Aug 2010 Financial News

Global recession still taking its toll on Barbados

Aug 16, 2010

THERE is no denying the fact that the Barbados economy still has its challenges from the prevailing global recession.

However, while the situation remains difficult there are some positives from the half year review by the Governor of the Central Bank of Barbados, Dr. Delisle Worrell and a subsequent assessment by Senator Darcy Boyce, Minister of State in the Ministry of Finance.

Following Dr. Worrell’s review in which he revealed among other things a one per cent economic slowdown, debate on the economy has intensified with calls for a Budget, expenditure controls, and a fiscal stimulus, to correct the economic imbalances.
Dr. Worrell outlined how the global recession was still taking its toll on Barbados, a point reinforced by Senator Boyce.

However, among the positives is the fact that tourism the main sector, has recovered somewhat to register a 3.1 per cent increase in visitor arrivals, although spending by visitors was down.

Another is the level of private capital inflows which both officials said had picked up in the first half although not to the level of pre-2007.

Considering that inflows had slumped badly in 2008, on account of the deep global recession, the pick up would seem to augur well for the future assuming that investors remained interested in Barbados’ real estate.

At $1.4 billion, foreign reserves were at a comfortable level even if they are based on foreign borrowing. And at 3.3 per cent (to March 2010) the inflation rate has moderated from the 8.6 per cent a year earlier.

Senator Boyce remarked that the foreign loan which the country had secured recently, as well as the subscription up of a domestic issue by local investors, represent a sign of confidence in the economy.

One of the challenges however, is to make sure unemployment does not get out of hand. The rate has inched to 10.6 per cent of the labour force and once the downturn persists, job losses could intensify.

Furthermore, while the fiscal deficit was lowered by two percentage points, at 8.6 per cent, it is still high.

Economic growth is anticipated this year, but there are some pressing issues ahead that could hamper an economic rebound. These are the likelihood of the USA economy slipping back into recession, continuing difficulties in the UK economy and the implications that holds for increased long stay visitors to Barbados, and stagnation in Europe. These countries are Barbados’ key global economic partners.

Another positive is that Barbados as of now, will not have to seek assistance from the International Monetary Fund (IMF). This position, outlined by government spokesmen, is an indication that the local authorities have the ability to handle the situation.

Like the current one, previous recessions dating back to 1973 have had devastating effects on Barbados. Lower economic growth, declining private sector output, a worsening government fiscal position, job losses and reduced inflows of capital, are examples to draw on.

In those of 1981/82 and 1991/92, the country sought IMF assistance to restore stability to the economy. The fact therefore this will not be the case in 2010 is a sign of the confidence the Barbados has in managing the present difficulties.

But what should be Government’s policy going forward? Would it follow the example of the UK Government. The new UK administration raised the VAT ( from 17 per cent to 20 per cent), and instituted a two-year wage freeze for public officers earning over £21 000, higher Capital Gain Tax. A bank levy will come into effect come January 2011. These measures are part of a broad strategy to lower a fiscal deficit of over 10 per cent.

Also would the American policy of no more fiscal stimuli but with emphasis on reducing the high USA fiscal deficit, offer some comfort to Barbados?

Both the proposed Budget and the fiscal stimulus are being ignored. This is because a stimulus can be counterproductive, especially given among other things the high fiscal deficit, the increasing debt it will incur and the threat to the existing parity. For its part the Budget while it would make sense, assuming its likely contents are revealed, seems unlikely in light of the medium term fiscal strategy being undertaken.

Policy therefore has to be cautious. There should be no hike in taxation since this is more likely to penalise consumers and economic sectors which are expected to ride the economy out the recession. Improved revenue collection is preferred.

The low interest rate regime must continue since because of its attractiveness to businesses wanting to invest. Tackling the high deficit must remain a priority and foreign exchange earning sectors ought to be given more support.

Government must go all out to ensure that those private sector projects like Four Seasons and the Pickering Development, and others in the wing, get going.

This global crisis is unlike anything before and while it is challenging, Barbados still has to conquer it.


Source:
By Jewel Brathwaite
Barbados Advocate
Monday August 16, 2010

http://www.barbadosadvocate.com/newsitem.asp?more=business&NewsID=12080