Notes

Outline

Economic Review of 2002 & Outlook for 2003 Research Department

Format of the Presentation Review of the year 2002 Highlights Real sector Financial sector Public sector External sector - foreign trade & payments Outlook for 2003

Highlights of the Economy The Barbadian economy showed signs of recovery during the second half of the year. However, overall real GDP dipped slightly during the year. Decline in the net international reserves. Larger fiscal deficit than that of last year. High level of liquidity in the banking system. Low inflation rate. Marginally higher unemployment

Real Gross Domestic Product (GDP) Real GDP fell by an estimated 0.4%, as compared to a 2.8% decline in 2001. Traded sector output was down 2.2%, following a 7.3% drop a year earlier, As large contractions in tourist arrivals in the first two quarters overshadowed a pick-up in the last two. Activity in the non-traded sectors rose 0.4%, compared to a decline of 0.9% a year earlier.

Real GDP, Traded & Non-traded Sectors

Traded Sector: Tourism Tourism value-added decreased by 1.9% in 2002, compared to a decline of 5.9% in 2001. Long-stay and cruise arrivals were down 1.8% and 0.8%, respectively. However, the contraction was not as sharp as it could have been, due to a second half upturn in arrivals.

Tourist Arrivals (% Changes)

Traded Sector: Sugar Following a decrease of 14.7% last year, sugar production contracted by a further 10.0% to  44,818.7 tonnes in the 2002 crop season. Contributing factors were: Diminished acreage of cane planted. Drought conditions during the planting season.

Manufacturing (% Changes) Output in the manufacturing sector was flat, contrasting with a fall of 8.1% in 2001. This was partially attributed to benefits from: The “Buy Local” campaign. The 60% tariffs on selected imports. The food processing and miscellaneous manufacturing industries recorded growth, while the other sub-sectors contracted.

Manufacturing (% Changes)

Non-sugar Agriculture (% Changes) Non-sugar agriculture and fishing output decreased by approximately 3.2%, following a 6.0% contraction a year ago. Fish catches declined by 9.3% Milk production shrank by 6.8% Chicken production fell by 0.3%

Non-sugar Agriculture (% Changes)

Non-traded Sectors Non-traded output registered 0.4% growth during 2002, after contracting by 0.9% in 2001. Government output of services rose 3.1% to compensate for weak private sector activity. Construction declined by 3.6% as a result of reduced private sector building activity. Mining and Quarrying decreased by 5.4% due to a 10.7% decline in oil production. Wholesale and Retail fell by less than 1.0% because of the second-half upturn in tourism.

Inflation Rate (Quarterly) The rate of inflation for 2002 was negligible, compared to a rise of 2.8% in 2001. Declines were recorded in the retail prices of fuel and light, household operations and supplies, and clothing and footwear. However, there were moderately higher prices for food, alcoholic beverages and tobacco, housing, and medical and personal care.

Inflation Rate (Quarterly)

Financial Sector Domestic deposits expanded by an estimated 9.1% or $356.9 million, after a rise of 6.1% ($224.5 million) in 2001. This was spurred largely by: Weak demand for private sector credit. A draw-down of Government deposits at the Central Bank ($316.2 million). Capital gains by LOB shareholders following the sale to Mutual.

Financial Sector Abstracting from the incorporation of an offshore loan portfolio involving $147.3 million into the domestic system, commercial bank credit to the non-financial private sector contracted by approximately 0.6% ($16.3 million) during the year. This contrasts with an increase of 0.3% ($8.4 million) over the comparable period a year ago.

Commercial Banks' Domestic Deposits and Credit to the Private Sector (Quarterly)

Selected Indicators The excess liquidity ratio rose to 19.0% at year-end, up 8.3 percentage points from December 2001. The treasury bill rate slid to 1.51% by end-December this year from 1.97% at the end of 2001.

Selected Indicators (Quarterly)

Public Sector The overall fiscal deficit was estimated at $273.4 million (5.4% of GDP), compared to $184.0 million (3.6% of GDP) in 2001. Higher expenditure due to counter-cyclical capital expenditure and higher public sector wages and consumption. Lower revenue as a result of a decline in corporate tax receipts.

Overall Fiscal Balance

Public Sector Revenue Total revenue decreased by about 1.6%, following growth of 2.1% a year ago. Direct tax receipts fell by 8.4%. Property taxes declined by 9.5%. Corporate taxes plunged by 20.8%. Personal taxes rose by 3.7%. Indirect tax revenue grew by 0.3%. Import duties jumped by 23.6%. VAT increased by 2.9%. Excise taxes fell by 26.3%.

Current and Capital Expenditure Total expenditure rose by 3.2% over the period, compared with an 8.0% increase a year earlier. The 1.2% rise in current expenditure reflected a higher wages bill and increased consumption. counter-cyclical spending by Government pushed capital expenditure up by 20.8%. Net lending decreased by $19.5 million (94.9%).

Current Expenditure

Capital Expenditure

Change in Net International Reserves The NIR declined by approximately $83.1 million, compared to underlying growth of $145.5 million in 2001. This was largely due to declines in travel credits and domestic exports, as well as reduced long-term private capital and financial inflows. Nevertheless, at year-end the stock of reserves amounted to over $1.3 billion, representing: 35.2 weeks of goods imports cover 31.4 weeks of imports of goods and services

Change in Net International Reserves

Current Account The current account deficit was an estimated $246.3 million (4.9% of GDP), compared to $187.7 million (3.7% of GDP) in 2001. Domestic exports fell by 6.6%, following a 7.1% drop a year ago, as all the major categories of commodity exports contracted. Net foreign receipts from services decreased by 5.1%, compared to a 2.7% decline in 2001. This was attributed mainly to the downturn in the tourism sector, as travel credits fell by 2.4%.

Net Earnings From Domestic Exports and Services

Composition of Retained Imports Retained imports decreased by 1.9%, following an 8.2% decline last year. Capital goods imports recorded the largest contraction (4.0%), followed by imports of intermediate goods (2.7%) and consumer goods imports (0.2%).

Composition of Retained Imports

Capital Account The Capital Account registered a surplus of approximately $123.6 million, which was significantly below the surplus of $570.6 million in 2001. Net long-term private sector capital inflows were $157.3 million below the level last year The 2001 figure was boosted by Government borrowings of $300 million

BOP Current and Capital/Financial Account

Outlook for 2003  Assuming no external shock occurs (e.g. war on Iraq), real economic activity is projected to grow by around 2.0% in 2002. driven by continued growth in tourism, an improved sugar crop and modest growth in manufacturing. In the event of a war, real GDP growth could be constrained within a range of –1% to –2.5%, depending on the length of the war.

Outlook for 2003 The traded sectors are forecasted to expand by about 3.0%. Tourism activity is projected to increase by 5.0% over the year. (around -3%) The non-traded sectors should increase by around 1.6%.

Outlook for 2003 The average rate of unemployment should decline slightly, in line with increased economic activity. The inflation rate is forecasted to increase to around 1.5%. A US-Iraqi war might, however, give rise to higher oil prices and hence higher inflation of between 3.9% and 4.5%.

Outlook 2003 The NIR is forecasted to contract by approximately $49.4 million, compared to $83.1 million in 2002. However, under the assumption that there is a war, the predicted decline in the NIR rises to between $99.0 million and $165.2 million.

Outlook for 2003 A modest decline in the overall fiscal deficit to around 4.6% of nominal GDP is expected for 2003. However, the deficit could rise as high as 6.2% of GDP in the event of a war. The anticipated rise in private sector activity should help to increase Government revenue from corporate taxes and reduce the need for counter-cyclical spending by Government, provided that there is no war. However, the fiscal reforms outlined in the 2002 budget session will mean lower personal tax collections. The deficit is likely to be financed primarily from the domestic banking system.

Outlook for 2003 In the case of a return to growth, a modest pick-up in credit and a slowdown in the growth of domestic deposits are expected, which would lead to a reduction in excess liquidity over the coming year. However, under the war scenario private sector credit could decline sharply, thus offsetting the effect of the slowdown in domestic deposit growth. There would therefore be very little impact on liquidity.

The End Thank You