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CENTRAL BANK THIRD QUARTER REVIEW: Prospects in international business


CENTRAL BANK THIRD QUARTER REVIEW: Prospects in international business

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DURING THE FIRST nine months of 2016, the economy expanded by 1.3 per cent thanks to improvements in the tourism sector (three per cent), construction (five per cent), and business and other services (three per cent).

The average unemployment rate fell to 10.2 per cent for the nine months ending June. Inflation remained in negative territory, with the price index declining by 1.2 per cent.

Barbados ranks at number seven in the Americas in the competitiveness of our tourism. Ahead of us are the United States (US), Canada, Brazil, Mexico, Panama, and Costa Rica. A strength of the tourism industry is the fact that Barbados does not have an overreliance on any one market. Long stay arrivals increased by 5.7 per cent, with arrivals from the US up 11 per cent and the United Kingdom up three per cent.

The economic foundations of Barbados’ international business and financial services sector remain strong, but the sector faces a challenge because of the sentiment against globalisation in advanced economies. Data up to July indicates that the number of licences granted to international business companies declined by 7.5 per cent. In addition, a total of $67 billion in assets were held by international banks in June 2016, representing a 16 per cent decrease over a 12-month period.

Maintaining the value of our currency hinges on crafting fiscal policies that aid in dampening the demand for foreign currency. Government’s fiscal consolidation has assisted in the maintenance of a level of reserves that are above the 12-week benchmark.

The stock of foreign reserves at end-September stood at $900 million (14 weeks of import cover). In efforts to augment this stock of foreign reserves, fiscal policy was tightened in August, by means of a combination of additional revenue measures and further cuts in expenditure. There has been a significant improvement in the current account of the balance of payments, but the financial account inflows have been very weak.

The current account deficit was lower by 3.6 percentage points of GDP, almost entirely because of tourism. Fuel imports were down by 1.9 percentage points of GDP, with a fall in both prices and the amount imported.

Total generating capacity for renewable energy in September was 13 megawatts. By year-end, capacity will rise to 30 megawatts, or 12 per cent of installed capacity, with the addition of the Barbados Light & Power’s 10 megawatt solar farm.

The fiscal deficit for the April to September period is estimated to be $145 million on the current account. Accrued tax revenues are anticipated to increase by $13 million, with corporate taxes, property taxes, and excises increasing by $6 million, $14 million and $10 million, respectively. Small reductions in grants to state-owned enterprises ($5 million) and in wages and salaries ($8 million) were more than offset by a $34 million increase in interest payments because of rising debt levels.

Government’s financing needs for the period April to September were met by using $326 million from domestic sources. The National Insurance increased their investment in securities by $91 million and insurance companies and other non-bank investors provided $4 million worth of financing. In addition, there was an $84 million switch from foreign to domestic financing because of amortisation of foreign loans. The resulting money creation by the Central Bank financing Government was $114 million.

The pressure of Government’s ongoing cash flow needs is reflected in the failure to narrow the gap between the Barbados and US three-month Treasury bill rates, which remains at 2.81 percentage points. The gross public sector debt at the end of September stood at 108 per cent of GDP, while the net public sector debt ratio was 57 per cent.

Outlook: The Central Bank forecasts economic growth of 1.4 per cent for 2016. Growth for the next five years is expected to be in the region of two per cent per year, driven by our competitive, diversified, and highly regarded tourism sector. An 11 per cent increase in airline capacity is expected from the US and Canada for the coming tourist season. A pickup in construction activity is also anticipated, much of it tourism-related.

The combined effect of the August fiscal measures and revenues from the sale of the Barbados National Oil Terminal Ltd. is expected to reduce the Government’s deficit to the end of the fiscal year slightly above four per cent of GDP. A continuation of the process of fiscal consolidation should reduce the deficit below the rate of GDP growth in 2017. In subsequent years, the ratio should decline as Government updates the medium term fiscal adjustment strategy.

Barbados remains confident of the prospects of our international business and financial services sector, and officials of Government and Central Bank are actively engaged with international institutions and companies to find ways of resolving the current challenges. The prospects for value-added rum and other high quality exports and services are encouraging. The growth of the renewable energy sector has great promise for the medium term.

Significant improvements in labour productivity, including the more productive use of new technology, could substantially better the expected growth rates generated by the foreign exchange sectors.

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