in most of the Caribbean countries, the adverse impact of the hurricanes is larger in social terms than in its contribution to GDP (less than 3 percent of GDP in 2003).

D. Government Response to the Hurricanes

16. The Bahamian authorities’ response to the 2004 hurricanes followed established procedures. Even before the hurricanes’ arrival, the National Emergency Management Agency (NEMA) activated the Humanitarian Supply Management System (SUMA) developed by the Pan-American Health Organization to receive and distribute assistance. The islands of Abaco and Grand Bahama were declared disaster areas by end-September. By mid-September the government had reactivated the Disaster Relief and Recovery Fund (DRRF, set up after Hurricane Floyd in 1999),5 allowed duty free imports, and implemented an emergency relief loan program (also created in 1999).

17. Donations were channeled to vulnerable groups. With donations amounting to 0.14 percent of GDP, NEMA expenditures focused on repairing damages to housing including for indigent or uninsured citizens.

18. To expedite reconstruction, the government allowed duty free imports of goods and construction materials up to end-March 2005. The import duty foregone due to the exemptions reached 0.5 percent of GDP. The scope of emergency relief loan program that aimed to repair residential property and support business rehabilitation was modest at US$2 million.

19. The Inter-American Development Bank is supporting the rehabilitation and reconstruction effort. In March 2005 the government obtained a loan for US$21 million (0.4 percent of GDP) under the IDB’s immediate response facility, which targets transport and education infrastructure rehabilitation.

20. The authorities are modernizing their policy framework in line with the IDB’s guidelines for effective disaster management. To this end, they have prepared draft legislation to provide better legal and administrative support for the management of hurricanes, including the establishment of emergency shelters, the identification of especially vulnerable areas, the storing of emergency supplies in warehouses, and the appointment of hazard inspectors and shelter managers. A disaster response plan would be prepared and revised annually. However, under the draft legislation, the funding of NEMA, which has six permanent employees, is left open to donations and unspecified budget allocations to be provided by parliament.

21. A financial strategy to protect against disasters is under discussion in The Bahamas. The authorities are shifting their focus from emergency relief and disaster response to an ex ante approach based on financial planning. They are considering the introduction of a calamity fund financed by an annual budgetary allocation of about 0.1 percent of GDP. Contributions of this size may be able to cover a large part of the cost of repairing public infrastructure. In both 1999 and 2004, the damage to public infrastructure was estimated at 0.4 percent of GDP, 6 and the record during 1990–2004 suggests that future hurricanes may strike The Bahamas every three years or so. A calamity fund as described above would be consistent with the Fund staff recommendation that governments in countries prone to catastrophes should save enough to cover the expected average annual cost (Rasmussen 2004 and Freeman 2003 B).

22. Fiscal savings equal to the expected average annual cost of the natural disasters avoid some of the difficulties associated with natural hazard insurance. The market for catastrophe risk insurance is known to have high volatility because, in the wake of catastrophes, insurers re-examine the extent of their exposure in catastrophe prone areas, and may make large adjustments to insurance premia and to the availability of insurance (Pollner, 2001). During the period 1970–99, catastrophic insurance premia amounted to 1.5 percent of GDP, while the total (insured and uninsured) losses averaged only 0.5 percent of GDP (Auffret, 2003).7 Capital market-based catastrophe bonds are also not perceived as a first best option due to the high transaction costs involved. In addition, with support from the Food and Agricultural Organization (FAO) the government is considering the introduction of a specialized insurance scheme for the agriculture and fisheries sector.

23. The government is also considering the introduction of a Disaster Assistance Fund. Administered by the National Insurance Board, the fund would provide a lump sum payment to current pension contributors who have suffered damage to personal property in an area designated as a disaster area by the government. The payment would be at the most one-fourth of the average annual salary of public servants. The scheme would be funded entirely by employees through a fairly modest new contribution rate, and damage assessments would be conducted by a still unidentified agency.

E. Conclusions

24. The 2004 hurricanes had a significant adverse impact on The Bahamas, concentrated in Grand Bahama. However, damage inflicted by the hurricanes was in the middle range of damages caused by hurricanes elsewhere in the Caribbean. In the public sector most of the damage was to uninsured infrastructure in the transportation, education, and health sectors.

25. Private markets provide broadly adequate financial protection through insurance to the corporate and housing sectors. Widespread insurance coverage avoided severe financial distress to residential households and to the hotel industry. In addition, building codes in the main islands mitigated the damage to private property. However, low-income households and the agriculture and fisheries sector remain highly vulnerable to natural disasters.

26. The authorities are modernizing the framework to manage disaster risk. The draft legislation to review annually the disaster response plan, establish shelters, identify specially vulnerable areas and appoint hazard inspectors and shelter managers will reduce the human and material cost of future hurricanes. A calamity fund could provide resources to finance future reconstruction needs and create better incentives for stronger public property management. There may also be a case for establishing a specialized agriculture and fisheries insurance scheme for social reasons, but care would be needed to ensure that such a scheme is adequately and transparently funded. However, the arguments for a Disaster Assistance Fund seem less strong, and such a system could be subject to abuse and cross-subsidies, or could imply a large implicit contingent liability to the government.

References

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  • Axco, 2005, “Insurance Market Report: The Bahamas Nonlife,” mimeo.

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  • Centre for Research on the Epidemiology of Disasters (CRED), 2005, “EM-DAT: The OFA/CRED International Disaster Database.” Available via the Internet: http://www.em-dat.net.

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1

Prepared by Mario Dehesa (WHD).

2

The available databases display gaps in coverage and inconsistencies in definitions and underlying methods (IDB-OVE, 2004). The reported damages in the EM-DAT database must be interpreted with caution, as the source does not always differentiate between total damage and insured losses.

3

By issuing a catastrophe bond, a government seeking protection against the risk of a hurricane may use the proceeds from the bond to finance reconstruction, if the specified hurricane occurs.

4

Most of the tax revenue foregone arises from foregone revenue from tourism related taxes.

5

The DRRF is a public-private trust to collect donations that cannot be used for the repair of public infrastructure. The donations received are reported to Parliament and DRRF funds are channeled to NEMA that shares a detailed balance sheet of its activities with donors.

6

See IDB 2000 B for the 1999 cost estimate of Hurricane Floyd.

7

The study reports the experience of Barbados, Dominican Republic, Jamaica and Trinidad and Tobago.

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Cover IMF Staff Country Reports
The Bahamas: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 224
Publisher:
International Monetary Fund
ISBN:
9781451804720
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781451804720.002