Economy and Trade
The island of Barbados has been independent of the United Kingdom since 1966. Settled initially by the British in 1627, the island was seen as an ideal location for sugar cane production, with plantations being worked by slaves until the abolition of slavery in 1834. Post-independence, tourism and light manufacturing became more important than sugar cane, and by the 1990s their combined contribution to GDP outstripped that of sugar production. In recent years, some three-quarters of GDP and 80% of exports have come from services. The country enjoys one of the highest per capita incomes in the region. Offshore finance and information services are important foreign-exchange earners, and thrive from having the same time zone as eastern US financial centers, and a relatively highly educated workforce. The government has made sustained efforts to reduce unemployment, to encourage direct foreign investment, and to privatize remaining state-owned enterprises. The public debt/GDP ratio of about 80% is likely to widen as the government undertakes a more expansionary fiscal policy to combat the impact of the global downturn.
Economic Policy over 12 Months
The government relaxed fiscal policy following the global economic slump. The government focused its spending on helping to support key industries. The tourism industry, in particular, benefited from increased disbursements from the Tourism Industry Relief Fund. The government also increased spending on capital projects by around 1% in 2009. The government began the construction of an office complex, continued its road works and coastal infrastructural programs, as well as a housing program. Higher expenditure on wages and salaries and on transfers and subsidies accounted for a major part of the increase in public spending. In addition, expenditure on goods and services and debt service payments grew by 15.2% and 6.9% respectively.
However, the government is committed to substantially reducing the fiscal deficit over the medium term. With this aim in mind the government is in the process of rolling out a medium-term fiscal strategy (MTFS) for the period 2010 to 2014. The specific objectives of the MTFS are: to put Barbados’s public finances back on a sustainable footing; to ensure that a balanced budget is obtained by 2014–15 and a small fiscal surplus by 2015–16; to reduce central government’s debt/GDP ratio to close to 70% by 2017–18; to maintain an investment grade rating for Barbados; to provide a stable fiscal framework that will enable the government to better achieve national goals and development; to maintain macroeconomic stability through sustainable management of the fiscal deficit and debt; and, to increase productivity and international competitiveness.
The Barbados dollar has been pegged to the US dollar at the rate of Bds$2.00 to US$1.00 since 1975. This peg has provided a long period of nominal exchange rate and price stability, which have had positive effects on investment and growth. The Central Bank of Barbados cut the minimum deposit rate by 25 basis points in April 2008 to 4.5%, and further cuts were made in 2009. By the end of the year, the rate stood at 2.5%. Barbados banks, which are predominantly Canadian-owned, appear well-capitalized, according to the International Monetary Fund (IMF).
Economic Performance over 12 Months
According to an IMF mission which visited Barbados in February 2010, the island was severely affected by the global economic crisis. In particular, the mission added, the deep global recession curbed tourism, affecting related activities such as construction and trade which, in turn, depressed aggregate demand and raised unemployment. As a result, economic activity contracted significantly in 2009 after remaining broadly stagnant in 2008. The economy is estimated to have shrunk by more than 5% in 2009. In February 2010, Prime Minister and Minister of Finance David Thompson said that preliminary data suggest that the decline in tourism activity was due mainly to an estimated 11% fall in long-stay arrivals and this took place in spite of a 6% increase in cruise ship passengers.
The decline in tourism numbers has undermined the country’s international reserves. The crisis-related loss of foreign exchange from tourism is estimated to be US$170 million, and private capital net inflows fell by around US$465 million in 2009. Declining tourism-related projects, coupled with the tight credit conditions experienced internationally, brought a number of real-estate investment projects to a standstill, retarding activity in the construction and mining and quarrying sub-sectors.
In 2009 unemployment rose to 10%, but this was better than many had anticipated with forecasts that the jobless level could reach 15%. However, the slowdown had a positive effect on inflation, which fell to 3.1% at the end of 2009, from 8.6% at the end of 2008.
Less positively, the fiscal deficit widened during 2009 to an estimated US$564.6 million or 8.4% of GDP. This deterioration reflected a marked slowdown in revenue intake on account of the weakened domestic economy and increased government expenditure. Government expenditure rose by an estimated 3.4% in 2009, below the 14.1% increase in 2008. Prime Minister Thompson forecasted that the economy would grow by around 0.5% in 2010, with the recovery driven largely by an anticipated improvement in performance in both the traded and nontraded sectors.
Balance of payments pressures increased in 2009, despite a narrowing in the current account deficit. The IMF expected the external current account deficit to narrow from 10.5% of GDP in 2008 to 5.25% in 2009, reflecting a sharp contraction in imports. In the second half of 2009, foreign reserves were boosted by the SDR allocations (around US$90 million) and the successful placement in August of a US$120 million government bond abroad.
Support for Inward Investment and Imports
Invest Barbados is the body charged with encouraging and stimulating inward investment in the country, as well as managing the Barbados brand. There is no restriction on foreign ownership of businesses.
Barbados offers a range of tax-efficient vehicles through which investors can conduct international business. Contact Invest Barbados for details.
GDP growth: −2.8% (2009 est.)
GDP per capita: US$18,500 (2009 est.)
CPI: 5.5% (2009)
Key interest rate: 10.03% (December 31, 2008)
Exchange rate versus US dollar: Bds$2 (fixed)
Unemployment: 10.7% (2009)
FDI: 362.2 (BCB, 2003)
Current account deficit/surplus: −US$254 million (2007)
Population: 285,653 (July 2010 est.)
Source: CIA World Factbook except where stated