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AmericasJanuary 2 2006

Reasons to celebrate

After several recessions, Barbados is bouncing back, and the government’s moves to strengthen the financial sector and bring in foreign investment are paying off.
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Barbados, an English-speaking and independent Commonwealth country since 1966, is the most easterly of the Caribbean islands and close to the major international financial centres. Its gross domestic product (GDP) is among the highest in the Caribbean; in 2004 it was an estimated $2.3bn, equivalent to a per capita income of $8,462.

In fact, Barbados is 29th among 177 countries on the United Nations Development Programme’s Human Development Index, the highest country placing among the Latin American and Caribbean region, with a standard of living comparable to many middle-income European countries.

Economic activity on the island has shifted in recent years from agriculture (more specifically sugar cane) and from manufacturing to services – the major areas being tourism, international business, financial and other professional services. Despite the declining relative economic contributions of agriculture and manufacturing, these sectors still play a significant role in Barbados’ economic and cultural life. As well as providing jobs for about 15% of the labour force, the country’s largest cultural festival, Crop Over, is a celebration marking the end of the harvesting of the sugar cane crop.

In the past decade, the Barbadian economy has performed creditably. Following a recession in the early 1990s, real output expanded for eight consecutive years between 1993-2000 at an average rate of 3.1% a year. This was accompanied by generally low inflation and fiscal deficits below 3% of GDP. In 2001, the economy slipped into recession again, suffering the combined effects of the challenges of meeting the World Trade Organisation (WTO) commitments on the liberalisation of trade, a sluggish world economy and the negative effects of the September 11 terrorist attacks on the US.

Fiscal expansion

To mitigate these shocks, the government embarked on a countercyclical fiscal expansion, which raised the overall public sector deficit and pushed the total debt-to-GDP ratio to about 80% of GDP. However, at 28%, the external debt-to-GDP ratio at the end of 2004 remained relatively low.

Fortunately, the economy rebounded in 2002-04: real GDP grew by 2.4% a year, led by a recovery in tourism, and strong growth in construction and in wholesale and retail trade. Inflation remained below 2% and the unemployment rate fell to 9.8% by the end of 2004. The government and private sector spending during the economic recovery, however, weakened the external position and Barbados’ external current account deficit (as a percentage of GDP) rose to 12% at end-2004.

This deficit was partially financed with net long-term capital and financial inflows averaging about $275m, the bulk of which were for private investment in tourism-related projects and utilities, and the shortfall was reflected in the loss of foreign currency reserves.

Government spending in the past four years – initially to shore up economic activity during the 2001 downturn and subsequently on foreign exchange earning projects, most noticeably the expansion of the Grantley Adams International Airport – built up debt levels. This eventually resulted in a downgrade in Barbados’ sovereign credit rating from A- to BBB+, although the country remained investment grade.

Growth trend

During the first nine months of 2005, the economy continued on an upward growth path, expanding by 2.6%, largely a result of a construction boom. Growth prospects in the medium term are favourable, too, reflecting the positive global environment and an expected boost from the significant planned investment in the lead up to the Cricket World Cup (CWC) 2007.

In view of the need to improve economic competitiveness, the government has implemented phased reductions in corporate and personal income tax rates, the liberalisation of the cellular market and the issuance of new licences for fixed telephone lines on a competitive basis. It also recently passed legislation to corporatise Grantley Adams International Airport and the Bridgetown Port Authority. Parliamentary approval for a Deposit Insurance Scheme has been granted and plans are afoot to develop a secondary mortgage market to supplement existing investment activity.

Efforts by Barbados and other Caribbean Community (Caricom) countries to establish a regional single market are fairly advanced. To satisfy the commitments under this economic arrangement, the economy has been undergoing gradual financial liberalisation. At present, most current account transactions have been delegated to commercial banks but given the government’s commitment to a fixed exchange rate, the liberalisation of capital account transactions has been more cautious.

In the past few years, the financial sector has experienced considerable change, the most significant developments being the merger of two banks to form a dominant player and the acquisition of a government-owned insurance company by a Bermudian company.

Banking sector

The banking industry – with only six commercial banks – can be characterised as oligopolistic. Monetary policy centres around the setting of a floor on deposit rates and is supported by moral suasion and appropriate adjustments in the cash and security reserve ratios. In the past three years, monetary policy has been largely accommodative and in 2005, rapid expansion in commercial bank credit has fuelled robust import demand, warranting contractionary monetary policy measures.

Barbados has earned its reputation as a clean, low-tax jurisdiction that encourages international companies to have a substantive domestic presence. The International Financial Services Act (IFSA) establishes the regulatory framework under which licensed offshore banks operate and complements the Financial Institutions Act, which provides the framework for the operation of domestic (onshore) banks. Barbados has a thriving banking sector, where the importance is placed on asset quality, capital adequacy and know-your-customer guidelines.

This article was contributed by the Central Bank of Barbados. (www.centralbank.org.bb)

INVESTMENT INCENTIVES

Barbados has the appropriate incentives and legislation in place to foster a competitive environment for international business and financial services. The Barbados Industrial Development Corporation, a government agency charged with the promotion of Barbados internationally and its industrial development, points out that Barbados offers:

  • Tax and other incentives for manufacturing industries and information services companies;
  • Legislation facilitating the establishment of international captive insurance companies, international trusts, societies with restricted liability (SRLs) and offshore banks;
  • High-quality professional and business services and a highly productive workforce with low absenteeism and turnover rates;
  • A network of double-taxation treaties with a number of countries, including the US, Canada, China, the UK, Malta, Switzerland, Sweden, Norway and Finland.
  • No restrictions on the repatriation of net income earned by individuals or companies during their tenure in Barbados, and income tax concessions to qualified employees of offshore companies;
  • No capital gains taxes and exemptions from taxes on transfers of shares and other assets listed on the Barbados Stock Exchange.

 

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