In the short term, any improvement in the Barbadian economy - including in levels of foreign investment, which ground to a halt with the crisis, and in unemployment, which is now in double-digit percentage figures - will depend on the effectiveness of the stimulus and other measures in the US and other industrialised countries. So says DeLisle Worrell, central bank governor of Barbados. This is because the small Caribbean nation's economy runs almost entirely on foreign exchange earnings from just two sources - tourism and offshore financial services.
Tourism, which was depressed in 2008 and 2009, has been growing moderately this year, at a rate of between 3% and 4%, says Mr Worrell. But this has not been sufficient to pull up the rest of the economy. Gross domestic product (GDP) growth, which contracted significantly in 2009, is expected to continue to contract by about 1% this year and only return to moderate growth in 2011, according to an IMF statement on the country's economy in September.
Offshore revenues
Meanwhile, the offshore financial centre, one of the Caribbean's largest with about 47 banks, has been growing at a much slower pace than before the crisis and has been much less profitable. Government tax revenues from the sector have also fallen sharply. "So our major challenge has been the fiscal situation," says Mr Worrell.
The government has now embarked on a fiscal consolidation programme, however, and this year the fiscal deficit is expected to be 5.2% of GDP, down from 9.4% at the end of 2009, according to the central bank governor.
An area of particular concern, Mr Worrell admits, is the rise in public debt, which reached 97.8% of GDP (about $7bn) at the end of 2009. This is well above the 60% rate normally accepted by international rating agencies. "We are concerned. We would like to bring the rate down on a gross basis in five to seven years, to about 70%," he says.
Mr Worrell believes Barbados' medium-term growth challenges will be more manageable due to the island's diversified tourism industry, coupled with the fact that the small Caribbean nation is mainly a high-income tourist destination - a segment of the market that is expected to bounce back fastest once the international economy and financial sector begin to show robust signs of recovery.
Moreover, in offshore financial services Barbados has an advantage compared to many of its competitors, due to its large network of double-taxation treaties. This has made it possible for many offshore banking companies to repatriate their profits tax-free after paying taxes in Barbados.
Doomed rescue
This year, a setback for the island's financial sector has been fallout from a government decision to prevent insurance companies CLICO International Life and British-American from writing new business. The decision showed that a rescue operation of the two insurance firms' parent companies in Trinidad a year before had not been sufficient to solve the liquidity and/or solvency problems of the Barbados subsidiaries. The episode also highlighted a need for greater regulation of non-bank financial institutions and for more coordination at a regional level in financial sector supervision.
The banking system in Barbados, as in other Caribbean nations, did not become involved in the kind of non-traditional investments (such as the structured mortgage-backed US securities) that triggered the international financial crisis. David Thompson, Barbados's finance minister, says: "I think we have a relatively strong system... from the fact that the financial crisis hasn't represented itself too much in the banking system and the fact that Barbados continues to rank relatively highly by most standards for its levels of regulation, the openness of its system and its transparency."
