1. General Trends s1

BARBADOS

1. General trends

Barbados experienced a second consecutive year of positive if modest expansion, with growth of 0.5% in 2011 following the 0.3% achieved in 2010. The economy remained stable, with tourism arrivals increasing by 7% and growth in construction (4.4%) and transportation and communications (0.6%). However, the gains in tourist arrivals did not lead to increased output, in the sector, with growth of only 0.3%, causing the economy to remain subdued in 2011. The government’s fiscal consolidation efforts through its Medium Term Fiscal Strategy resulted in a reduction of the fiscal deficit from 7.4% of GDP in the period from April to December 2010 to 4.8% for the same period of 2011. Management of the public debt stock remained a high priority for the government in 2011, and the ratio of gross central government debt to GDP fell by 2.6 percentage points from 98.5% in 2010 to 95.9% in 2011. In spite of these achievements, the prospects for the economy in 2012 continue to be strongly linked to developments in the international economy and their concomitant effects on the performance of the tourism sector. Proposed new investments in luxury accommodation and measures to upgrade and expand financial regulations and the network of double taxation agreements with a view to bolstering international business and financial services offer encouraging prospects for further growth over the medium term. Growth is projected at 1% for 2012.

2. Economic policy

(a) Fiscal policy

The government’s efforts at fiscal consolidation continued in 2011 as it sought to enhance revenues and cut expenses while continuing to protect the most vulnerable. Since the Barbados fiscal year runs from April to March, data as of December represent the fiscal situation for the nine months of the fiscal year. Measures taken during this period, including an increase in the value added tax (VAT) rate from 15% to 17.5% and higher property taxes and import duties, resulted in overall tax revenues rising by 4.8% in 2011. At the same time, stringent control of public expenditure led to significant decreases in both capital expenditure and transfers to public institutions in 2011, with the former falling by 17% and the latter by 10% compared to the same period in 2010. As a result, the fiscal deficit for this period declined from 7.4% to 4.8% of GDP between 2010 and 2011. Even with these adjustments, the government extended some social protections to vulnerable groups by introducing a one-off energy grant for unemployed and elderly people to offset the significant increases in energy costs during 2011.

Tight fiscal policy also resulted in a marginal reduction of gross central government debt from 98.5% of GDP in 2010 to 95.9% in 2011. Because economic growth is expected to remain modest, however, the government has been forced to push back its balanced budget target to fiscal year 2016/2017.

(b) Monetary and exchange-rate policy

With the Barbados exchange rate fixed at BDS$ 2 to US$ 1 since the 1990s, the priority of the central bank continues to be the management of international reserves in order to support this exchange rate. Reserves fell by US$ 7.5 million during 2011 to end the year at US$ 709.95 million. While a 2011 International Monetary Fund (IMF) assessment indicated that the real effective exchange rate was close to 2 its equilibrium level, rising inflation was seen as a possible threat to the country’s competitiveness. Where monetary policy was concerned, efforts to manage liquidity and credit resulted in a further cut in domestic interest rates with a view to stimulating short-term credit growth. The average deposit rate had fallen slightly from 2.69% in 2010 to 2.65% by October 2011, while the average lending rate declined from 9.39% to 9.34% over the same period. This trend resulted in a spread between commercial lending and deposit rates of 6.69% in October 2011. At the same time, there was a marginal increase in the domestic 3-month treasury bill rate from 3.35% to 3.45% over the period, reversing the previous downward trend. Notwithstanding this overall decline in interest rates, the enduring sluggishness of the Barbadian economy limited credit demand, with non-financial private-sector credit falling by 0.29% between 2010 and 2011. Finally, although the government initiated amendments to the financial regulations affecting occupational pensions and benefits in 2011, the financial system remained stable and the capital adequacy ratio increased from 17.1% in 2010 to 19.3% as of September 2011.

3. The main variables

(a) Economic activity

Tourism, the main driver of economic growth, saw a renewed rise of 7% in long-stay arrivals in 2011. However, a 5.6% decline in average length of stay resulted in overall sector growth of only 0.3%, with the overall contribution of the sector to national GDP remaining at 12.3%. The strong growth in arrivals from traditional source markets in 2010 was tempered somewhat in 2011, with long-stay visitors from the United States and the United Kingdom increasing by only 5.5% and 4.4%, respectively, while arrivals from Canada contracted by 0.5%. A notable development was the launch of RedJet, a regional low-cost airline, which boosted arrivals from the CARICOM region. Trinidad and Tobago proved to be a significant source of growth, with an increase of 35%. However, following a rise of 4.6% in 2010, cruise visitors declined slightly (by 1%) in 2011.

The lacklustre performance of the tourism sector continued to affect business confidence, generating spillover effects in other economic sectors. The non-trade sector grew by only 1.2%, although this represented a marginal increase in the sector’s GDP contribution to 78.9% in 2011, with construction, business and other services, and storage and communications being the principal sources of growth. The financial services sector also grew slightly, with the number of international business and financial services companies rising by 3.8%. At the same time, both manufacturing and agriculture continued to decline in 2011.

