A recent Central Bank of Barbados review of the first nine months of 2002 shows an economy ready to rebound.
Following a decline in real gross domestic product (GDP) in the first half of 2002, the Barbadian economy is estimated to have made notable gains in the third quarter, brought about by an improvement in tourism, and, to a lesser extent, wholesale and retail activity. Nevertheless, over the nine-month period ending 30 September, real economic activity in Barbados is estimated to have contracted by 1.1%, compared to a 2% decline in the same period a year earlier. This outcome largely reflected the prevailing uncertainty in the international environment and weak domestic demand.
Commercial bank credit was also affected by sluggish demand, and contributed to the steady rise in excess liquidity during the review period. As a consequence of the weak economic outturn, the unemployment rate at the end of the second quarter was slightly higher than at June 2001.
The government was, however, able to use some of the liquidity in the system to finance its growing deficit, which was largely the result of a counter-cyclical expenditure policy, designed to boost economic activity. The generally poor performance of the foreign exchange earning sectors, as well as significantly lower capital inflows when compared to last year, led to only a modest rise in net international reserves (NIR).
Inflation remained low during the first three quarters, principally as a result of falling import prices and depressed local demand.
Although tourism added value in the third quarter, the overall tourism output for the first nine months contracted by an estimated 5.4%, compared to a 3.2% reduction for the corresponding period the previous year. With the exception of tourist arrivals from the US and Trinidad and Tobago, which recorded some growth, arrivals from most of Barbados' other traditional markets fell.
The agricultural sector continued to perform poorly. In addition to the decline in sugar production, output of non-sugar agriculture decreased by an estimated 2.5% during the first three quarters of 2002, due to lower levels of milk and chicken production as well as fishing.
The manufacturing sector, which was hard-hit by the effects of trade liberalisation, was helped in the first nine months of the year from the continuing `Buy Local' campaign, and from the 60% tariff imposed on selected imported goods. As a result, manufacturing output expanded by approximately 1.2%, in contrast to a near 10% decline in the corresponding period a year earlier.
Food processing and miscellaneous manufacturing were the two sub-sectors which recorded the most significant gains; the downside was represented by beverages, electronics and non-metallic mineral products.
Construction activity is estimated to have contracted by 5.6% during the review period, due to a fall in residential construction and the completion of large-scale commercial projects that had fuelled the sector during the past three years. This followed decreases of 2.9% and 0.4% in the corresponding periods of 2000 and 2001, respectively.
After shrinking by approximately 2.5% in the first half of 2002, the wholesale and retail sector is estimated to have picked up in the third quarter, as the sector benefited from the spill-over effects of improved tourism activity during that period. Consequently, the decline in distribution slowed to 1.2% in the first nine months of 2002, from a reduction of 1.9% in the corresponding period a year ago.
Transportation, storage and communications, as well as electricity and gas, are also estimated to have improved during the review period.
Despite an uncertain global environment, the international business sector was able to record an increase in the number of entities granted permission to operate during the first nine months of the year. Over the review period, the number of licensed international business companies grew by 197, compared to 187 in the same period last year. There were also six new licences issued to exempt insurance companies, up from two a year earlier, while permits to exempt management insurance companies rose to three from one for the same period in the previous year to three.
The number of licences issued to new offshore banks remained unchanged at four. In contrast, 15 societies with restricted liabilities were granted permission to operate during the year, compared to 18 in the corresponding period of 2001.
The rate of inflation continued to be low, and at the end of July was estimated at 0.7%, down from 3.5% at the end of July 2001. Those categories that fell were fuel and light, household operations and supplies, and clothing and footwear, while moderate price increases were recorded for food, alcoholic beverages, housing and medical and personal care.
The unemployment rate at the end of June 2002 was estimated at 10.1%, up marginally from the 10% recorded a year earlier. Employment in the general services and construction sectors decreased, offsetting gains in finance and business services, government and wholesale and retail. The female unemployment rate rose to 12.1% from 11.8% a year earlier, while the male unemployment rate fell to 8.1% from 8.3% over the same period.
The high levels of liquidity evident in the first half of 2002 continued into the third quarter, as the excess liquidity ratio was 18.8% at the end of September, compared to 15.3% at the end of June, and 11.4% at the end of the third quarter the previous year. These conditions encouraged intense competition for treasury bills, which led to a decline in the average discount rate to approximately 2.51% at the end of the review period from 2.71% at 30 September 2001.
The relatively weak domestic demand was reflected in a decline in commercial bank credit to the private sector. During the first three quarters of the year, private sector credit contracted by approximately $51.6m, in contrast to an increase of $22m in the same period in 2001. Reduced lending to private individuals and public financial institutions were the main contributors to the decrease, negating an expansion in credit to private financial institutions.
Domestic deposits grew by approximately $343.8m, following a rise of $220.9m in the corresponding nine-month period of 2001. The main reasons for this outcome were the government's drawdown of its special deposits at the Central Bank and a rise in the ways and means account, the proceeds of which were subsequently re-deposited by the private sector in the banking system.
