Sugar, the sweet and sticky stuff, once king of Barbados, has been well and truly usurped. Low world prices, combined with cuts in the European Union’s preferential prices, will make it difficult to compete in world sugar markets in any meaningful way.
And while, ironically perhaps, the island produced a bumper crop in 2005, tourism and financial services, areas where Barbados can exploit its scenic beauty, year-round sun and well-educated workforce, have seized the island’s crown and sceptre to become the major earners of foreign exchange.
These of course are also competitive and unpredictable industries: tourism accounts for 15% of the economy directly. On a multiplier, that rises to somewhere closer than half. And when tourism nose-dived in the aftermath of September 11, the whole island was hit.
Line of fire
In fact, over the past five years, each of the island’s new economic sovereigns have had to prove their resilience. In 2001, Barbados found itself in the line of fire of the Organisation for Economic Co-operation and Development’s (OECD) war against harmful tax competition, and had to fire on all cylinders to keep itself off the OECD’s dreaded blacklist. Had it failed to do so, inclusion on the list could have had a disastrous effect on an economy that has nailed its colours to the provision of high-quality professional services and wealth management.
Marion Williams, governor of Barbados’ central bank, has been instrumental in keeping variations institutions at bay, and the Barbadian economy and its fiscal sovereignty intact. She told The Banker: “There was a difficult time following the OECD report – 1999-2001 – but things improved in 2002 after the OECD eventually withdrew the tax haven designation.”
There were other, bilateral moves Barbados had to contend with, including a US law enabling courts to freeze the US-held assets of Barbadian banks if the courts had evidence that a bank had been doing business with a company suspected of money laundering, “So, the US kept sending over lists of companies, and we had to check them and make sure they weren’t banking here,” says Dr Williams.
She adds that it is in Barbados’ own interests to ensure the jurisdiction keeps a reputation for transparency. “What we’ve been doing is implementing measures to screen companies doing business. We’re doing our due diligence, and we’ve got a good record in closing businesses down if they’re not clean.” Such measures include a Proceeds of Crime Act, and rigorous anti-money laundering (ALM) provisions. “Other offshore centres have grown faster,” says Dr Williams, “but they’re less selective than we are.”
As central bank governor, she must keep a firm and steady hand on the tiller, working closely with the Ministry of Finance and Economy, but maintaining an independent perspective: “The [central] bank’s principal role is to ensure the stability of the commercial sector and to take the right macroeconomic measures necessary to bring about the stimulus for growth.” The bank, she says, has a great deal of autonomy from the ministry in the setting of interest rates and reserve requirements and, she adds, the two bodies work closely and well together.
Asked whether she has any concerns about levels of government spending (government expenditure increased by 5.7% in the last financial year), Dr Williams insists: “The government engaged in anti-cyclical measures in 2002, and I think it paid off – in that it got us through that period, and the economy picked up.”
Financial stability
Unlike some Caribbean currencies, the Barbadian dollar has been pegged, two to one, to the US dollar since 1975; it might make Barbados a pricier destination than some others in the region, but has provided investors with a much valued stability – and given a much envied purchasing power to Barbadians. But it keeps the central bank on its toes more than it would if it were able to sit back and watch the exchange rate float, and makes the issue of national reserves all the more critical.
The central bank has also had to keep its eye on excess liquidity: heightened and aggressive competition between lending institutions in the first half of the last financial year put pressure on the balance of payments, pushing the bank to weaken demand for consumer credit by hiking up interest rates 200 points over the period, and eventually, for the main lenders to sign a memorandum of understanding that they would rein in their promotion of consumer lending in support of the bank’s efforts to reduce credit demand. (One banker pointed out that “government, business, and the central bank have excellent channels of communication. The prime minister [Owen Arthur], for example, consults regularly with business and is very responsive to concerns”.)
While not a “concern” per se, business will be scouring the horizon for a changed terrain and new opportunities as Barbados and other Caribbean countries move toward the single market (CSME). Corresponding liberalisation of the finance sector has proved controversial. Issues such as the continued removal of capital controls have implications for the adequacy of foreign reserves and the outflow of funds, and are regularly discussed in the local business press.
