DO TOURISM RECEIPTS CONTRIBUTE TO THE SUSTAINABILITY OF CURRENT ACCOUNT DEFICITS IN BARBADOS

Author(s): LORDE, TROY; LOWE, SHANE; FRANCIS, BRIAN; (2010)

Created 26 Jul, 2010
Categories Working Papers
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Given Barbados’ recent history of persistent current account deficits and its reliance on tourism as a major source of foreign exchange and driver of the economy, this paper investigated the contribution of tourism receipts to the sustainability of Barbados’ current account deficits in the long-run. Utilizing the inter-temporal budget approach of Hakkio and Rush (1991) and Husted (1992), and the conditions outlined by Quintos (1995), we found that Barbados’ current account deficits were weakly sustainable as a result of tourism’s contribution. Without tourism, Barbados’ trade balance exhibited no indication of sustainability, underlining the island’s dependence on the industry. Due to our finding of only weak sustainability, a number of implications arise with respect to the vulnerability of the Barbadian economy to external shocks and the over-reliance on an increasingly vulnerable tourism sector. Careful and proactive measures should be taken to ensure that drastic changes to the economic framework of Barbados are unnecessary in the medium- to long-term. Policies must be put in place to lower deficit levels in the future and to reduce the over-reliance on a single sector. Indeed, further diversification of the Barbadian economy, and Barbadian exports by extension, should be at the forefront of policymakers’ thinking and discussions in charting a way forward for the island. Indeed, further diversification of the Barbadian economy, and Barbadian exports by extension, should be at the forefront of policymakers’ thinking and discussions in charting a way forward for the island. The EPA provides opportunities for such diversification. Efforts to slow down the growth in credit by the monetary authorities, as well as fiscal incentives provided by the Government for using credit for foreign exchange earning purposes are other avenues that should be explored.

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