Barbados fought hard to withstand the financial challenges of the last few years and is now set to take advantage of a healthy economic and regulatory environment. James Eedes reports.

The Barbados Tourism Authority describes the country thus: “An island of unspoiled charm and sophistication, alive with possibilities as boundless as the turquoise sea and endless as the sandy shore. Wake up to the rhythm of the tropics and paradise to explore.” Little wonder that the island is a magnet for sun-seekers and a favoured stopping place for Caribbean cruise liners.

Tourism is the biggest source of revenue in Barbados. No less important, however, is the international business and financial services sector, drawn by the appeal of low taxes, supportive legislation, effective regulation, a wide network of tax and bilateral investment treaties and a cadre of highly qualified professionals. This mix of attractions earned accolades from the United Nations Conference on Trade and Development (UNCTAD), which identified Barbados in 2002 as one of the leading exporters of computer information, insurance and financial services among developing countries.

Government support to these sectors, and the rest of the economy, meant consistent growth in the 1990s, improving macro-economic conditions and a fall in the unemployment rate. In the second half of the decade there was average growth of 3.6% per year, driving this small economy – with just 266,000 inhabitants on 166 square miles of land – to a GDP of more than B$4bn ($2bn).

Trouble in paradise

But the new millennium brought trouble to paradise: an ominous mix of factors revealed the island’s vulnerability. Most worrying was the move by the Organisation for Economic Co-operation and Development (OECD) to target what it deemed harmful tax competition. Barbados had to fight hard to protect its right to set low tax rates, at the risk of being placed on an international blacklist of countries offering domicile to companies that want to lower their tax liability in their country of primary activity. Even now, having seen off this challenge, Barbados is increasingly mindful that low tax jurisdictions are under scrutiny. At the same time, the offshore financial services sector was being forced to weather the global economic slump that brought a decrease in capital flows.

Elsewhere, Barbados’s tourism sector felt the pinch as global tourism numbers dropped following the 9/11 attacks in the US in 2001.

Today, economic liberalisation, in particular trade and financial liberalisation, is also causing disruption as the country moves to meet its commitments under World Trade Organization rules and other treaties. The erosion of trade barriers is showing up the competitive weakness of the country’s domestic manufacturing sector. The economy has felt the full brunt.

Island-specific problems

These factors are compounded by problems that are specific to small island developing states. Among these, Barbados is constrained by its size, remoteness from markets, vulnerability to exogenous economic and financial shocks, a highly limited internal market, lack of natural resources, heavy dependence on imports and limited commodities, depletion of non-renewable resources, migration and its limited ability to reap the benefits of economies of scale.

However, the government is far from idle. Prime minister Owen Arthur has set 2005 as the target date for the economic structural transformation of the country. At its core is the goal of establishing Barbados as a successful, modern, diversified economy that is resilient enough to withstand any negative impact of external forces. It involves ongoing development of the country’s international business and financial services sector, in particular enhancing the integrity of its jurisdiction in anticipation of new challenges.

The government has also recognised the imperative of attracting investors to sectors other than tourism. High value-added sectors, such as information technology (IT), are being targeted. The government has rolled out comprehensive computer training courses, starting at primary school level. Sharing the same time zone as the eastern seaboard of the US, Barbados is able to offer outsourced IT solutions to companies that are looking for a low cost operating environment and highly skilled workforce. Call centre operations have shown keen interest, exploiting an already sophisticated and robust telecommunications infrastructure.

“The government remains committed to its vision of transforming Barbados into a country that provides high quality services to the international market, that acts as a hub for the Caribbean and a convergence point for business facilitation in the Americas,” says Mr Arthur.

Progress has been the spin-off of political stability. Barbados is the third oldest parliament in the British Commonwealth. At the same time, a pragmatic openness to engaging the rest of the world has fostered a climate that is friendly towards inward investment.

An improving picture

There are encouraging signs that the country has turned the corner. Economic data for the first half of the year show the economy is running along a gradual path of recovery, with a further improvement in real output and continued low inflation.

Economic activity rose by an estimated 2.4% on an inflation-adjusted basis during the first half of 2003, reversing the decline of 2.3% in the comparable period of 2002. Growth was recorded in both the first and second quarters of the year, with the second quarter expansion being boosted by an increase in tourism.

The country is not completely out of the woods, however. The 2003 sugar crop – the main agricultural commodity – was down 11.6% on the previous year, the result of drought conditions and operational problems at processing facilities. The manufacturing sector was estimated to have shrunk by 0.9% in the first half of 2003 – hardly dramatic but symptomatic of brittle business confidence and the impact of trade liberalisation. The Ernst & Young Caribbean Business Outlook Survey for 2003 revealed that only a little more than a third of Barbadian corporate executives expected positive growth in 2003.

Excess liquidity in the banking system rose to 18.7% at the end of June, up from 17.8% at the end of 2002. This reveals an unwillingness to borrow to invest, again a symptom of poor confidence. Credit to the non-financial private sector contracted by an estimated 2.0% ($53.2 m) in the first two quarters, a little more than double the decline in the corresponding period last year.

