Regional Economic Developments

In most regional economies, preliminary estimates indicate that real output contracted in 2009, reflecting the lagged impact of the global financial crisis and economic recession. 

Indications are that Belize, Guyana, Haiti and Montserrat recorded positive GDP growth in 2009.  Antigua and Barbuda and Cayman Islands recorded declines that were in excess of 5%, while the real output contraction among most of the remaining regional economies was between 1% and 4%.

The main features of the crisis to regional economies were sharply declining tourist arrivals and a fall-off in Foreign Direct Investment (FDI), which negatively affected investment in tourism-related construction projects; reducing output and employment in both the tourism and construction sectors.

In addition, the financial crisis adversely affected offshore sector activity in all major jurisdictions and threatened the soundness and stability of regional financial sectors. 

Generally, stay-over arrivals declined across the Region, with double-digit falls posted by most destinations, amid weak source market demand and reduced airlift.  This was also reflected in significantly lower visitor expenditure.  Conversely, cruise passenger arrivals have remained buoyant, with several countries reporting increases in excess of 15%. Available data indicates that the downturn in economic activity has been reflected in rising unemployment in most countries, particularly in the hard-hit tourism and construction sectors.

Inflationary pressures in the Region subsided during 2009 from their peaks in 2008, largely reflecting the fall-off in aggregate demand due to the crisis and the generalised reduction in international food and petroleum prices observed since the latter half of 2008.

The public finances deteriorated in most other regional economies, largely reflecting the impact of the crisis on already-limited fiscal space.  In some cases, salary increases, interest payments on accumulating debt stocks, rising transfers and subsidies, pre-election spending and/or fiscal responses to the crisis played a role in the resulting large fiscal gaps.  A significant decline in revenue, especially in those countries with narrow revenue bases, was also a major contributing factor. 

The outlook for regional economies in 2010 is largely predicated on the timing, pace and magnitude of the incipient global recovery, with recovery in the Region expected to lag behind that of the major world economies by a few quarters. In 2010, growth is expected to return, but the recovery of regional economies is not likely to take hold before 2011.

Collectively, those forecasts beg the question as to how is it possible for any entity or individual in Barbados to possess the secret formula for returning Barbados alone to prompt and total economic recovery.

The outlook for every other country in the world is hazy at best and unpredictable in the main.

Domestic Economic Performance

Barbados like other Regional economies is faced with a number of challenges occasioned by the Global financial situation and economic recession. The challenges strike at the very core of the domestic structure of the economy. 

The impact of the global economic recession on Barbados has been felt mainly in the real economy. The recession manifests itself in lower rates of growth;  decreases in foreign exchange inflows from tourism and other services; falling exports and remittances; and reduced private commercial financing and  direct foreign investments.

This scenario has generated lower levels of government revenue, a rising fiscal deficit, higher levels of unemployment and an increasing public debt.

Such developments place great strain on the social safety net and threaten to erode the considerable gains made by Barbados in poverty reduction.

Under the impact of external shocks, a significant contraction in GDP of around 5.3 percent is estimated for 2009. The nature of current economic conditions has led to broad-based contraction in output across virtually all sectors during 2009.

This economic outturn has in large measure been driven by a severe downturn in tourism activity which plummeted by 8.7 percent in 2009 following a 1.2 per cent decline registered in 2008.

Preliminary data suggest that the decline in tourism activity was due mainly to an estimated 11.0 percent fall in long-stay arrivals and took place in spite of a 6.0 percent increase in cruise ship passengers.

The contraction in tourism output, as expected, had a knock-on effect and severe declines in manufacturing and non-sugar agriculture were recorded at the end of 2009.

The recession-related loss of foreign exchange from tourism is estimated to be $170 million. This outturn, coupled with an estimated shortfall of $465 million in private capital net inflows relative to initial forecasts, were the main factors in a lower than anticipated NIR position. In the non-traded sector, lower tourism activity was reflected in the wholesale and retail sub-sector, transportation, storage, communication and other services, which all contracted for the first time in many years.  

In relation to unemployment and inflation, the position on these indicators during the reporting period was mixed. Although the inflation rate has moderated during 2009, falling from 8.6 percent at the end of 2008 to 3.1 percent at the end of 2009, reflecting a return to normalcy of commodity prices, I must also in the same breath report that the unemployment rate rose to around 10.0 percent, due to slumping domestic demand. Since then, I am happy to report, there has been a decrease in unemployment.

On the financial sector side, domestic deposits of commercial banks declined marginally during 2009. Credit accumulation was severely constrained by the great downturn in productive activity. Notwithstanding the relatively flat performance in credit and deposits, liquidity in the banking system continued to edge upwards. The excess liquidity ratio rose from 8.9 percent at the end of 2008 to 10.7 percent at the end of December 2009.

Following a similar trend to 2008, the fiscal deficit widened during 2009/10 to an estimated $637.4 million or 8.2 percent of GDP. This fiscal outturn reflected a marked slowdown in revenue intake on account of the weakened domestic economy. A projected slight decrease in expenditures was not enough to reverse this outcome. Revenues from VAT, which had increased at an average rate of 6.5 percent between 2001 and 2008, slumped by an estimated 18.2 percent in 2009/10.

This contributed to an overall reduction in tax revenues by approximately 9.4 percent. Despite the fall off in economic activity, it is projected that corporation taxes will increase slightly by $30.1 million, or 6.7 percent, while personal tax receipts will decline by $8.9 million or 2.4 percent. Revenues from import tax also fell by 16.0 percent in 2009/10, mirroring dampened domestic aggregate demand.

On the expenditure side, Government expenditure rose by an estimated 0.8 percent in 2009/2010. This slower rate of expansion in Government's spending can be attributed to a reduction in current transfers and capital spending by a projected 3.6 percent and 12.4 percent respectively.

