Bridgetown -- Jan. 14, 2010 -- As was to be expected in a country that is highly dependent on tourism, the performance of the Barbadian economy in 2009 was worse than in 2008, by most indicators. The impact of the economic and financial crisis in industrialised countries showed up in a contraction of real output, a reduction of foreign exchange inflows and an increase in unemployment.

In addition, the fiscal deficit widened because of a decline in tax revenue, and Government borrowed both locally and in Trinidad and Tobago to finance the widening gap. However, the deficit on the current account of the balance of payments narrowed as a result of the fall in oil prices, which reduced import payments substantially.

The key to economic stability in Barbados is the maintenance of an adequate level of foreign reserves, and the Net International Reserves (NIR) of the Central Bank remained comfortably above the international norm for fixed exchange rate countries, thanks in large measure to capital inflows and an allocation of Special Drawing Rights (SDRs), which the IMF made to all member countries.

The projections for the Barbadian economy in 2010 are clouded by uncertainty about the pace and robustness of the recovery in the North American and European markets on which Barbados’ tourism and international financial and business sectors depend.

Although Barbados has a strong showing in the higher income segments, which should be among the earliest to recover, prospects are for a small decline in real domestic output in 2010, based on the international economic projections currently available from the IMF and other international organisations. Unless there is new borrowing, Government’s external debt may decline, because expected inflows from official borrowings are projected to be less than the amount to be repaid on a maturing market loan. The NIR is expected to be boosted by private capital inflows, as new projects
come on stream, although the current account of the balance of payments is expected to show no further improvement. However, Government will need to achieve a reduction in the fiscal deficit in order to avoid excessive pressure on the NIR, though any reduction will most likely be modest because tax revenues will remain depressed.

The
Impact of the Economic and Financial Crisis in 2009

The worldwide economic recession led to a broad-based contraction in output in the Barbadian economy in 2009, with virtually all sectors suffering adverse effects. Tourism receipts, remittances and private capital inflows into Barbados all declined, as global output contracted, international credit markets remained depressed and unemployment rose to double-digits in Barbados’ major trading partners. Moreover, the unanticipated depth and protracted duration of the crisis resulted in outcomes markedly worse than were projected before the crisis deepened in September 2008 (See Table 1).

Prior to the onset of the global economic recession, the Barbadian economy was forecast to slow to 1.8% in 2008 and then accelerate to 2.8% in 2009. However, it
turned out that Gross Domestic Product (GDP) stagnated in 2008, and a significant contraction of 5.3% is estimated for 2009. The crisis is estimated to have cost
Barbados almost 10 percentage points in economic growth over the two years. This in large measure reflected a drop in long-stay arrivals over the two-year period of roughly 13.3% below the initial forecast, and a 3.9% decline in cruise passenger arrivals over the two years. The poor performance of tourism depressed other major sectors of the economy, which provide services to the tourism sector.

The crisis-related loss of foreign exchange from tourism was approximately $170 million. This, coupled with an estimated shortfall of $465 million in private capital net inflows relative to initial forecasts, were the main factors in the estimated NIR shortfall of approximately $743 million, compared to pre-September 2008 expectations. However, foreign reserves were augmented by $232 million from a bond issue arranged by Scotiabank in the Trinidad and Tobago market, and by the allocation to Barbados of $170 million in Special Drawing Rights.

The Scotiabank bond issue helped to support a widening fiscal deficit that was substantially greater than pre-crisis forecasts. Because of the contraction in economic
activity, government revenue was about 10% (or $548.5 million) less than the initial forecasts. The growing deficit was compounded by a greater than anticipated expansion in Government expenditure, to the tune of $144.7 million, 2.5% more than expected.

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Source: Barbados central bank