||Central Bank Of Barbados
Uncertainty continues to cloud the outlook for the Barbados economy for 2021. The pace of the global economic recovery is expected to quicken this year and the IMF has recently raised its growth forecast, partly on the expectation of a revitalised US economy and the anticipated favourable impact of the vaccine roll-out across countries. Even so, significant downside risks remain and the global recovery is likely to be uneven. Of concern is the on-going uncertainty related to access to vaccines, particularly for small economies, and the limited policy space that some countries continue to have in dealing with the pandemic.
The Bank anticipates that following the sharp decline in economic activity last year, the Barbadian economy will make a modest recovery, growing within the range of 1.0 percent to 3.0 percent in 2021. This forecast for weaker growth than envisaged three months ago, reflects the impact of renewed travel restrictions in source markets, and the national pause in February that lowered economic activity more than expected during the first quarter of the year.
The eventual outturn for 2021 will be influenced in large measure by the country’s ability to contain the domestic spread of the virus and by the timing and pace of the resumption of activity in the tourism sector. As more individuals are vaccinated both locally and abroad, international air and cruise traffic is expected to resume gradually, boosting demand for ancillary services. The impact of the ongoing volcanic eruptions and resulting ash falls on growth is likely to be muted, but downside risks remain from future major eruptions.
The economy remains heavily dependent on tourism. To accelerate the recovery and facilitate market diversification, tourism planners will need to explore opportunities for targeting source markets that have a low incidence of the virus and/or high level of vaccinated citizens. The Welcome Stamp initiative has tapped into non-traditional markets and it will be critical to build on this as the sector recovers. This programme offers the potential of converting these visitors into repeat tourists and investors.
To boost medium term growth prospects, promote diversification and enhance economic resilience, structural reforms that are designed to facilitate the ease of doing business and improve competitiveness will remain critical. The shocks provided by COVID-19 and more recently the ash fallout from the eruption of the La Soufrière volcano, underscore the need to accelerate the transition to a digital environment.
The uncertainty about the speed of the economic recovery is likely to leave unemployment and under-employment at elevated levels. The re-opening of hotels, partly under the BEST programme, has eased the impact of reduced activity on employment and provided a partial safety net for some tourism services employees as unemployment benefits expired. Protracted unemployment or the reversal of the re-engagement of these employees will dampen demand further and place pressure on government to accelerate its public sector investment programme in an effort to drive the recovery.
In its FY 2021/22 Estimates, Government provided for a primary deficit of -0.3 percent. With the diminished level of economic activity and an expected fall in corporate taxes, revenue increases will not be sufficient to recover to FY 2019/20 levels. With the smaller primary surplus than originally programmed for this time, government will need to rely on the continued support of international financial institutions. The drawdowns are unlikely to remain as large as in 2020 and as a result, government will therefore need to continue to prioritise its spending.
The debt ratio will remain elevated because of the shock to economic activity. Government remains committed to attaining the targeted 60 percent debt-to-GDP ratio, but in the context of the lost GDP as a result of COVID, consideration of a new target date may be necessary.
The country has more than adequate buffers to meet its external obligations. However, the delay in the recovery of the tourism sector, weak demand for exports, rising oil prices and reduced external borrowing from the international financial institutions, are expected to prevent further accumulation of international reserves this year.
The low interest rate environment is expected to remain unchanged in the near term. Financial institutions were proactive in 2020, offering moratoria to their customers to dampen the impact on non -performing loans. While regular business operations are resuming, some further deterioration in non-performing loans is to be expected but the financial system should remain stable. Access to funding by small and medium-sized enterprises remains critical in avoiding increased insolvencies and the Bank will work with its licensees to create conditions for a soft landing, where feasible.