Global effects

Central bank governor Dr Marion Williams is not unduly perturbed, though. Sluggish private sector investment is an inevitable feature of the weak global economy, she says. Similarly, uncertainty over the impact of trade liberalisation is inevitable but transient. The government is working closely with the private sector to improve productivity and competitiveness, looking towards closer regional integration, mergers, joint ventures, strategic alliances and greater consolidation. It is already happening in the financial services sector, although manufacturing has been slower to move. The Ernst & Young survey backs this up.

Despite the unemployment rate edging 1.4 percentage points higher to 11.7% in the first six months of 2003, the total number of individuals employed increased. The deteriorating unemployment numbers were the result of new entrants to the job market.

Inflation was negligible at the end of March 2003, compared with a 2.4% rise for the corresponding period in 2002.

Despite the weaker domestic economy, government finances held their ground. The fiscal deficit for the first six months of 2003 was estimated at $31.9m, less than half of the $88.8m deficit recorded in the same period last year. The improvement in the fiscal position was attributed to a significant rise in tax revenue but came at the expense of a reduction in capital expenditure. Capital expenditure was estimated to have decreased by 14.4% ($28.8m) in the period, following expansions of 14.1% and 17.5% in the comparable six months of 2002 and 2001 respectively.

The current account of the balance of payments registered a deficit of about $70.7m during the period, significantly below the average first half surplus of $41.5m in the previous three years, as higher retained imports and sluggish domestic exports eclipsed the improvement in travel credits. Again, Dr Williams believes this is a passing trend as exporters improve their competitiveness.

The capital and financial account recorded an estimated surplus of $58.4m, about $18.1m more than the surplus recorded last year. Net long-term private sector capital inflows amounted to approximately $92.2m, $48m up on the previous year.

Cautious optimism

The central bank is cautiously optimistic that real GDP will grow by 1%-2% in 2003, following four consecutive quarters of expansion. But it concedes that Barbados remains hostage to international developments.

Whatever the economic ups and downs of the past few years, the underlying health of the economy is good. Inflation remains low, government’s debt position is manageable and the country’s anchor economic sector – tourism – is rebounding. Credit rating agency Standard & Poor’s awarded Barbados an A rating, the highest in the Caribbean and equal to the highest in Latin America. The country’s stable political system was compared favourably to highly rated European countries while standards of governance and public accountability scored higher than any other Caribbean nation. Also, unlike other Caribbean countries and many developing markets, Barbados is increasingly less vulnerable to the commodity cycle as its burgeoning services sector continues to grow. In addition, for such a small country, it has a relatively diversified economy.

Having withstood the challenges of the last few years, Barbados is in a strong position to capitalise on an improvement in investors’ sentiment. Investment laws are clear, transparent and modern, providing for easy incorporation and corporate maintenance. There are no restrictions on foreign ownership of business enterprises and other bureaucratic requirements are kept to a minimum. The government’s policy is to support productive investment, with supportive legislation and significant incentives. The legal system is based on English law while the Companies Act is based on the Canadian Business Corporation Act.

The island also boasts an excellent physical infrastructure with a reliable power supply, a modern network of roads, ultra modern internal and external telecommunications facilities, and airport and seaport facilities of the same high standard as those in industrialised countries. Liberalisation of the telecoms sector is set to enhance service levels while lowering costs. Last month, three new entrants were licensed to compete in the cellular technology industry.

According to the government’s chief telecommunications officer, Chelston Bourne, the opening of the cellular market for competition is part of the first phase of a complete liberalisation of the telecommunications sector. In phase two, there will be the opening of the domestic telecommunication networks, while phase three will see the full liberalisation of the sector.

Barbados prides itself on the calibre of its highly literate, skilled and industrious English-speaking workers. Its well-established education system has ensured a 98% literacy rate, which is one of the highest in the world. It has yielded productivity levels comparable to and sometimes exceeding North American and European standards.

Individual income tax rates are on a par with international norms, although expatriate employees in the offshore sector are eligible to receive 35% of their salary tax free. The standard rate of corporation tax for a resident company in Barbados is 40%.

Healthy banking

The banking system is well established with a number of local and international banks available to service commercial, developmental and offshore needs. The unit of currency is the Barbados dollar, which has been pegged to the US dollar at a parity of $1 = B$2 since 1975. The high level of foreign ownership, including three out of seven banks, and the strong capitalisation of the sector augers well for financial stability. The Barbados dollar is backed by gold and foreign assets, which have promoted stability and confidence in the currency.

The Central Bank of Barbados has been in operation since 1973. Its main role is to act as banker, fiscal agent and financial adviser to the government, and to monitor and regulate the activities of commercial banks and other financial institutions.

The Securities Exchange of Barbados (SEB) was established in 1987. It is a self-governing body that provides a marketplace where its members (the stockbrokers or shareholders) meet to buy and sell shares on behalf of their clients.

“We wish to convey to investors that Barbados is a stable, well-administered economy,” says Dr Williams. “The government recognises that stability and predictability is a key factor that investors look for. Our track record as one of the oldest parliamentary democracies proves our credentials.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter