by Shawn Cumberbatch
Contraction has become a synonym for the Barbados economy.
It summed up the Central Bank of Barbados’ half year review released today, marked by a 0.6 per cent decline and no immediate signs of improvement.
Foreign exchange has dried up, Government spending continues to climb in an unsustainable fashion, revenue sources including tax receipts have shrunk, Governor Dr. DeLisle Worrell said today in a review which mirrored the contents of the recent national economic consultation.
As a result of the difficulties, the financial institution said the first course of action had to be reducing spending in the economy “so as to balance the inflows and outflows of foreign exchange”.
This should be followed by efforts “to revive economy growth, led by tourism, international business, agro processing and alternative energy”, Worrell advised.
The bank’s economic report card for the first six months of this year did not afford happy reading.
“The first half of the year witnessed a contraction in the main foreign exchange sectors — tourism and international business and financial services. At the same time, private foreign capital inflows were less than a quarter of the figure recorded in the same period last year,” the economist reported.
“Foreign exchange levels were relatively unchanged for most of the first three months, but weakened considerably during the second quarter. As a result, the foreign reserve cover fell from 19 weeks of imports as at March to 16 weeks at the end of June.
“Overall economic growth is estimated to have contracted by 0.6 per cent in the first half; the inflation rate is estimated at 2.7 per cent to June, and the rate of unemployment was 11.5 per cent at end-March,” he added. Based on the Central Bank report tourism and international business and financial services bore the brunt of the blame for the economic decline between January and June.
“Long stay visitor arrivals decreased by seven per cent for the first six months of the year and earnings fell three per cent. Declines in arrivals were recorded from all major markets — the UK, USA, Canada and the Caribbean,” the review stated.
“The average length-of-stay was higher by about four per cent, but airline seating capacity and hotel room occupancy rates were below last year’s levels.
“The number of new licenses issued to international business and financial services entities increased by eight per cent up to May, but renewals fell by 14 per cent. Measures to stimulate this sector included amendments to the tax structure and intensified marketing in Canada and Latin America.”
There also declines in exports, a factor which affected foreign exchange earnings.
“Exports of rum fell by 37 per cent and exports of sugar were down significantly in the first four months. Similar declines were recorded for exports of chemicals and other beverages. Activity in the construction sector declined by an estimated nine per cent,” Worrell noted.
Based on the review, however, Government’s big appetite for spending also significantly affected the economic performance, and was the cause of increased fiscal challenges.
“The operations of Central Government during the first three months of financial year 2013/14 resulted in the overall fiscal deficit widening to the equivalent of 9.4 per cent of GDP compared to 6.2 per cent in the similar period of financial year 2012/13.
The expansion of the deficit stemmed from both a continued weakening of the revenue base partly owing to the weak economic performance and a further expansion in current and capital expenditure,” Worrell said.
The challenge was made more difficult by the fact that there was no increase in revenue to match the higher spending, especially in the last three months.
“For the period April to June, 2013, total Government revenue is anticipated to fall by eight per cent, compared to relatively flat growth in the same period of financial year 2012/13. This decline in revenue was driven mainly by the reduction in tax receipts of seven per cent,” the governor stated.
“Personal income tax collections are projected to fall by 19 per cent, this decline is on top of a 17 per cent fall-off observed during the first three months of the last fiscal year, and partly reflects the adjustment of the effective income tax rates and threshold implemented in 2012.
Corporate tax receipts are expected to remain relatively flat compared to an expansion of $12 million in the similar period of the last fiscal year. Indirect taxes are projected to decline by six per cent as the expected reductions in VAT receipts (nine per cent) and excise taxes (10 per cent) are anticipated to outweigh a modest increase in import duties (five per cent),” he added. [email protected]