The fiscal adjustment package passed recently by Government provides a platform for the restoration of economic growth through incentives and business facilitation for the foreign exchange sectors, and through investment in infrastructure that will further strengthen the quality of Barbados’ tourism products. These measures include a reduction in the VAT for tourism services, additional financing for small and medium-sized hotels, support for two major hotel investments (Almond Resorts and Silver Sands Hotel), and promoting the Cruise Pier and Pierhead Marina projects.
The budgetary tightening is intended to improve the external accounts in the coming months, as economic agents adjust their expenditures downwards. In the interim, the foreign exchange reserves declined to $1 billion, a fall of $447 million since December 2012. However, reserve levels were adequate to cover contingencies such as this and the foreign reserve cover was 13 weeks of imports as at the end of September.
The main contributing factor to the foreign exchange weakness has been the decline in private foreign investment, from $473 million at September 2012 to $147 million at September this year. In addition, there were declines in foreign earnings from tourism, other services, sugar, beverages and chemicals. Retained imports rose by 8 percent, primarily the result of increases in the imports of consumer and some capital goods. Real economic activity fell by an estimated 0.7 percent, reflecting the decreases in output of both the traded and non-traded sectors. Inflation was 2.1 percent at end July and the average unemployment rate was estimated to be 11.1 percent for the first half of the year.
Tourism value-added is estimated to have declined by 2.1 percent, with long-stay arrivals down 6.2 percent, partly offset by an approximate increase of 2 percent in the average length of stay. There were declines in visitor numbers from all major source markets, the UK, the US, Canada and the Caribbean. However, cruise passenger arrivals were up 12.3 percent to the end of September.
At the end of September, the total number of active entities in the international business and financial services (IBFS) sector was estimated to be 3,990. During this period, new registrations totaled 334, on par with the corresponding figure for the same nine-month period last year.
Output of energy generated from alternative sources is gathering momentum, with approximately 4 megawatts of electricity currently being generated by solar power, double last year’s level. This level of energy output represents an estimated $3 million in foreign exchange savings so far this year.
With the fiscal measures announced in the Budget not yet in effect, third quarter government revenues continued to be weak. Revenues are estimated to have been $140 million lower than for the April-to- September period of 2012. Corporation tax receipts were down $59 million, and collections of VAT and personal income taxes each fell by $35 million. Expenditure was reduced, but by only $23 million, and the fiscal deficit widened by $117 million.
The main expenditure reductions were in grants to individuals ($13 million) and grants to public corporations ($12 million).
The net public sector debt-to-GDP ratio was 62 percent at end-September. Against the gross debt of $8.9 billion, the public sector holds financial assets of $3.5 billion, including $1.5 billion of deposits with the Central Bank and commercial banks, sinking funds and cash; $0.3 billion of external assets of the NIS, and $1.8 billion of foreign reserves and other foreign assets.
An assessment of the financial system over the first six months of this year, revealed the sector to be generally stable, with well- capitalised institutions. Liquidity continued to be high, and entities were generally profitable, though with lower profit margins. While credit quality declined further at banks, credit unions and non- bank financial institutions experienced no increase in their non-performing loans. For banks, the deterioration was mainly in the personal mortgage and real estate portfolios. Assets of insurance companies continued to expand gradually, even though both life and general insurance premiums have been falling. In June 2013, the Judicial Manager presented his final recommendations to the Barbados High Court in respect of a resolution of the CLICO insolvency.
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