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The Barbados’ the economy is described as a small open
economy (SOE). ‘Small’ refers to the county’s inability to influence
the price it pays or charges when doing trade with the rest of the world.
In other words, Barbados is a ‘price-taker’ for both exports and imports.
‘Small’ also refers to the size of the economy in
terms of the relatively limited value of the total output and production of the
country when compared to other countries in the world. ‘Open’ implies
the extent to which a country is dependent on international trade in trade in
goods and services for the generation of foreign exchange. This is
especially important since it is also highly dependent on imports for all
aspects of its function and for the survival of the people of the country.
The country has a very limited resource base and this contributes
significantly to its high degree of openness.
The economy is usually looked at in terms of sectors.
These are the real, financial/monetary, public or fiscal, external, regional and
international sectors. The Central bank monitors these sectors and
publishes information on them quarterly and annually.
The real sector refers to those areas of activity that
result in the production of traded (foreign-exchange earning) and non-traded
(foreign-exchange using) goods and services. Construction, wholesale and
retail trade and the production of electricity and water are examples of
‘foreign-exchange using’ sectors, whilst tourism, sugar production and
International Business Services are foreign-exchange earning sectors. The
total value of output produced locally in this sector is commonly referred to as
the country’s Gross Domestic Product (GDP). The movement in the prices
of goods and services, along with the fluctuations in the level of unemployment
are also aspects of the real sector activity, which are monitored on a regular
basis by the economists of the Central Bank.
The financial/monetary sector includes all of the
activities of commercial banks and non-bank financial institutions, such as
trust companies, insurance companies and finance companies. These
financial intermediaries are regulated by the Central Bank in order to ensure
that they operate efficiently. Credit unions are also part of financial
sector activity, but are not currently regulated by the Central Bank. The
financial sector also includes Government’s activities in the financing of the
fiscal deficit which can be from domestic sources or foreign sources. In
order to have a stable financial sector close attention is paid to the
fluctuations in the overall levels of deposits and credit, liquidity ( that is
the amount of money) in the banking system, and the level of interest rates.
The public sector’s focus is on tax administration,
i.e. the imposition and collection of taxes, and the provision of goods and
services to the citizens of a country. Government’s revenue comes from
tax collections or from borrowing. Government’s expenditure then uses
these funds to provide hospitals, schools, parks, roads etc. and to pay salaries
to public workers and to make interest payments to its creditors.
Expenditures on Government’s capital works programmes (for infrastructural
development or maintenance) are also closely monitored because these
expenditures use valuable foreign exchange. In many instances, expenditure
is greater than revenue collected and this gives rise to what is known as a
fiscal deficit (where revenue is more than expenditure, we realize a fiscal
surplus). Running a deficit becomes dangerous when it becomes too large in
relation to the level of productivity within the economy. In Barbados, a
deficit of 2% or less of GDP is considered reasonable and manageable.
The external sector records the activities of the Balance
of Payments (BOP) of Barbados. The BOP can be described as a orderly
record of all transactions between the residents of the local economy and the
residents of the rest of the world. The BOP can be broken down into
1.
The Current account. This captures transactions of exports of goods and
services and imports of goods and services (the “Visible trade balance”) ,
the arrival of income or the transfer of money in the form of gifts or grants.
2.
The Capital and Financial Account. This records the movements in
Barbados’ foreign assets such as deposits overseas in Banks and foreign
liabilities, eg. in interest payments on debt.
The regional sector includes the economies of regional
countries, especially those that are members of CARICOM, of which Barbados is
also a member. Regional trade is important to Barbados and the integration
of economies is important if we are to realize the Single Market Economy (SME)
for the benefit of the region as a whole. As a result, careful monitoring
of the performance (growth trends) of regional economies is essential. It
is hoped that someday CARICOM member-states will share a common currency and the
possible benefits that will accrue. However, unless member-countries can
consistently achieve certain convergence criteria, optimism surrounding the
success of such a venture will be very little. Convergence criteria refers
to agreed standards of performance for each economy within the proposed currency
area. This should be reflected in the leading economic indicators.
