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In 2011 the ICB made significant steps forward re-designing the solvency framework used by long term life insurers in The Bahamas.  However, further reforms are required to protect policyholders and to help strengthen the financial situation of life insurance carriers.

We support insurance reforms that are aimed at ensuring strong reserves and capital adequacy which recognize and account appropriately for the relative risk inherent in an insurer’s operations and level of product guarantees.  We also support reforms and policies which also allow for good risk management through appropriate assets and liability cash flow matching.

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This week we wish to briefly visit the Standard & Poor’s (S&P) – the international rating agency –change in its rating from stable to negative for The Bahamas. However, before getting into this report, perhaps it would be useful to briefly describe what S&P is and what purpose it serves.

S&P is an American financial services company. It is a division of the McGraw­Hill group of companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock market index – the U.S.­based S&P 500. The company is one of the Big Three credit rating agencies, which also includes Moody’s Investors Service and Fitch Ratings. As a credit rating agency, the company issues credit ratings for the debt of public and private corporations.

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At the half-way point in 2012 it appeared that the Bahamian economy would sustain its trend of growth which began in the previous calendar year.

The outlook for our primary tourism sector continues to improve, albeit marginally as hotels have started to reattract the lucrative corporate group travel segment in addition to yielding positive results from on-going travel incentive programs jointly sponsored by the Ministry of Tourism and the private sector. This positive forecast however, still remains contingent on the strength of the global economy and in particular, that of our number one trading partner, the United States.

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Bahamians are regularly bombarded with political speeches on the state of hopelessness in the country. They often quote our embarrassing unemployment rates or our unimpressive economic growth prospects. Of course, they blame the ‘other’ party for the country’s problems and typically the debate ends there. Solutions to our problems often tinker around the edges – short-term bandages on wounds that have been spewing blood for decades.

We believe the strongest and most sustainable economies are built from the ground up, where the desires, problems and opinions of stakeholders at all levels are taken into account (See ‘Collaborate, Research, Invest’ July 18, 2012). We also believe that robust economic growth is often the result of proactive economic planning by government and the private sector that targets areas for investment and develop the institutional/ policy environment to aid in their success.

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The people, enterprises and government of Chile identified a need for greater industrial diversification in the 1980s as a means to position the economy for more stable growth.  Led by investors and specialized experts, Chile established a public/private institute saddled with the task of researching specific opportunities for job creation and investment.

The government acted as a facilitator, using the recommendations of the institute to build an appropriate policy foundation and strategically organizing the country’s trading relationships.  The private sector acted as the implementer – buying the ideas and research from this institute to invest in profitable businesses.  Chile used this institutional framework to start and develop its salmon industry, building on the experience of Norway, the world’s number one exporter of salmon.  The researchers tested whether salmon could thrive in Chilean rivers and lakes enough to be cultivated on an industrial scale.  After having exported no salmon in the 1970s, Chile was the world’s number two exporter of farmed salmon in 2010.

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In our last blog we examined the need for a new tax system in The Bahamas and gave an example of how value added tax, or VAT, would be calculated in practice.  

In this article we examine the experience of Barbados in its transition to VAT and look at how we can apply those lessons to The Bahamas.  Finally, we present an argument for why the tax discussion should ultimately be extended to include modest corporate taxes.

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Much has been written in the press recently on the need for a new tax system in The Bahamas.  Value added tax, or VAT, has emerged as the frontrunner to supplement or completely replace our system of customs duties.

In this first of a two-part article, we will examine why we need to change our tax regime in the first place, give an example of how VAT taxes work in practice and describe the basic structures that will be needed by both the government and private sector to make VAT work.

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Our present situation

As you listen to the various radio shows, none of us are prepared to take the blame for our present predicament.  Instead, we blame our financial institutions; they are the main culprits, according to some pundits and by nearly all persons who took out mortgages they could not afford, who now discover that the property is now worth less than they paid for it.  It is often overlooked that these financial institutions never forced anyone to buy or borrow.  Admittedly, some institutions made it extremely easy with no or minimal down payment requirements which were supported by inflated appraised values by the realtors; both with the knowledge that should one person lose their job in a household they could no longer honor their commitment.

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You cannot bring about prosperity by discouraging thrift.  You cannot strengthen the weak by weakening the strong.  You cannot help the wage earner by pulling down the wage payer.  You cannot further the brotherhood of man by encouraging class hatred.  You cannot help the poor by destroying the rich.  You cannot keep out of trouble by spending more than you earn.  You cannot build character and courage by taking away man’s initiative and independence.  You cannot help men permanently by doing for them what they could and should do for themselves.

– Abraham Lincoln

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By David Geraldo Frazer

Let’s be smart about debt reduction: Focus on growth

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CFAL, Third Floor, 308 East Bay Street, P.O.Box: CB 12407, Nassau, New Providence, The Bahamas. Tel: 242-502-7010