Projections for 2010

Current projections suggest that in 2010 the Barbadian economy is likely to register a marginal growth rate of 0.5 percent.

These projections are in large measure however determined by the kind of recovery that will occur in our major source markets.

While any signs of a global recovery are welcome, your government acknowledges that there are a number of policy initiatives that must be continued in order to reposition the Barbados economy. In my view, the challenge facing Barbados is to protect employment and output, while at the same time enhancing the promotion of exports of goods and services, with a view to maintaining essential foreign exchange earnings in the light of a slowdown in capital inflows. Your Government remains committed to efforts geared at creating a new, efficient, productive and prosperous economy for all. 

This will pave the way for the complete transformation into the new Barbadian economy, which I envision by 2030, will be a fully developed and people centered society based on new development pathways.

Medium Term Fiscal Strategy 2010 - 2014

Your government is in the process of rolling out a medium-term fiscal strategy (MTFS) for the period 2010 to 2014 which has been circulated to the social partnership as well as the World Bank and IMF staff. This document was widely circulated more than 10 days ago - and therefore is no "secret" document that needed to fall of the back of a truck - is available for all to see, read, inwardly digest and comment on. This Fiscal Strategy constitutes one of our Government's key crisis management tools for the realization of a sustained recovery, adjustment and sustainable growth during this waning period of financial crisis and economic recession.

The Medium Term Fiscal Strategy 2010 to 2014, together with our Medium Term Development Strategy, also for the period 2010 to 2014, will lay the framework for sustainable growth. The Plans, through encouraging strong foreign exchange earnings, increased productivity and competitiveness, the creation of private sector jobs and greater social advancement, can achieve these goals.

The Medium Term Fiscal Strategy highlights the targeted policy interventions and strategies over the next five years that are designed to address the fiscal issues and challenges confronting the economy.

These issues and challenges point to the following:

• the growth of Government Expenditure: If this growth trend continues over the medium term, our primary fiscal objective of maintaining macroeconomic stability will be in jeopardy. It is therefore Government's intention to ensure that there is no further deterioration in the fiscal position. In particular, wages and salaries, along with subsidies and transfers will be closely monitored, as these constitute the largest expense to government.
• slowing of revenue yields/growth: This is attributed to the periodic declines being experienced during recessionary periods and a result of certain administrative and structural issues that have to be addressed such as Tax Collection and Tax Arrears. Over the last two decades the major revenue collecting agencies; the Customs, Inland Revenue and Land Tax Departments, along with the National Insurance Scheme as well as the Barbados Licensing Authority accumulated a high level of arrears. It is estimated that BDS$500.0 million (excluding NIS arrears) is owed in arrears. Of this total, an estimated $238.2 million is owed to the VAT Department and $114.5 million to the Land Tax Department. There is therefore an urgent need to collect this portion of the existing arrears and to minimise the accumulation of further arrears. In this regard, it is expected that the establishment of the Central Revenue Authority should result in an improvement in the collection of tax arrears, through reducing the cost to businesses of compliance, as well as improving the efficiency of tax collection procedures. 
• the sustainability of the fiscal balance: Since the 1990-1992 recession, the aim of government has been to ensure that the fiscal deficit did not exceed 2.5 per cent of GDP. This target was achieved in the ensuing ten years, except in 1996, 2001 and 2002. The fiscal deficit of central government reached a high of 6.4 per cent of GDP in 2002 and is estimated to have increased to 8.4 per cent at the end of 2009.
• the rise in public debt: Our percentage stands well above the 60.0 per cent rate accepted by the international rating agencies.
• Efficient implementation of the Public Sector Investment Programme: Our PSIP faces a number of administrative challenges that serve as a hindrance to the smooth implementation of projects.

For example, the long period between the conceptualisation, implementation and execution stages of projects not only delays the delivery of benefits to targeted beneficiaries but results in high real costs of project financing due to higher than expected transaction/administrative costs, accumulated commitment fees and inflation in  cost.

• the inefficient performance of a number of public sector enterprises.

For the most part, the operations of a number of public sector enterprises need to improve and to rely less on central government's scare resources. This must and can happen without reducing the service being provided to the public.

The Medium Term Fiscal Strategy outlines eight broad strategies to confront the above fiscal issues and challenges.

1) Expenditure Management

2) Revenue Management

3) Debt Management

4) Development of Public-Private Sector Partnerships

5) Divestment Policy

6) Public Enterprise Reform

7) Incomes and Prices Policy and

8) Financing and Management of the Public Sector Investment Programme.

The objectives:

• 1. enable Barbados to make the critical transition from crisis to recovery;
• 2. turn the page on an era of expanding fiscal deficits;
• 3. adopt a set of policies parameters, regulations and reforms to meet the needs of the 21st century global economy.

The specific objectives and targets of the MTFS are to:

• i. Put Barbados's public finances back on a more sustainable footing.
• ii. Ensure that a balanced budget is obtained by 2014/15 and a small fiscal surplus by 2015/16.
• iii. Reduce central government's debt to GDP ratio to near 70.0 per cent by 2017/18.
• iv. Maintain an investment grade rating for Barbados.
• v. Provide a stable fiscal framework that will enable the Government to better achieve national goals and the objectives of its Medium Term Development Strategy.
• vi. Maintain macroeconomic stability through sustainable management of the fiscal deficit and debt.
• vii. Increase productivity and international competitiveness.
• viii. Return real GDP growth to the sustainable annual average rate of approximately 3.0 per cent by 2012.
• ix. Ensure that Government's social policy objectives are not compromised in anyway that will jeopardised the social welfare and well-being of citizens, and the most vulnerable persons/sectors in the society.