Outlook for the Barbados Economy

Date: 7/29/2022
Author(s): Central Bank Of Barbados

Created 29 Jul, 2022
Categories General Press Release
Views: 1159

The domestic macroeconomic environment will continue to be affected by the global instability as the surge in global prices has intensified short-term growth challenges associated with the pandemic. The policy response of raised interest rates in industrialised economies has created fears of a new recession and the IMF has tempered its global growth forecast in light of this uncertainty. The continued strength of Barbados’ recovery remains dependent on a sustained revival of the tourism sector and the accelerated implementation of investment projects.

Forward tourism bookings for the remainder of the year are encouraging, as travellers reschedule their COVID-19 postponed trips. The anticipated opening of the Wyndham Sam Lords property is expected to boost demand towards year-end. However, significant downside risks remain. For example, the global price pressures, the impact of monetary policy changes on advanced economies as well as summer-travel bottlenecks could dampen travel demand. Changes in relative exchange rates in Barbados’ key source markets also have the potential to divert some travel away from the Caribbean while longstanding vulnerabilities associated with climate change remain.

In the circumstances, with new investment projects coming on-stream at a slower pace than anticipated and with construction costs rising, the Bank has lowered its growth forecast slightly, within the range of 9 to 10 percent, with the possibility of a stronger outturn if tourism is more favourable than currently forecast.

Given the island’s import dependency, high energy and food prices are expected to continue to impact domestic prices. The U.S. Energy Information Administration projects that average WTI crude oil prices will fall by approximately 6 percent during the second half of the year, while the Food Agriculture Organization of the United Nations predicts that food prices will remain at elevated levels throughout 2022.

A sustained rise in prices over time reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption. Given the erosion of purchasing power, those with less income feel it more. Lower-income consumers tend to spend a higher proportion of their income overall than those with higher incomes on necessities like food and they have less of a cushion against the loss of purchasing power inherent in inflation.  This erosion of purchasing power may result in lower income earners consuming less.  Reduced domestic demand creates the prospect for a fall in economic activity. This risk can be heightened where consumers in markets into which we export goods and services also reduce demand on imported goods. 

Rising costs may also have a significant impact on firms. For example, construction projects can be delayed, particularly if the conditions for access to or the cost of funding change materially. Price sensitive sectors like tourism and manufacturing, if faced with higher costs of inputs and lower demand for their products for prolonged periods, may attempt to reduce operating costs through staff layoffs. A loss in employment can lead to reduced demand and growth prospects. It has potential wide-ranging implications, including for the social security scheme if the weak demand is protracted.

As prices rise, Government revenues increase in the short-run given that the bulk of revenues are generated by ad valorem taxes. This inflation dividend is likely to be offset by increased government expenditure as the Government faces rising costs of goods and services. Where interest rates on debt are floating, the interest cost on existing debt will move in line with any upward shift in rates and new borrowing could also become more expensive. The upward movement in international interest rates as countries respond to the spike in inflation will raise Barbados’ interest costs by 0.2 percent of GDP for every one percentage point increase in rates.

Government has to balance its mandates to protect the most vulnerable in the society and to maintain economic stability. This is particularly relevant where there is a lack of fiscal space to engage in expansionary policies.

The Government of Barbados recently introduced a suite of measures to assist in reducing the cost of living. These measures include widening the basket of tax-exempted goods and reducing the cost of electricity and the cost of gasoline and diesel. These measures have been complemented by a private sector initiative to lower mark-ups on a select basket of goods which often form part of the consumption of the poor and most vulnerable.  This joint initiative provides relief while minimising the impact on the public finances.

The high global energy prices highlight Barbados’ vulnerability to external shocks and underscores the importance of accelerating the transition to a 100 percent renewable energy economy. Simultaneously, the supply chain disruptions, together with the spiral in food prices, emphasise the urgent need to address food security challenges. Regional initiatives to increase food production and improve transportation links remain pivotal in addressing this challenge.

The rise in import prices could have an impact on reserves in the short term, but the reserve buffer is adequate to maintain exchange rate stability. Moreover, as tourism and commodity prices return to a semblance of normalcy, reserves should remain adequate over the medium term. Over the past two years, multilateral financing has played an integral role in sustaining adequate international reserves levels amid turbulent global economic conditions and providing access to critical financing.  With the imminent end to the EFF programme with the IMF, government is in the process of evaluating its external financing options for the medium term so as to benefit from low cost funding while pursuing its medium-term debt anchor goal.

Achieving the targeted debt ratio requires Government to tighten fiscal policy over the medium term. This goal is expected to anchor the fiscal rules to which the Barbados government is committed as a means of instilling confidence in investors and creating a pathway to sustainable growth by freeing up resources for developmental spending.

In theory, there are different paths to the target for the primary surplus and the actual path chosen will ultimately be influenced by the expected growth of the economy in nominal terms and by the degree of access to new financing. As developments occur, government may need to adjust its primary balance from time to time. The debt trajectory path requires government to engage in both domestic and external borrowing going forward, but total debt levels will fall over the medium term as repayments exceed new borrowings.

The complex juncture we currently face requires a collective approach to restore economic recovery and ensure sustainability over the long-term horizon. Government’s ability to achieve a debt-to-GDP ratio of 60 percent by FY 2035/36, relies on intensified efforts to promote economic growth and attain higher primary surpluses.

In order to unlock Barbados’ growth potential, strengthening the private sector is critical. Greater access to finance for businesses with the potential of export diversification and improving the ease of doing business is needed. On the public sector side, expenditure management needs to focus on the capital works programme while reforms to state owned enterprises gather momentum and ease the pressure on government finances.

Copyright 2022 by Central Bank of Barbados