The international sector, like the regional sector, has
grown in importance in recent times especially as globalization and trade
liberalization become more important. It consists of all the
extra-regional economies, particularly the major world economies such as the
USA, Japan, the countries of the European Union (EU), Britain, Canada, China and
Mexico and Brazil in Latin America. Economic events in any one of these
countries and even smaller countries, as the financial crisis in South-East
Asian countries showed, can impact on Barbados’ economy. Furthermore,
economic events in the United Kingdom and the USA, Barbados’ major markets for
tourists, do affect the number of arrivals from these countries, which in turn
affects the income earned from tourism. As countries of the world form
regional economic blocs to facilitate trade as well as to increase their ability
to influence the world economy, the monitoring of trading arrangements, in which
CARICOM-member states are directly involved, is of growing importance.
Thus, CARICOM’s relationship with the World Trade Organization (WTO) and the
EU (via the EU-ACP arrangement), along with current preparatory negotiations
leading up to the formation of the Free Trade Area of the Americas (FTAA) in the
year 2005, is closely observed. ACP refers to the economic grouping
consisting of those countries that were former colonies of Western European
countries and are situated in Africa, the Caribbean and the Pacific Ocean.
Among the actors or agents that participate in the
activities of an economy are:
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Consumers (individuals, households, firms and government)
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Producers (firms, government and individuals)
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Commercial intermediaries (wholesalers & retailers)
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Financial intermediaries (commercial banks, trust companies, finance companies,
insurance companies, credit unions, etc.)
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Government, and
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The Central Bank.
Consumers purchase goods and services, receive salaries,
wages or other payments and gain satisfaction from consuming.
Producers supply goods and services as well as
intellectual property, generally, with a view of making a profit.
They may also hire workers, i.e. buy their time and services, pay salaries,
wages or other payments.
Wholesalers purchase goods from foreign and local
producers and sell them to retailers. Retailers, who may also be in the
wholesale business, sell their goods to consumers. Wholesalers and
retailers, in most cases, store goods until consumers demand them.
Wholesalers and retailers earn revenue by placing a percentage mark-up on their
goods. They may also employ staff or independent salespersons to sell
their goods for them on a commission basis.
Financial Intermediaries are banks and other lending and
saving deposit institutions. They are essential as they assist
businesses to manage their personal financial transactions. They
receive deposits from individuals, firms and/or Government and lend these
deposits to borrowers, which may be individuals, firms and/or Government.
They also pay interest on deposits and charge interest on loans. Since
money transactions are the preoccupation of financial intermediaries, it is
important to know what money is. Money, in its most ‘liquid’ form,
consists of cash and demand deposits and is a medium of exchange (replacing the
barter system - exchange of goods and services only), a store of value (watched
over by the Central Bank) and is the most ‘liquid’ of all assets, the
fastest medium of exchange.
Government carries the overall responsibility for the
country and management of the economy. It is responsible for the creation of a
suitable economic, social and political environment that fosters sustainable
development of the people, business and the economy. To accomplish this,
it is responsible for drafting and amending (where necessary) laws.
As the representative and servant of the people, Government also manages the
country’s relationship with other countries so as to obtain benefits for the
nation, where possible. It also provides goods and services, such as
roads, schools, the hospital, clean air, fresh water, security and freedom,
education and health services, etc. to all other economic agents. In order
to do so, Government needs to generate and spend revenue. Its main source
of revenue comes from devising and administering taxes, some direct (on personal
income, business profits and property) and others indirect (on transactions
involving the transfer of goods, property and services).
The Central Bank assists the Government in maintaining
confidence in the economy. In particular, it looks after the health of the
financial system and carries the unique responsibility of defending the value of
the Barbados dollar. To achieve these objectives, it:
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develops and administers monetary policy,
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is a banker to Government (making loans, usually short-term, to Government),
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is a banker to commercial banks (acting as the lender of last resort),
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issues the domestic currency and redeems it,
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supervises the banking system, which includes registered offshore institutions,
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oversees and exercises limited control over the movement of foreign exchange
(i.e. imposes exchange control restrictions), and
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advises the Government on fiscal policy.
The responsibility within monetary policy includes:
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maintaining stable prices (keeping inflation low),
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setting the bank rate (Central Bank’s discount rate - price of loans - to
commercial banks, on which commercial banks base their interest rate charge on
customer loans),
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setting the
minimum deposit rate (on which commercial banks base their interest rate paid on
customer deposits).
More
About the Central Bank of Barbados
Now that we have looked at the
Economy and how it is structured let us read about the latest Economic
Press Release
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