Barbados’ recent economic performance has been commendable given the unprecedented recession in the markets for our tourism and traded services.
The current economic recession in Barbados, which hit its lowest point in 2009, is the fourth since the mid-1970s. Previous recessions in 1981 to ’82 and 1991 to ’93 were deeper and more prolonged, even though the challenges faced then were nowhere as daunting.
Economic growth in Barbados is driven by the sectors that earn foreign currency. Small countries like Barbados specialize in the export of a few categories of goods and services that are produced profitably at prevailing international prices.
The foreign exchange earned is used to fuel economic growth, which requires a range of consumer and producer goods for which there are no domestic substitutes. The Central Bank of Barbados estimates the potential savings from additional import substitution at less than two per cent of imports.
The economy achieves a competitive edge by continuously increasing productivity, efficiency and the quality of final goods and services. Barbados’ economic growth is led by private investment in tourism, international business and financial services, and agro-processing (all net foreign exchange earners), and green energy, where there is potential for savings on fuel imports.
In each of these activities, the prices of Barbadian products are targeted at levels comparable to those of our competitors. To enhance international business and financial services activity, new markets are being explored in Latin America, Europe and the Far and Middle East.
In tourism, research is being undertaken for more focused and cost-effective marketing to complement the introduction of new products and services, such as sports, cultural and heritage tourism.
Barbados brings a number of competitive strengths to the international market. The country’s social and political institutions are stable, the labour force skilled and educated, the physical infrastructure good, and there are strong institutions for information sharing, discussion and democratic decision-making.
The Barbados brand is highly regarded in the key sectors of the economy. The financial regulatory systems are of a high standard, judged by the norms of the Basel Committee on Banking Supervision and other international regulatory bodies.
Government plays an important role in catalyzing investment in the private sector by providing incentives and infrastructure. Government has intervened to jump-start private investments in tourism, and is setting the example by investing in green energy production across the public sector; public investment in physical infrastructure continues.
In addition, emphasis is placed on labour market reform, public sector and institutional reform, and improvements in business facilitation by the public sector.
Supporting the currency
In the small open economy the maintenance of a credible exchange rate anchor is essential in promoting long-term investment that generates real growth and employment.
The Central Bank of Barbados protects the value of the currency by intervening as necessary on the interbank market. To do so convincingly, the bank must at all times maintain an adequate level of foreign reserves.
Up until April this year, Barbados’ foreign exchange reserves were the equivalent of 19 weeks of imports. By September, reserves had declined to a little over 13 weeks. In response, the Government took action to introduce a major budget correction in mid-August.
The measures included expenditure cuts equivalent to about three per cent of GDP, plus additional taxes of about two per cent. In December, additional measures, including job cuts in the public sector, were introduced to reinforce the effect of the August adjustments.
Projections are for a deficit equivalent to five per cent of GDP for fiscal year 2014/15, when the budget cuts will have full effect. Tourism-related investment will impart some stimulus to the economy in 2014, but this effect will be largely eroded by the fiscal contraction, and the forecast is for growth of less than one per cent.
Fiscal consolidation continues into the medium term, and the ratio of net public sector debt to GDP is expected to peak at about 67 per cent of GDP in 2015, and decline thereafter. The ratio of external debt service to earnings of foreign exchange is projected at eight per cent for 2014, and to remain at about ten per cent for the foreseeable future.
Dr DeLisle Worrell is governor of the Central Bank of Barbados.