(b) Prices, wages and employment

The inflation rate at the end of 2011 stood at 8.7%, a 2.9 percentage point increase from 2010. A 36% increase in international oil prices fuelled this rise, with higher rice prices (up 8%) also contributing to higher inflation. However, the sluggishness prevailing in the Barbadian economy resulted in the average unemployment rate increasing from 10.8% for the first three quarters of 2010 to 11.5% for the same period in 2011. Manufacturing and finance and professional services suffered the largest job losses during the period. At the same time, the Barbados Statistical Service reported that both unemployment claims and the average period of job search for the unemployed had increased. Under conditions of rising unemployment, the tripartite agreement on wages remained in effect with no change in the average wage rate. 3

(c) The external sector

While the current account deficit worsened in 2011, the overall balance improved owing to strong growth in net capital inflows. The current account deficit increased from 6.1% of GDP in 2010 to 7.9% in 2011. The value of imports rose to BDS$ 3.1 billion in 2011 from BDS$ 3.013 billion the previous year as a result of higher international oil and commodity prices. At the same time, travel inflows fell 6.3% to BDS$ 1.94 billion. These developments were mainly responsible for the increase in the deficit. The capital account was boosted by significant growth in net capital inflows, which totalled BDS$ 711 million in 2011, an increase of 38.9% over the 2010 figure. Real estate transactions (BDS$ 252 million) and the sale of Barbados Light and Power shares (BDS$ 188 million) were the main sources of private capital inflows. Although Barbados received a loan injection of BDS$ 140 million from the Inter-American Development Bank (IDB), loans of BDS$ 200 million in 2010 resulted in an overall decline in public sector capital inflows. Still, Barbados managed to maintain its foreign exchange reserves, with only a 1% decline between December 2010 and December 2011. International reserves were estimated at US$ 709.95 million at the end of 2011, sufficient for 3.5 months of import cover.

4. General trends (first quarter of 2012)

The slow economic recovery taking shape in the Barbados economy was sustained into the first quarter of 2012, as GDP grew by 1.5%, a relatively significant improvement over the annual growth rate of only 0.05% recorded in 2011. The main growth impetus continued to come from tourism with arrivals increasing by 2.4% during the quarter, and more significantly, the average length of stay moving up from 4.7 to 5.2 days. Together, these two factors resulted in a 5% gain in tourism valued added during the first quarter of 2012. The fiscal deficit also narrowed further from 9.1% in fiscal year 2010/2011 to 5.4% by the end of the first quarter of 2012. Inflation, driven by rising food and fuel costs and increased tax rates, remained high at an annualized rate of 9.7% at the end of March, while unemployment averaged 11.2% in 2011. Central government debt grew slightly to 73.9% of GDP at the end of the first quarter of 2012. Given the first quarter performance, the Barbados economy is projected to grow by 1% in 2012, with construction being the other main source of growth.

Apart from tourism and construction, international business and financial services (IBFS) also contributed to growth. The construction sector rallied by 3.4% in the first quarter of 2012 thanks to brisker activity in the housing sector and tourism-related projects; meanwhile, the IBFS sector retained its market share with an 11.3% increase in license renewals for the first two months of 2012 over the same period last year. Enhanced tourism performance also generated 2% growth in the wholesale and retail sector. However, manufacturing and agriculture remained depressed, with a projected decline of 7.5% for manufacturing during 2012 due to competition from inexpensive imports from China and losses of 4.1% for non-sugar agriculture due to unseasonable weather during the first quarter of 2012.

The current account deficit widened during the first quarter of 2012, compared with the same period in 2011 following a 4.9% rise in imports. Food and beverage imports were up by 6% while overall exports increased by 5%. Although net capital inflows declined in the first quarter of 2012 relative to the previous year, they were still sufficient to finance the current account deficit. International reserves also contracted by 3.4% in the first quarter of 2012 compared with the same period of 2011 . 4

With respect to the public sector, overall tax revenue for the 2011/2012 fiscal year 1 increased by 9%, while total expenditure decreased by 2%. Both current and capital expenditure also fell by 2% and 14%, respectively, and government debt grew by 2% compared with the previous year to stand at 74% of GDP. In spite of this development, the primary balance remained unchanged compared with the first quarter of 2011.

The financial sector recorded a 0.5% decline in domestic deposits at the end of the 2011/2012 fiscal year relative to the previous fiscal year. However, credit to the non-financial private sector increased by 0.3% over the same period. Excess liquidity also grew slightly from 9.6% in December 2011 to 10.9% in March 2012. Credit union loans expanded by 6.5% during 2011, while deposits grew by 8%. At the same time, private mortgages granted by commercial banks fell by 1.8%.

1 Note that the Barbados fiscal year runs from April to March. This figure therefore takes into account the first quarter of 2012.