Published On: Wed, Oct 31st, 2012

Review Of Barbados’ Economic Performance For The First Nine Months Of 2012

BRIDGETOWN (CBB) - The Barbados economy continues to grapple with the challenges posed by the protracted weakness of the global recovery.

Real economic activity is estimated to have been stagnant for the first nine months of the year, mainly because of the lacklustre tourism performance, particularly during the summer months. There was modest expansion in construction output and marginal gains in international business and financial services activity, but these were offset by lower estimated output in manufacturing and agriculture.

Reduced domestic demand contributed in part to lower retained imports, primarily of consumer and capital goods. This led to an improvement in the current account deficit of the balance of payments from 7.5 percent of GDP, to 5.4 percent. However, net capital inflows for the private sector were lower by $125 million than for the same period last year and flows for the public sector were down $8 million, contributing to a loss of foreign exchange reserves of $108 million. At the end of September, the foreign reserves stood at $1,312 million, representing around 16 weeks of imports of goods and services. The international minimum standard is 12 weeks.

Tourism value-added for the January-September period is estimated to have declined by 3.7 percent, following a contraction of 1.2 percent in the comparable period last year. While the length of stay of tourists has remained steady over the course of the year, the number of long-stay tourist arrivals has been declining since the second quarter. Barbados has lost airlift out of the US market and seating capacity from the UK has also fallen. With regard to cruise tourism, a 10 percent reduction in cruise ship calls in the third quarter reversed the gains in cruise passenger arrivals in the first half of the year.

The rate of increase in retail prices is slowing, mainly on account of the moderation in food and international fuel prices. The 12-month moving average inflation rate stood at 7.8 percent as at the end of July, representing a decline of almost 2 percentage points from the rate at the end of last year. In contrast, the average unemployment rate for the first half of the year rose by one percentage point to 12.2 percent, a reflection largely of job losses in tourism.

For the period April to September 2012, the fiscal deficit was estimated at 5.9 percent of GDP, compared to a deficit of 4.7 percent for the six-month period of the previous fiscal year. Total tax revenue fell by 2 percent, following an expansion of 11 percent one year ago, mainly because personal income taxes declined 13 percent, and VAT revenues fell 4 percent, compared to 2011. However, collections of property taxes more than doubled, representing an increase of $29 million, owing to the early distribution and payment of land tax bills.

Total expenditure rose by only 1 percent, because of higher domestic interest payments (up 4 percent) and transfers to individuals (up 13 percent). Capital spending was lower than in 2011. Almost all of the financing for the April–September 2012 fiscal deficit was sourced domestically. Commercial banks and private non-bank entities each provided 32 percent of the domestic financing, while 26 percent was sourced from the NIS. At the end of September 2012, the gross government debtto- GDP ratio stood at 79 percent, and the net government debt ratio, 60 percent.

Economic Prospects for the Remainder of 2012
Real economic output is forecast to rise marginally for the remainder of 2012, provided the winter tourist season does not disappoint. Moderate growth in construction is expected, with the continuance of both private and public building projects. Critical to the realisation of sustainable economic growth in the medium term is investment in the foreign exchange sectors to improve quality and non-price competitiveness.

It is anticipated that in the near term, weak demand growth in large economies such as Brazil, China, USA and Europe is likely to exert downward pressure on international oil prices. However, rising costs of production could heighten inflation fears in 2013 and beyond, as world demand is expected to rebound.

The foreign exchange earning sectors are not projected to expand significantly in 2012. Nonetheless, the current account deficit is forecast to be lower than last year, as long as international oil prices continue to moderate. Additionally, major on-going private investment in the tourism sector is anticipated to result in about $70 million in long-term capital inflows for the last quarter of the year.

Given the projected sluggish real GDP growth for the remainder of fiscal year 2012/13 and the likely negative impact on tax revenues, expenditure management remains the central focus of Government’s economic strategy going forward.

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