The deposits by shareholders who sold their stakes in Life of Barbados Ltd to the Barbados Mutual Life Assurance Society also contributed to the growth in domestic deposits during the period. As a result, deposits of private individuals rose, along with those of financial institutions, and statutory bodies. Conversely, deposits of business firms contracted as a result of the lower economic activity.
The government's deficit widened to an estimated $174.6m over the first nine months of the year, up from the $130.2m recorded a year earlier. Total revenue decreased marginally by 0.2%, following an increase of nearly 2% in the same period of 2001, as a fall in direct taxes exceeded growth in indirect tax receipts. The 8% dip in direct taxes largely reflected declines in the collection of corporate and property taxes.
On the expenditure side, total spending is estimated to have risen by nearly 3% during the period January to September 2002, compared to an expansion of 6.3% in the corresponding period the previous year. Outlays on recurrent items inched up by 0.6% due to increases in goods and services (10.6%) and wages and salaries (0.5%), which reflected higher remuneration and rising public sector employment. On the flipside, transfers and subsidies declined marginally and interest payments contracted by 4.8% because of lower domestic outlays.
Capital expenditure, however, is estimated to have escalated by around 22.9% during the review period, partly reflecting the government's counter-cyclical expenditure policies, and compares with an increase of only 2.1% in the equivalent period one year earlier.
Financing for public sector operations came primarily from the government's deposits at the Central Bank and borrowings from the institution. At the end of the review period, therefore, funding from the Central Bank totalled $220.7m, in contrast to the previous three years when the government was a net depositor with the Central Bank.
Official holdings of foreign reserves are estimated to have expanded by $27.3m in the first three quarters of 2002. This compares to a rise of $137.9m in the corresponding January to September period a year earlier, and represents the smallest nine-month increase in the NIR since 1993.
Reduced earnings from tourism and domestic exports along with lower capital inflows were primarily responsible for this outturn, offsetting the effect of a reduction in imports.
During the review period, Barbados recorded a capital account surplus of $96m, compared to $170.9m in 2001. While net long term private sector funds of $75m were received for tourism-related projects and public utilities, this amount was less than half that for the comparable period a year earlier. The public sector also received a net inflow of capital to the tune of $17m in contrast to net outflows of just over $9m recorded for the same period in 2001.
Outlook for the rest of 2002 and 2003
There are signs that Barbados is beginning to emerge from the recession experienced over the past several quarters. However, the pace at which the Barbadian economy will emerge from this recession will be influenced, in large measure, by the extent of the uncertainty still characterising the international economy in the near-term.
In addition to trade liberalisation and globalisation, which have severely affected the manufacturing and agricultural sectors, Barbados could also be adversely affected should there be a military invasion of Iraq. This could have a negative impact on energy prices and the propensity to travel. However, in the absence of any serious global setbacks, output is expected to rise in the fourth quarter and real output for the year is forecast to decline by less than 1% in 2002, following the slump of 2.7% in 2001.
The recovery in tourism, which started in the third quarter of the year, is anticipated to carry on into the final quarter of 2002, as the sector should continue to benefit from the enhanced promotional efforts. As a result, the decline in value-added in the tourism sector for the year as a whole is expected to be about half the 5.9% recorded in 2001. The growth of the manufacturing sector during the first nine months of 2002 is also projected to extend to the rest of the year.
In the non-traded sectors, electricity, gas and water, transportation storage and communications, and business and other services are expected to record gains. Activity in the construction sector for the remainder of the year is likely to benefit from ongoing work on various major projects. Consistent with the pick-up in tourism towards the end of the year, activity in the wholesale and retail sector is also projected to improve by the end of the year.
In light of the anticipated increase in activity for the rest of the year, no further employment losses are expected. Inflation is also forecasted to remain relatively low, at around 2%. The fiscal balance is projected to climb to around $200m or just over 4% of GDP for 2002. Capital expenditure is likely to rise by around 20%, as work progresses on infrastructure, housing and educational programmes, while current spending is expected to rise by around 1% on account of higher wages and salaries.
Total revenue should also increase, though at a slower rate than expenditures, reflecting higher collections of personal taxes, VAT and import duties. Financing for the deficit is forecast to come from domestic sources, primarily through a further reduction in the government's deposits at the Central Bank.
The NIR is anticipated to fall by about $45m, following an underlying reserve increase of $145.5m in 2001. Lower export earnings, coupled with reduced public and private sector inflows, are expected to be the main contributors to the reserve loss. Liquidity is projected to tighten slightly towards the end of the year resulting from slower growth in deposits coupled with a modest expansion in credit, on account of greater spending by businesses and individuals.
The Barbadian economy is expected to return to its growth path in 2003, barring any global and other unforeseen impediments to real output. The increase in real GDP in the up-coming year is anticipated to be in the region of 2%, on the strength of traded sector activity, particularly tourism, sugar and manufacturing. The projected rise in real GDP, however, could lead to an increase in imports, which may result in minor reserve losses, despite an anticipated upturn in tourism receipts. Capital inflows are also expected to be somewhat lower in the following year.