As it is, the economy has had a mixed run this year, growing by 2.6% (against 4.6% for the first nine months of 2004), and also seeing a decline in tourist numbers against the previous year. Other indicators have been more positive: construction has grown by 8.2%, and transport, storage and communications have also seen a market upward trend, while there have been 311 licences granted to business and financial services companies, and a decrease of $33m in net international reserves left Barbados with a robust £1.16bn.
Welfare state
In point of fact, for most Barbadians, the small island nation does not resemble a tax haven – direct taxation and sales tax are high – financing a sophisticated and welfare-minded society which can boast of being 30th on the United Nation’s Human Development Index. But for foreign investors, the world’s rich and others who like to combine large sums with sun and sea, it offers an alluring package of tax incentives. Although all business-minded Barbadians stress the point: Barbados is not a no-tax haven, it’s a low-tax location.
The body charged with conveying the good news, the Barbados Investment and Development Corporation (BIDC), has the role, its chief executive, Anthony Sobers, told The Banker, of promoting Barbados as a centre for financial services, promoting the export of goods and services, and developing the local manufacturing base.
Mr Sobers says the BIDC, which has offices in London, Miami, New York and Toronto, estimates that “offshore services” combined contribute around $400m to the nation’s GDP each year, the second largest single sector after tourism – and employs 3000 people. Says Mr Sobers: “The financial services industry is based on a network of bilateral treaties with the US, UK, Netherlands, and soon China. These carry the right to exchange information, so it makes the jurisdiction very transparent.” There is, he says, a sufficient degree of regulation, but one that is less onerous than that found by investors in their domicile jurisdictions.
Economic diversification
Mr Sobers says that key segments of the sector are the captive insurance industry, the registration of International Business Companies (IBCs) for undertaking aspects of a company’s operations in a tax efficient manner, and of course, managing the wealth of high net worths. But it isn’t all in the finance sector. Barbados is extremely keen to demonstrate its flexibility – and has, for example sold itself as an alternative to India for outsourced services such as telemarketing, collections and other back-office functions – largely for US-based companies; a potential that it certainly has the capacity to extend to other anglophone markets.
For foreign companies doing business in Barbados, investor-friendly legislation includes a package of measures including a corporate tax rate of 1%-2%, full exemption from taxes on corporate profits for 15 years for export-only manufacturing companies, full exemption on import duties on components, raw materials, production machinery and other production-related equipment, and unrestricted repatriation of capital, profits and dividends.
There are added extras for Canadian companies: dividends paid to Canadian holding companies out of income earned from an active business in Barbados are considered as “exempt surplus” and not subject to Canadian tax. (The two countries have a close and long-standing relationship, Barbados being one of the largest recipients of Canadian foreign direct investment.)
Local competition
On the high finance front, Barbados has some catching up to do if it is to compete with the Cayman Islands, Bermudas, and the Isle of Mans of this world – if indeed it chooses to. (While Deloitte & Touche, Pricewaterhouse Coopers and Ernst & Young are both on the island, the island has not yet piqued the interest of some of the legal services brands routinely found on the “offshore circuit”.)
All in the industry agree that a light touch regime combined with transparency is more in keeping – and better from a reputational perspective, than allowing a “no-tax and secrecy” culture to flourish. For the household name banks on Barbados – non-domestic financial services have yet to develop as a main line of business – but they almost certainly will develop, not least as the trend toward regional banking services converges with a harmonisation in the forthcoming single market.
“The perspective is changing,” one banker told The Banker, “people are looking at trends in the regional economy. Barbados will play a major role in that, put from now on, it will have to be seen in a much broader context.” On the other hand, Barbados is set to keep a keen sense of both its national character and identity, and economic sovereignty: a prudent hand on the tiller, and both careful, and transparent about, the businesses it allows to call themselves Barbadian.
