Jan 2007 Financial News

Barbados economy drops slightly but still ranks high among the Americas

Jan 24, 2007

THE Barbadian economy has maintained its ranking among the top 30 countries in the annual Index of Economic Freedom, standing as the 28th freest economy in the world.

With a slight drop from its 26th ranking last year, the small island economy of Barbados has been described by the joint publishers of the report, The Heritage Foundation and The Wall Street as 70.5 per cent free.

The Index, released only a few days ago, has created a global portrait of economic freedom and established a benchmark by which to gauge a country's prospects for economic success.

The report highlights that the overall score for the services based on Barbados economy is 4.7 percentage points lower than last year, partially reflecting new methodological detail.

With respect to the region, Barbados is ranked 6th out of 29 countries in the Americas, and its overall score is well above the regional average. Barbadoss business freedom, property rights, and labour freedom all rate highly, as do financial and monetary freedoms, although to a lesser extent.

This global study explains that the business regulations are clearly laid out in commercial laws and generally followed, and are simple and not cumbersome. It describes the labour market as highly flexible and open. A focus on transparency levels the playing field for domestic and foreign businesses alike, though certain restrictions on foreign investment and moderately high taxes exist.

A strong legal system allows for the effective adjudication of business disputes, as well as a relatively low level of corruption and the protection of private property.

Despite a healthy respect for law and a relatively positive economic environment, Barbados does levy tariffs on non-CARICOM goods. Average tariff rates are similarly high, and non-tariff barriers are a hindrance to a more efficient flow of goods.

The 2007 Index places Business Freedom in Barbados at 90 per cent, with 100 per cent being viewed as the most free in the ranking. According to study, Barbados business climate makes starting, operating, and closing a business easy and free from burdensome regulation. The business environment which is created with transparent policies and effective laws have enhance competition and establish clear rules for foreign and domestic investors. The Company Act ensures flexibility and simplicity for establishing and operating companies in Barbados.

Trade freedom is only ranked at 47 per cent with the simple average tariff rate in Barbados standing at 16.5 per cent in 2003. The index highlights that the government requires permits, licenses or permission prior to importation and maintains restrictive sanitary and phytosanitary policies.

Consequently, an additional 20 per cent is deducted from Barbados's trade freedom score to account for non-tariff barriers.

According to the Index Fiscal Freedom in Barbados, it is among the highest in the region standing at 78.3 per cent. The report notes that Barbados has a high income tax rate and a moderate corporate tax rate.

The top income tax rate is 37.5 per cent, and the top corporate income tax rate is 30 per cent. Other taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 30.9 per cent.

Freedom from government as analysed by the experts who created the Index is 64.4 per cent. It describes total government expenditures, including consumption and transfer payments, as high. In the most recent year, government spending equalled 38.1 per cent of GDP, and the government received 5.1 per cent of its total revenues from state-owned enterprises and government ownership of property.

Monetary freedom is seen as high according to the experts who compiled this index placing the percentage at 76.5. Inflation is moderate, averaging 4.5 per cent between 2003 and 2005. Relatively moderate but unstable prices explain most of the monetary freedom score. Although prices are generally set by the market, an additional 10 per cent is deducted from Barbados's monetary freedom score to adjust for price control measures that distort domestic prices for basic food items and fuel.

For a country that is continually making strides to improve its investment climate and trying to make it easy for investment freedom, Barbados permits 100 per cent foreign ownership of enterprises and treats domestic and foreign firms equally; but the government is more likely to approve projects that it believes will create jobs and increase exports. Foreign investors can be subject to performance requirements. Central bank approval is required for both residents and non-residents to hold foreign exchange accounts. Foreign currency transactions and current transfers are restricted by quantitative limits. Exchange control approval is required for direct investment and real estate purchases, and the central bank must approve all credit operations.

Barbados Financial Freedom has been placed at 60 per cent and according to the study, Barbados has a smaller financial sector than other Caribbean financial hubs.

Commercial banking is dominated by foreign banks, including Canadian, British, and Caribbean banks based in other countries. Citicorp Merchant Bank initiated operations in 2001.

In recent years, the government has intervened in the domestic credit market to influence interest rates, restrict the volumes of funds and borrow funds. Domestic financing is generally restricted to Barbadians or permanent residents.

As of 2004, the offshore financial sector included over 4 500 international business companies, exempt insurance companies, and offshore banks. Legislation passed in 1998 tightened the controls against money laundering. The securities exchange is small, listing about two dozen local and foreign Caribbean companies in 2005. Sagicor, the largest local insurance company, controls 75 per cent of the eastern Caribbean market.

Source:
Stacia Browne
The Barbados Advocate
Wednesday 24th January, 2007

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