The current state of the Barbados economy
The latest review of the economy from the Central Bank of Barbados (CBB) stated that real GDP in Barbados rose by 1.6% in 2016, compared to 0.9% in 2015, on the back of the tourism industry – long-stay arrivals rose by 6.3% for the year up to December 29. Industries connected to tourism – reflected in sectors such as transport, distribution, utilities, construction and other services – all performed modestly, and these performances contributed to a decline in the unemployment rate to 10.2% at the end of September 2016 from 11.3% at the same point of 2015. The story from the renewable energy industry was also quite promising, with the addition of a 10 megawatt solar photovoltaic farm. As a result of the improvement in economic activity and moderate growth in goods and services exports, the external current account balance improved.
Despite 2016 being the third consecutive year of real GDP growth according to the CBB, the Barbadian economy is still not out of the woods. In fact, it is probably in one of its most dangerous phases since the downturn began back in 2009. The foreign exchange reserves have dropped to 10.3 weeks of imports of goods and services – almost two weeks below the internationally accepted floor of 12 weeks – and the fiscal deficit remains high at a provisional 8.2% of GDP. The drain on the reserves has been caused by a severe reduction in net capital inflows – from $371.8 million in 2015 to $136.1 million in 2016 – while the government seems incapable of reigning in its current expenditure in line with the lower revenue collections. The CBB has been placed in the difficult position of printing money to finance the government’s operations, which has not helped the current low-confidence environment that is at least partially responsible for the fall in net capital inflows.
Policy debates have so far centred on devaluation of the Barbados dollar and/or entering into a financing agreement with the International Monetary Fund (IMF). Our view is that neither of these options would work without the supporting structural changes. Barbados is a net-importer of goods and has limited capacity to substitute imports for locally produced goods should the currency be devalued and imported goods become relatively more expensive. Devaluing the currency would simply make consumption more expensive in an environment where the population has little room to cut back. Already the levels of both personal consumption per capita and personal savings at banks and credit unions have remained relatively unchanged since 2014. For devaluation to work in this economy, the local production capacity would have to increase to such a degree that it seems almost impossible, even in the medium-term; at present, exports of goods represent a mere 16% of retained imports. Concessionary financing appears attractive, but when you consider that the IMF has been advocating for devaluation as one of its policy reforms, the luster starts to fade. Furthermore, the success of IMF programmes, when well-designed, hinges on timely and effective execution, and Barbados does not have a good track record in recent times when it comes to policy execution.
Barbados has to make some difficult decisions and commit to long-term structural change that is sustained beyond political cycles. Many of these changes are in the hands of the private sector. Yes, the government can improve business processes and take its role as a facilitator of business more seriously. We would all welcome more streamlined and transparent processes, with predictable turnaround times and efficient, productive staff. But the economy is the sum of the production of mainly businesses. If the economy is struggling, it’s because businesses are struggling.
Some have argued that Barbados is too tourism-dependent, so when arrivals are down, it affects too large a proportion of businesses in the country and makes the economy too vulnerable. Though there are some large, successful producers, the manufacturing sector is too fragmented, which does not lead to the economies of scale required to produce efficiently in most sub-industries. Agriculture has tremendous room for growth, but once again it may be too fragmented, which contributes to the acres and acres of idle land and inefficiencies that prevent strong, sustainable linkages with other large industries. Renewable energy has great potential for both reducing the amount of imported fuel as well as lowering the overall cost of energy, but the ability of this industry to propel the country out of its woes will hinge on the timing of investments. And the cultural industries, long lauded as the future of economies all across the Caribbean, are still too disorganized to even facilitate a reliable estimate of its size.
The short-term policy options can be boiled down to two interconnected themes: create some breathing room and raise confidence. In the public sector, government can reduce its deficit by reducing both the expenditure of state-owned enterprises and the government’s wage bill. Doing so should provide the government with the financial space to tackle its arrears and reform the entire public sector, both of which would go a long way to improving the public’s trust. Demonstrating that it is committed to fiscal responsibility would also assist with negotiations to gain low interest rates on any future debt.
The private sector is willing to lend its support and demonstrated this by its recently called for a return to active dialogue and cooperation under the Social Partnership. The Social Partnership is a series of protocols that commits the Government of Barbados, labour (represented by the Congress of Trade Unions and Staff Associations of Barbados) and business (represented by the Barbados Private Sector Association) to cooperating to develop the economy in the long-term interests of the country. The last protocol expired in 2013. A return of the Social Partnership would not only raise the confidence of residents, but could also assist the government with tackling arrears and ensuring a smooth adjustment of its wage bill.
But the devil is in the details and that’s where all planning discussions start to fall apart.