The consistent economic expansion over the past 10 quarters demonstrates that Barbados is on a sustainable growth path. After increasing by 13.8 percent in 2022, economic growth is projected to moderate to around 4.5 percent in 2023 which still surpasses pre-pandemic levels. The upcoming winter season, bolstered by events and improved air access, is expected to be very good for tourism, although high ticket prices could pose a challenge. The increase in tourism will spill over to other sectors, including distributive trade and transportation. Major construction projects slated for late 2023 will also contribute to the economy's expansion and employment generation.
Forward bookings and increased seating capacity also bode well for the winter tourism season. The English cricket tour of the West Indies and the opening of the new Sam Lord’s Castle (Wyndham branded resort) Hotel are expected to boost demand for the destination in the upcoming winter season. Increased airlift into the island should bolster arrivals with the opening of a direct link to the Cayman Islands permitting more access from the United States. Airline ticket prices, however, are well above pre-pandemic levels and remain one of the downside risks to the full recovery in visitor numbers.
Inflation is expected to moderate in the medium term in line with recent international commodity price declines. Domestic inflation should fall to 5 percent or below by the end of the year given price declines in cereals, vegetable oils and dairy products. However, the contribution of crude oil prices to the slowing inflation rate for the remainder of the calendar year may not be maintained due to global oil production cuts by members of the OPEC+ grouping.
Risks to the outlook are balanced. Downside risks to the outlook include a possible slowing of growth for Barbados’ key trading partners and rising food and commodity prices. While the recent World Economic Outlook (WEO, October 2023) projects minimal risks to global growth from the China slowdown, a deeper-than-anticipated slowing in the Chinese economy could have significant spillovers to other advanced economies and by extension the Barbados economy via reduced capital and tourism flows. Similarly, heightened global geopolitical tensions (including an intensified Russia/Ukraine war and the Israeli–Palestinian conflict) along with weather-related shocks, could lead to higher inflation stemming from rising international food and commodity prices. More frequent and intense local weather events could dampen domestic food production and exacerbate inflationary pressures. Additionally, if global monetary authorities tighten interest rates in response to rising commodity prices, this action could weaken of global economic growth prospects. On the upside, lower air travel costs could strengthen tourism performance, further accelerating growth. An acceleration of the both the level and pace of investment, particularly by the private sector will lead to faster and more sustainable growth.
Barbados is well poised to maintain a strong external position over the medium-term. Continued improvement in the tourism sector will narrow the current account deficit. Foreign investment, particularly related to tourism, will also improve the financial account balance. However, imports are anticipated to increase given the continued growth in economic activity, thereby placing downward pressure on the current account balance and the accumulation of international reserves. The transition towards a fossil-free economy holds the key to supporting a strong build-up of international reserves over the longer term. Yet, absent any significant savings from renewable energy investment, gross international reserves are still expected to remain well above the internationally accepted benchmark of 12 weeks of imports of goods and services.
Government is on track to meeting its FY2023/24 primary balance target. The sustained growth performance bodes well for anticipated revenues for this fiscal year. Current efforts to modernise the tax administration system and reduce outstanding tax liabilities are expected to contribute to improved revenue collection. Concurrently, Government’s continued commitment to restrain expenditure within budgeted allocations signals a favourable end of year fiscal position. Efficiency gains from SOE reforms, continued improvements in the tax compliance monitoring systems, and enhancements in the tax exemptions framework will be pivotal in boosting the fiscal performance in the medium-term.
Public sector debt continues to be sustainable despite elevated global interest rates. The recent rating upgrade by Moody’s, the first credit rating increase from the agency since 2019, along with the improved outlook for Barbados’ debt by both Standard and Poor’s and Fitch, support domestic and international investor confidence in Government’s fiscal and economic framework. Government’s continued commitment to maintaining a fiscal position that supports the downward debt-to-GDP trajectory towards the targeted ratio of 60 percent by FY2035/36, should lead to further investment upgrades.
The financial system is expected to remain stable with capital and liquidity levels above prudential requirements. Credit growth is expected to increase during the last quarter of the year, with heightened demand for mortgages by individuals and increased borrowing by businesses to support further capital investments. Additionally, it is likely that deposit growth will slow further, as residents spend more and by extension, increase imports, during the last quarter of the year.
The responsibility to create new opportunities for economic growth rests with both the public and private sectors. Creating and maintaining linkages with the international community, leveraging investment opportunities with both traditional and non-traditional sources, continuing to maintain fiscal and debt sustainability, and building a climate-resilient country continue to be crucial keys to Barbados’ economic resurgence.
Reprinted from the Central Bank of Barbados’ Review of the Barbados Economy: January-September 2023.