BARBADOS
1. RECENT ECONOMIC PERFORMANCE A. Overview Economic activity in Barbados was estimated to have grown by 3.4% in real terms during 2006 compared with growth of 3.8% recorded for 2005. Growth was recorded for all sectors except agriculture. Unemployment remained below 10%, while consumer prices continued to rise above trend, in part reflecting the impact of rising international oil prices over the last two years. Strong revenue growth led to a lower overall deficit of $24.6 mn on Central Government operations during the first nine months of 2006 compared with an overall fiscal deficit of $70.4 mn during the corresponding period of 2005. Reflecting the broad-based expansion in economic activities, the monetary liabilities of the banking system expanded by 6.7% or $219.1 mn during the first nine months of 2006. On the other hand, net domestic credit grew by 8.4% or $218.1 mn; consequently, net international reserves grew only marginally. Net international reserves had declined in each of the preceding two years by a total of $238 mn. B. Sectoral Performance Tourism A 2.2% decline in value-added from tourism activity in 2005 was reversed in 2006 by an estimated 2.5% increase in activity. During the first nine months of 2006 visitors arriving in Barbados by cruiseship declined by 11.5%, following a 21.9% decline during 2005. The impact of the decline in cruiseship arrivals on tourism activity during 2006, was outweighed by 4.1% increase in stay-over visitors. Continued changes by cruiselines to their routes as they adjusted to higher fuel cost, led to the decline in cruiseship arrivals. Stay-over visitors from all major markets rose during 2006, and those from the UK and the USA, the two largest sources, rose by 4.7% and 3% respectively during the first nine months of the year. Tourism remained important to the economy of 30
CDB Annual Economic Review 2006
Barbados and in 2006 contributed an estimated 12.7% to real GDP, compared with a contribution of 12.5% in 2005. Agriculture The area of land under sugarcane under cultivation declined from 6,464.4 hectares in 2005 to 6,108.5 hectares in 2006, contributing to contraction in sugar production of 11%, declining from 38,241.3 tonnes in 2005 to 33,701.7 tonnes in 2006. While output had increased by 11.3% during the previous year, that outturn was due to improved weather conditions as heavy rains had affected the harvest and restricted production during 2004. Value-added from nonsugar agriculture and fishing remained stable. The contribution of agriculture to real output stood at 16.2% in 2006 compared with a contribution of 21.8% during 2000. Manufacturing An increase in output of approximately 2.7% made 2006 the third consecutive year in which real growth was recorded in manufacturing activity since 2003. Growth in manufacturing activity averaged 2.7% annually between 2004 and 2006. In contrast, between 1998 and 2003, activity in the sector had contracted at an annual average rate of 6.2%, reflecting increased competition resulting from trade liberalisation. During 2006, manufacturing activity contributed an estimated 14.1% to GDP in real terms and in that year output of wooden furniture, petroleum products and processed foods increased, while the production of garments, beverages, and tobacco declined. Other Sectors Preparation for the hosting of matches in the CWC 2007 continued during 2006,and this,along with other private residential and public sector infrastructure projects, contributed to growth in construction activity during 2006. Activity in the construction sector, which contributed 11.4% to real output in 2006, grew by an estimated 2%, compared with growth of 13.5% during
Barbados
the previous year. Among other sectors, value-added from transportation, storage and communication grew by 8.1%;, the production and distribution of electricity gas and water increased by 7.1%, and value-added from wholesale and retail services rose by 5.3%. Output from business and other services including international business and financial services, activities which account for a significant contribution to employment, rose by 6.8% during 2006. C. Prices, Wages and Employment During 2006, price inflation continued to be above the trend, partly reflecting the continued impact of rising international crude oil prices over the last two years, although there was some evidence of domestically generated price increases, including the impact of a 3% surcharge on extra-regional imports imposed in September 2005 and an additional 3% surcharge on extra-regional imports levied in January 2006. Reflecting this, the consumer price index rose by 6.2% at the end of September 2006 from the position at the end of 2005. The index had risen by 7.4% during 2005. The indices for all major sub-categories, except for clothing and footwear, rose during the first nine months of 2006, while the index for food, which carries the greatest weight, rose by 7.5%. Public sector wage negotiations were concluded resulting in a two-year agreement that provides for a 7.5% wages increase in the first year and 2.5% in the final year of the agreement. The average rate of unemployment during the first nine months of 2006 remained virtually unchanged from 9.1% in 2005. D. Fiscal Policy and Debt Operations Strong revenue growth led to a lower overall deficit of $24.6 mn on Central Government operations during the first nine months of 2006. An overall fiscal deficit of $70.4 mn was recorded during the corresponding period of 2007. Revenue grew by 13.2% to $860.4 mn, compared with expenditure growth of 6.5% to $885 mn. The yield from the corporate income tax rose by 41.4%, or $48.2 mn over that during the corresponding period of 2005 and gave a major boost to tax revenue during the period. The rise in corporate tax receipts continued to be underpinned by strong activity in international business and financial services. Recurrent expenditure grew by 5.5% to $741.7 mn, a moderate expansion compared with the 15.4% growth in capital expenditure to $40.5 mn. Higher capital expenditure reflected the continuation of preparation for the hosting of matches in CWC 2007 and the commencement of other major public sector road infrastructure projects including the widening of the ABC Highway. Central Government debt
was estimated to have amounted to $2,466.7 mn (72.4% of GDP) at the end of 2006 compared with $2,540.1 mn (79.6% of GDP) at the end of 2005. Government debt service to revenue ratio was estimated at 18.5% during 2006, down from 20.6% a year earlier. It should be noted, however, that a not inconsiderable portion of public sector investment during the year was financed through public-private partnership arrangements, resulting in the capital expenditure not being shown in the government accounts. E. Financial Sector Reflecting the broad-based expansion in economic activities, the monetary liabilities of the banking system to the private sector expanded by 6.7% or $219.1 mn during the first three quarters of 2006. On the other hand, net domestic credit grew by 8.4% ($218.1 mn) and consequently net international reserves grew only marginally. Net international reserves had declined in each of the preceding two years by a total of $238 mn. The halt in the trend was attributable to the slower growth in net domestic credit,which had grown by 37.3% ($567.7 mn) in 2004 and 17.1% ($356.6 mn) in 2005, partly reflecting aggressive loan marketing by financial institutions. The slower growth in domestic credit may have been influenced by monetary and fiscal measures implemented during 2005 and 2006 to halt the decline in international reserves. Among monetary measures taken, the Central Bank had increased the minimum deposit rate at commercial banks in several steps from 2.25% in April 2005 to 4.25% at the end of September 2005. The monetary measures were supported by fiscal measures including a 6% surcharge levied on extraregional imports and implemented in two steps. Credit to the private sector grew by 8.1% during the first nine months of 2006 compared with growth of 24.6% during 2005 and 18.7% during 2004. F. External Sector The small overall balance of payments surplus reflected in the increase in net international reserves was underpinned by an improvement in both the external current account and the external capital account positions. During 2005, there was an overall payments deficit of $152.1 mn. A current account deficit of $206.7 mn during the first nine months of 2006 was lower than the deficit recorded during the corresponding period of 2005 by $42.4 mn. During the first nine months of 2006 imports fell by $64.3 mn while exports fell by $24.6 mn. The resulting decline in the merchandise trade deficit, along with a $61.4 mn increase in net travel inflows, were the major sources of the improvement on the current 31
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account balance. Imports of consumer goods declined by 11.9% to $374.9 mn during the first nine months of 2006 in contrast to growth of 16.4% during 2005, suggesting there may have been some success in the fiscal and monetary measures implemented to improve the balance of payments outturn. On the other hand, imports of capital goods continued to increase, moving by 16.7% to $249.1 mn compared with growth of 11.3% during 2005. The growth in imports of intermediate goods slowed to 0.4% compared with growth of 1.7% during 2005. Imports of intermediate goods amounted to $419.2 mn during first nine months of 2006.
2. PUBLIC SECTOR INVESTMENT PROGRAMME Several challenges remains to be addressed as Barbados seeks to sustain and build on the progress it has made in economic and social development since independence in 1966 and as it aspires to achieve developed country status by 2025. In pursuit of its aspirations, Government policy includes improving governance, building an inclusive society with opportunities for all, and accelerating the accumulation of social capital. Thus, enhancing the effectiveness of the education system, further developing the public health system, and eradicating poverty are important components of the policy agenda. The authorities are also committed to the protection, preservation and enhancement of the physical infrastructure, with particular attention to the natural environment and its scarce resources, as it seeks to advance social and economic development. Adequate water and energy supplies, a good transportation system, and the development and maintenance of sound infrastructure are deemed to be important for facilitating social and economic development. Further, given challenges with respect to the competitiveness of the agriculture and manufacturing sectors, Barbados has been paying particular attention in its development strategy to expanding more traditional services exports, such as tourism and international business, and to developing new services export areas, as culture and health, in an attempt to further diversify the economy. Public sector investment has an important direct and indirect role in facilitating social and economic development. Public investment spending over the medium term is expected to continue to support the attainment of the stated development objectives. The approved budgeted capital spending in Barbados for FY 2006/07 amounted to $150.7 mn compared 32
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with actual capital expenditure of $126.2 mn in FY 2005/06 and $111.8 mn in FY 2004/05. The approved budgeted expenditure for FY 2005/06 was $129.6 mn. Capital expenditure during FY 20006/07 included significant outlays on health and education services, road and tourism related infrastructure, environmental protection, and poverty reduction. Further, there was significant spending on preparation for the hosting of CWC 2007. In the health sector, much spending was focused on solid waste management, and on HIV/AIDS prevention and control, while the traditional high level of capital spending on education was maintained. Over the medium term, public sector investment is likely to continue to focus strongly on health care, education, and on improvement of road infrastructure, given the steady increase in the number of motor vehicles in the island. Additional spending is likely on the upgrading and renewal of country’s water supply infrastructure, on improving energy security, and on the transformation of the sugar industry into a sugar cane industry. Over the period FY 2004/05 to FY 2006/07 less than 20% of the Central Government capital budget was financed from external sources. Domestic financing was raised largely through debentures, bonds and treasury notes. External loan support was received from multilateral institutions including the World Bank, the IDB, CDB and the EDF.
3. MEDIUM-TERM ECONOMIC PROSPECTS Growth in economic activity is likely to be sustained during 2007. Tourism activity is expected to be boosted by the hosting of matches in the CWC 2007 during April.. Growth in construction activity is likely to slow somewhat during 2007 as much of the growth in activity during 2005 and 2006 was propelled by preparation by both the public and private sectors for the hosting these international cricket matches. Following the anticipated spurt in tourist arrivals during 2007, activity could slow during 2008, but subsequently modest growth in the tourism activity is anticipated to ensue as marketing efforts continue, and as efforts are made to secure a legacy dividend from CWC 2007. Continued growth in tourism activity along with growth in international business and financial services are expected to be the main sources for growth over the medium term. The performance of the agriculture sector will continue to be challenged by the decline in the level of preferential access for ACP sugar on the EU market, by the high cost of labour, and by the attractiveness of non-agricultural
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alternative uses for land, particularly for residential purposes. Forestalling further decline in agricultural activity will depend on the success of government plans to transform the sugar industry into a sugar cane industry, involving the expansion of the existing product line to include high-end sugars, rums, and biofuels, and to process output further into a range of final consumer goods for niche markets. Attention is also being paid to food security issues, and this is likely to limit the volume of arable land that is taken permanently out of agriculture in the future. Growth in commodity-based manufacturing activity will continue to be constrained by regional and international competition, and the focus is increasingly on niche production targeted at special markets. Unemployment is likely to remain below 10% over the medium term as growth in economic activity is sustained, while inflation is likely to decrease during 2007, particularly given the comments on rising prices
by an inceasingly vocal consuming public. A slowing in oil price increases during the second half of 2006 will result in an easing of inflation, as will the removal of the 6% surcharge on extra-regional imports. The overall deficit on Central Government operations is likely to be lower than the outturn in 2006 as capital expenditure will decline given the completion of preparations for the hosting of international cricket matches. Thus, even with good growth, government debt relative to GDP may fall further. The external current account position could improve over the medium term as travel inflows are expected to be boosted in 2007, and there is likely to be a slower rate of growth of imports after the end of the competition. The external account position may also be influenced by lower payments if recent trends in international crude oil prices hold steady or decline; and credit expansion will continue to be moderate if the Central Bank adheres to current policies aimed at protecting the reserves.
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