Slow road to recovery
Economy not out of the woods just yet, suggests Central Bank Governor
The latest report of the Central of Barbados is out.
In it, the Governor projects growth in the order of two per cent for the country by next year
He also has a timely warning of the need for greater fiscal adjustment.
Following is the full text of the Governor’s report.
Barbados remains among the most competitive economies in the Caribbean and Latin America, as reported in the Global Competitiveness Index 2014-15. Barbados continues to be ahead of its regional counterparts in the strength of institutions, development of infrastructure, the quality of health and education, the efficiency of our labour market, the development of our financial market, and our technological readiness.
Barbados’ growth strategy is private sector led, focused mainly on the foreign exchange earning sectors, and anchored on the peg to the US dollar. It is the strategy which has always worked for us. Furthermore, our growth is premised on increases in productivity, enhancement of the quality and appeal of our country’s products and services, and reforms aimed at improving Government’s facilitation of business.
The value of the Barbados dollar is being protected by measures to contain spending in line with foreign exchange availability. The fiscal measures to date have achieved the most important objective, to reduce the demand for foreign exchange in line with supply. As a result, the normal daily pattern of changes in foreign reserves has now been restored. At the end of September, the stock of foreign reserves was $1,066 million, equivalent to 15 weeks of import cover.
The tourism sector has begun to turn around. Arrivals increased eight per cent from the UK, the market which has always recorded the highest expenditure per tourist. Airlift from the US and Canada will increase by nine per cent and 20 per cent respectively, in time for the coming winter season. Tourism value added is estimated to have increased 0.1 per cent so far for the year.
Barbados continues to hold its own in the international business sector, on the basis of its reputation for sound regulation, good infrastructure and compliance with international standards. New products are under development, and new markets are being actively explored. However, uncertainty about the implications of new international guidance on the taxation of international companies has put a temporary brake on the expansion of our international business centre. The number of operating international business and financial services companies has remained virtually unchanged at 3,904 (a decline of 0.4 percent compared to 2013).
Exports of rum for the first nine months earned $61 million, $7 million less than for the same period last year.
Barbados has become increasingly price competitive in the areas of tourism and international business when compared to its peers in the Caribbean. This is highlighted by a steady decline in the indexes of price competitiveness since the early 2000s. Going forward, this trend is expected to continue, in light of the recently announced investments and other tax incentives in the tourism sector and the further development of the already extensive network of bilateral Double Taxation Treaties (DTAs) and Tax Information Exchange Agreements (TIEAs).
Foreign capital inflows have picked up, with private foreign direct investment, net of outflows, estimated at $399 million, compared with $173 million last year.
The take-up of solar electricity generation by households and businesses continues to accelerate, and it now appears that Government will need to raise the current limit on co-generation in the very near future. Installed capacity is approximately 6 Mwh, and is expected to quickly approach the revised limit of 9 Mwh.
Real output to September is estimated to be about the same level as last year. Unemployment averaged 13.2 per cent in the year ending in June, up from 11 per cent at June last year. On the other hand, the rate of price inflation was only 1.7 per cent in the 12 months ending in July.
The fiscal adjustment measures have reduced the deficit by 0.9 per cent of GDP so far this fiscal year. The measures already in place are forecast to yield an additional one per cent and a recovery of revenue is expected to yield an additional two per cent. Further revenue enhancement and expenditure adjustment equivalent to 2.0 per cent of GDP will be required in the second half of the fiscal year, to bring us to the target deficit of 6.6 per cent of GDP.
So far this year, the fiscal deficit of $360 million has been financed largely by a reduction in Government deposits with the banking system, to the tune of $235 million.
The remainder of the deficit was financed by the drawdown of the Government’s deposits at the Central Bank and by the NIS. An additional financing requirement of about $205 million is anticipated for the remainder of the fiscal year. Barbados’ net public sector debt at end-September was equivalent to 75 percent of GDP, up from 67 percent at the end of last year.
Financial institutions have seen a pickup in mortgages, but demand for all other private credit remains in the doldrums. There has been a modest increase in deposits, and much of this additional funding was used to purchase Treasury bills. The financial system remains sound, well capitalised and resilient to economic instability. Banks are gradually working down under-performing loans, and actual losses to financial institutions because of bankruptcies or foreclosures remain in the region of one per cent of total loans. However, bank profitability is low, and insurance activity has not grown.
The Barbados economy is firmly set on the path to sustainable growth, led by the sectors and activities in which we have a demonstrated comparative advantage over the competition, in terms of quality, productivity and the strength of the Barbados brand. Focused efforts are underway, with the assistance of international financial institutions, to raise the level of public sector performance. The Barbados economy is forecasted to grow by two per cent in 2015 and by 2.3 per cent in 2016.