The Barbados economy remains stable, and we may be witnessing the beginnings of a slow recovery, but there is some distance further to the resumption of sustained economic growth. The economy recorded a balance of external receipts and payments in the first quarter of the year, and the Central Bank’s foreign exchange reserves increased by $3.8 million. Real output increased by an estimated 1.5 percent, stimulated in part by a 2.4 percent growth in tourist arrivals. The fiscal deficit was reduced from 9.1 percent of GDP in fiscal 2010/2011 to an estimated 5.4 percent in the fiscal year ended last month. This outturn is on target with the Government’s Medium Term Fiscal Strategy (MTFS), which aims to reduce the ratio of Government debt to GDP from fiscal year 2013/14 onwards. The rate of unemployment averaged 11.2 percent for 2011, and the inflation rate for 2011 was 9.4 percent, driven mainly by rising oil and food prices.
Real value added in the tourism sector is estimated to have risen by 5 percent in the first quarter, a combination of the increase in arrivals and an increase in the average length of stay. The pace of recovery in arrivals has slowed, with the Canadian and Caricom markets performing above 2011 levels, while the UK and US markets softened. The average length of stay for the first quarter increased from 4.7 days in 2011 to 5.2 days in 2012.
In the international business and financial services (IBFS) sector there was an 11 percent increase over last year in licenses renewed up to February, but new licenses granted during the first two months of the year were 37 percent fewer than those issued during the same period in 2011.
Net long-term capital inflows for the private sector were sufficient to cover external debt service, including $37 million in amortisation and $50 million in interest payments on foreign bonds and loans from international institutions. The current account of the balance of payments continues to be adversely affected by persistent increases in the prices of oil and commodities, and the deficit for the first quarter is estimated at 3.8% of GDP.
In the fiscal year just ended, Government’s revenues, expenditures and the fiscal balance were on target with the Medium Term Fiscal Adjustment Strategy. The MTFS is Government’s published strategy to reduce the ratio of Government debt to GDP over time, starting with a large contraction in the fiscal deficit for the last fiscal year. The Estimates of Expenditure for the fiscal year which began this month are designed to further reduce the deficit to 4.4 percent of GDP, with additional declines in future years until the budget is balanced in FY 2016/2017.
The fiscal deficits which are projected under the MTFS will be financed mainly by surpluses of pension funds, insurance companies and other domestic investors, at market interest rates which vary according to the maturity of the security. Foreign financing contributions will be mainly from international institutions, and the cost of servicing foreign debt will remain below 10 percent of foreign earnings for the remainder of this decade. The interest cost of the government debt is projected to decline from 21 percent to 19 percent of revenue by the end of the MTFS period.
The ratio to GDP of the gross government debt owed to the private sector is 74 percent, recalculated according to international guidelines published by the IMF last year (See Box 1). Over time, as the Government implements the MTFS, this ratio and that of the external debt to GDP, which is 29 percent, are expected to decline from the beginning of FY 2013/14. The declining ratios of debt to GDP indicate that the fiscal strategy is sustainable, and there is little risk of insolvency of the Government or the country in the foreseeable future, based on the IMF’s debt sustainability analysis.
The first issue of the Central Bank’s Financial Stability Report, published online in January, revealed a system that is stable, well capitalised, liquid and profitable, even though there was some deterioration of credit quality in 2010. Stress tests revealed no systemic weaknesses among commercial banks, insurance companies, large credit unions, or other entities large enough to pose a potential risk to the financial system as a whole. There was also no systemic risk exposure from financial linkages to the rest of the Caribbean, Canada and elsewhere. The resolution of the failed insurance company, Clico, has no implications for the stability of the financial system as a whole.
The economy is expected to grow by a little less than one percent in 2012, with the major contribution coming from tourism and construction, much of it tourist-related. In addition, several low-to-medium income housing initiatives are being undertaken by Government.
The current account deficit is expected to widen slightly, based on a projection of higher oil prices. Foreign direct investment in tourism-related projects is expected to be higher this year, with inflows for major projects such as the Four Seasons Resort, the Merricks Resort and Port Ferdinand. While some losses are projected, foreign reserves are expected to remain at levels that are adequate. The Central Bank and the fiscal authorities monitor the external accounts on a daily basis, with a view to timely fiscal and monetary action to protect the foreign exchange reserves as necessary.
In the medium term of three to five years, investment already underway in tourism-related projects creates additional capacity in the remunerative high-end of the market, as a basis for renewed growth. The tourism product is being further diversified, with the development of new markets and ancillary services, including initiatives to capitalise on the designation in 2011 of Bridgetown and its Garrison as a UNESCO World Heritage Site. In addition, new strategies are being initiated to enhance Barbados’ competitive advantages in the IBFS sector, to improve service quality and to take full advantage of the country’s leadership in the negotiation of double taxation agreements. Government is promoting greater use of alternative energy, and incentives for commercial and household use of alternative energy sources are being strengthened, with assistance from the Inter-American Development Bank (IDB). A strategy for the renewal of the agriculture and agro- industry is being developed. On the basis of these initiatives, the Central Bank projects sustained growth in the region of 2 to 3 percent for the Barbadian economy in 2015 and beyond.
Last year the IMF issued the Public Sector Debt Statistics – Guide for Compilers and Users, in association with the Bank for International Settlements, the Paris Club, the Commonwealth Secretariat, the OECD, the European Central Bank, UNCTAD, Eurostat and the World Bank. The Debt Statistics produced by the Central Bank have now been revised consistent with this guidance.
The Guide states “Institutional units controlled by government, that are legally established as corporations but are not market producers (i.e. they do not sell their output at economically significant price), are classified as part of the general government sector, not the public corporations sector.” (Page 7). The principal implication for Barbados of the adoption of the Guide has to do with the treatment of NIS. NIS falls within the “general government” sector by the definition just given, rather than being a “public corporation”, as per the previous Central Bank treatment.