The economy grew by over four percent in 2007: What are the projections for 2008 and which sectors are expected to drive this growth?
Calendar 2007 represented the sixth consecutive year of growth in real GDP and this expansion should persist into 2008. During the coming year, growth is expected to slow down somewhat to three percent to 3.5 percent with some weakening in both the traded and non-traded sectors.
The expected expansion in the economy in 2008 is more in line with the long-term trend for Barbados. None of the foreign exchange earning sectors is expected to achieve two percent growth.
The economic activity will therefore be driven mainly by the construction and distribution sectors and these will again spur expansion in utility usage, transportation, storage, communications and other services.
What impact do you think the declining US dollar will have on economic growth in Barbados given that the Barbados dollar is pegged to the US dollar at $2 to $1?
Since the Barbados dollar is fixed to the US dollar, the decline in value of the US dollar will not impact on trade and other transactions with the US itself. This is in Barbados’ interest since the US is Barbados’ leading trading partner. The fall in value in the US dollar, however, should encourage increased numbers of visitors from the UK and Europe since a holiday in Barbados would now be cheaper. Conversely, goods and services imported from the non-dollar countries will be more expensive. So that the net impact on the external current account will depend on the relative strengths of increased tourism expenditure and higher payments for imports.
Given the increasing likelihood that your major trading partner, the US, will go into recession during the year, how can new monetary and financial policies help to protect the Barbadian economy?
During 2007 a decision was taken to alter the way the Bank does business in two important areas. Firstly, as part of a package of financial liberalisation measures, the Minister of Finance decided that the Bank would be given the right to change its benchmark interest rate without reference to him. This initiative will enable the Bank to respond more quickly to negative trends in the macroeconomic environment by shortening the lag period associated with monetary policy.
The Bank is also seeking to rationalise its toolkit of monetary policy measures so that they are more focused on particular objectives and can deliver the desired results. To this end the Bank expects during the coming year to be able to rely more market related instruments in determining monetary policy measures. Open market operations which are already in use in some other Caricom countries are intended to make the financial sector more efficient by improving the quality of intermediation and channeling resources into their most productive use.
Barbados is also committed under the agreement which establishes the Caricom Single Market and Economy (CSME) to virtually liberalise its capital account for transactions with other Caricom countries. It is expected that such a move will attract additional foreign investment to Barbados. Concomitant with capital account liberalisation the Bank is co-operating with commercial banks to devise a monetary system which will still enable it to track foreign exchange flows. Such monitoring will, inter alia, help to identify speculative inflows which are potentially destabilising when they are reversed.
How is the country managing the inflationary pressures occasioned by the volatile petroleum and other commodity prices?
Policy options in this regard are limited since inflation in Barbados is largely determined abroad. To the extent that some of the price increases derive from institutional features and the structure of the distributive sector, the Government has already met with key players and agrees to reduce taxes on a range of consumer items. There has also been agreement in principle by major distributors to cut their profit margins. Moral suasion is being used to persuade consumers to rely more on domestically-produced goods wherever possible. In the case of petroleum products there are possibilities for conservation by modifying travel habits and the consumption of energy generally.
How is Barbados adapting to the on-going changes in the global environment with respect to: trade in goods and services, financial sector regulation; Basel II; anti-money laundering and countering terrorism financing, and auditing and governance standards?
The two sectors which are most affected by the trade liberalisation are manufacturing and agriculture. For more than a decade the Government of Barbados has been assisting entities in these sectors in adapting to the new trade rules. While the Government has sought to comply with the requirements of the World Trade Organisation (WTO) it has also provided manufacturing firms with incentives to purchase new plant and equipment and assistance with improving the quality of their products. In the sugar industry a decision has been taken to reorient production away from raw sugar towards special sugars (whose income elasticities are much higher) and ethanol for fuel. Simultaneously, efforts are continuing within the framework of the Regional Negotiating Machinery to get the WTO to reorganise the special needs of small developing countries.
In the area of financial sector regulation the Central Bank has taken the lead in ensuring that practices and legislation are up to international standards. This covers areas such as Basel II, corporate governance, liquidity and credit risk as well as business continuity. In this regard, the Bank has recently partnered with a regional entity in hosting a highly-successful seminar/workshop on operational risk management for financial institutions.
With respect to legislation, the Bank continues to issue guidelines pertaining to corporate governance, as well as anti-money laundering/financing of terrorism. During the last two years, necessary amendments were made to the Financial Institutions Act and the International Financial Services Act in order to make them more relevant to the financial services sector. In addition, work continues on preparations for implementing Basel II, including completion of guidance notes and training sessions for the industry.
Offshore banking and financial services have become an increasingly important source of foreign exchange and economic growth. But as competition increases and standards keep rising, what is Barbados’ strategy to remain competitive?
Barbados has a number of attractive attributes which can help it to remain competitive as a provider of financial services. First of all, it has a reputation as a stable democracy where there is the utmost respect for the law. It is very important to a prospective investor to be assured that there is little or no political and social risk associated with doing business in a country.
Secondly, as was mentioned before, the laws and regulations which govern the financial sector are best practice and in the few areas in which there are deficiencies there are on-going efforts to correct them.
Thirdly, Barbados has a large and growing number of skilled professionals who are highly competent in their respective fields. These include accountants, lawyers, wealth managers and tax and insurance specialists. They have helped the country to acquire a reputation for service excellence which is so important to clients.
Also important is the standard of living in Barbados which is similar to that to which the average North Atlantic investor is accustomed. The country is ranked as the world’s leading developing country by the United Nations. Its demographic and social indicators are similar to those in developed market economies and its spending on health and education ranks among the highest in the world for a small country. Investors from North America and Europe therefore feel more comfortable doing business in Barbados than in some other developing countries.
The CARICOM region offers a market of approximately six million people. Since the inauguration of the Caricom Single Market (CSM) in 2006 what have been the benefits to date for Barbados’ financial market?
There is little doubt that the inauguration of the Caricom Single Market has helped to deepen the financial market in Barbados. More regional companies are now listed on the local stock exchange, providing Barbadian residents with additional investment options.
There is also now more interest on the part of regional investors in investing in Barbados and a growing number of Barbadian nationals are keen to invest in the region. Inward investment clearly provides additional liquidity in the local market and this can potentially attract more participants. When Barbadian residents are able to invest in the region without restriction it will allow financial resources to fetch their most productive return, especially when high levels of domestic liquidity prevents this in the domestic economy.
Where do you see Barbados in the next 10 years?
At the end of the next decade Barbados should be well on its way to achieving the developed country status for which a deadline of 2025 has been set. It has already laid the foundation for this goal by building a stable democracy with political stability, high living standards as well as excellent physical and social infrastructure. Based on the wide-ranging economic reforms which have already been implemented, the economy should be in a position to raise the average annual rate of economic growth to around five percent, from the current three percent or so. A higher rate of growth, coupled with a change in the structure of production will enable the country to earn the foreign exchange which is so vital to economic diversification, job creation and continued improvement in living standards.
