Is the Balance of Payments Deficit Really a problem? A lot has been said over the past three years about Bermuda's balance of payments `problem', but a careful study of the situation begs the question -- is there really a problem at all? It is true that Bermuda has run up three consecutive multi-million dollar balance of payments current account deficits -- $52 million in 1989; $24 million in 1990; and about $17 million in 1991.

But this is not so surprising given the generally depressed state of the world economy. And the actual deficits amount to a drop in the ocean given the size of the Island's economy.

Mr. Malcolm Williams, general manager of the Bermuda Monetary Authority, which calculates the balance of payments figures, says there is no great cause for alarm.

"Of course we want our position to improve and we would prefer to have a continuing surplus, but the results over the past three years are nothing to be overly concerned about,'' he says.

"Compared with other jurisdictions, Bermuda is in a very enviable economic position. You only have to look around you to see that. It's important to keep that in mind when you're talking about an economic recession and thins of that nature.'' When Bermuda runs up a balance of payments deficits it can take several measures to rectify the situation, such as sell some of its assets to foreign concerns, as happened when land for the Ritz Carlton Hotel was sold for more than $20 million; borrow from a third party; draw on its foreign currency reserves or raise taxes on tourists or international business.

When, in the past, Bermuda has run up a deficit, Government has shown a preference for raising taxes over other forms of action, says Mr. Williams.

"The Government has said it will keep it's borrowing requirements down to a low level,'' he adds. `They've tended to raise taxes rather than go out and borrow.'' But in the February Budget, there was a change of tack when Government announced it was increasing its borrowing from $15 million for the 1991 992 fiscal year to a an estimated $56 million during the current fiscal year.

Unlike several other countries which have reached their borrowing limits, Bermuda's economy has been so strong that Government has no trouble proving it credit worthiness to lenders.

"Government has a certain borrowing ability and the Minister has announced that they will go out and borrow money,'' says Mr. Williams.

"Bermuda has the economic cushion of being able to borrow if it wishes.

"Some other countries have reached their limit and are having to make fiscal policies which are hard for the public to take. Bermuda has none of this.'' Balance of payment figures, which are calculated annually, are a systematic overview of Bermuda's foreign currency transactions. They are the country's equivalent of a household budget.

Having accurate figures is vital to assess precisely how well or how badly Bermuda's economy is functioning and, as a result, the BMA has taken great strides over the past two years to improve its method of calculation.

Balance of payments transactions are grouped in to two categories: current account transactions and capital account transactions.

Capital account transaction consist of capital outflows, such as investments by Bermudians in real estate abroad, and capital inflows, such as investments by foreigners in Bermuda and foreign currency loans to locals.

Most countries also maintain official reserve balances in the form of foreign currency, gold and, in some cases, special drawing rights (SDRs) with the International Monetary Fund, which can be drawn on when Bermuda has balance of payments problem.

Similarly, counties running up a surplus can build up foreign currency reserves or use them to expand the domestic economy, as Bermuda often did during its glory years in the 1980s.

The most important balance of payments figure for Bermuda, though, is that of its current account, which shows if the Island is making losing money in its day-to-day operations.

The current account figures show how much foreign currency Bermuda earns and how much is spends in seven all-encompassing areas -- merchandise (imports exports); shipping and other transportation; travel; investment income; professional management and technical services; other goods, services and income; and transfers of money.

The areas which affect the Island most significantly are the amount visitors spend here on travel, expenditure by Bermuda residents on imports, and income from anything to do with international business.

Despite 1991 being one of the worst years on record for many local businesses, Bermuda's balance of payments position actually improved compared with the previous two years.

If it has not been for one or two exceptional, non-recurring payments totalling around $25 million, the Island's current account would have shown a modest surplus instead of losing $17 million.

This encouraging performance was not as unusual as it would at first appear, says Mr. Williams.

The main reason for the improvement was that the amount of foreign currency Bermuda residents sent out of the country to pay for imports came to $459 million -- down almost 100 million on 1990 and even down $70 million on 1989 (not taking inflation into account).

"There was a tremendous difference in the amount spent on imports,'' says Mr.

Williams. "As well as this, costs associated with imports, such as shipping and insurance, also fell , by around $7 million.'' "One of the main reasons for less expenditure on imports is that people's ability to pay has been diminished because of the economic recession. also, people are tending more to think ahead. Rather than replace a car or washing machine today, they are waiting to see what happens tomorrow, when they may not even have a job.'' This reduction in import expenditure, which was good for the Island, more than offset the harm done by a decline in tourism earnings, which fell $36 million to $454 million in 1991, compared with $490 million in 1989.

As Mr. Doug Selley, the BMA's manager of financial services, puts it: "The propensity to spend has transferred over to a propensity to save in anticipation of leaner times.'' Mr. Williams adds: "Tourism has taken a hit but not as much as imports. Our import figure had gone down much more than our tourism figures so there's a net benefit.

"The balance of payments position has improved mainly on the back of improved import figures.'' On paper, Bermuda's second largest foreign currency earner, international business, has remained stagnant in terms of income, with receipts of $334 million in 1990. When inflation is taken into account, though, this represents a decline in earnings in real terms.

Mr. Williams says Bermuda needs to diversify its economy as much as possible to give it more stability and make it less reliant on one or two particular industries.

"Of course, we must encourage tourism and international business to diversify from within so that it does not depend too heavily on captive insurance.'' Mr. Selley adds: "We need to diversify our market more and become more reasonably priced.'' Bermuda has nothing to offer the world but the toil and ingenuity of its people, says Mr. Williams.

"Bermuda is a service industry with its tourists and international business,'' he adds. "To some extent, therefore, we are not the controller of our own destiny. We have no natural resources other than our entrepreneurial skills.

"We must make sure we continue to provide a good service. I believe Bermuda has a great deal of uniqueness to offer the world which we service.

"We must make sure we continue to provide a good service. I believe Bermuda has great deal of uniqueness to offer the world which we service.

"We have seen many Hong Kong firms move their legal base to Bermuda in recent years and also our banks are exploiting opportunities abroad and setting up in different jurisdictions.

`providing we can continue to give a good service and value, I've no reason to doubt our ability to overcome the world recessionary trends which we find ourselves in and, to some extent, import.

"Once that picks up, then Bermuda's economy will also pick up. We need to posture ourselves in order to take full advantage of recoveries as they come about in various parts of the world. There are signs that we are doing just that.''