BARBADOS 2005 ECONOMIC REVIEW

UNCLAS SECTION 01 OF 02 BRIDGETOWN 001128

SIPDIS

SIPDIS

SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EAGR EIND EINV ELAB ETRD PINR BB XL
SUBJECT: BARBADOS 2005 ECONOMIC REVIEW

REF: A. BRIDGETOWN 386

B. BRIDGETOWN 178

C. 05 BRIDGETOWN 1217


1. Summary: The Barbados economy performed well in 2005.
GDP growth, inflation, and unemployment registered 4.1, 5.1,
and 8.5 percent, respectively. Construction drove growth,
making up for a drop in tourism. The fiscal deficit (2.9
percent of GDP) and the national debt (88 percent of GDP)
have both been increasing due to government spending on
Cricket World Cup 2007 preparations. High world energy
prices helped push up inflation, while the buzzing economy
drove unemployment to record lows. Barbados struggles with a
structural trade deficit but has kept the outflow of foreign
exchange at a reasonable level. Prime Minister (and Finance
Minister) Owen Arthur's economic policies of encouraging
private investment and promoting regional economic
integration appear to be working well. Most commentators
expect economic growth of around 4.0 percent for 2006. End
Summary.

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Overview
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2. Barbados is the fourth wealthiest independent country per
capita in the Western Hemisphere (behind the U.S., Canada,
and the Bahamas). Barbados' per capita annual income is
around US$12,000. The country benefits from a strong
education system, stable currency, healthy democracy, and
solid rule of law. For centuries a sugar monoculture, the
Barbadian economy now relies on tourism and financial
services. The global slowdown in tourism after the September
11 attacks hurt the island's economy, but it quickly
recovered and has grown at a moderate pace for the past three
years. GDP growth, inflation, and unemployment registered
4.1, 5.1, and 8.5 percent, respectively, in 2005. High world
energy prices helped push up inflation, while the buzzing
economy drove unemployment to record lows. The government
oversaw an increasing fiscal deficit (2.9 percent of GDP) and
a high level of debt (81.3 percent of GDP). Preparations to
host several games and the final of the Cricket World Cup in
2007 have given the economy a boost.

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Construction-led Growth
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3. Construction drove growth in 2005. Preparations for the
2007 Cricket World Cup, as well as a healthy expansion in
high-end residential and tourism development, caused
construction activity to rise by a whopping 17.6 percent.
The rapid increase in demand for construction workers
outstripped the locally available supply, leading companies
to import labor. In one well-publicized case, the company
renovating the cricket stadium brought in workers from India
and was paying them well below the prevailing wage (Ref A).
After a public outcry, the government ended up deporting the
Indians but letting back in a different group of their
countrymen. According to Chris DeCaires, Chairman of World
Cup Barbados, the construction company was able to bring in
new workers after promising the government that the Indian
workers would be paid better wages.

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Decline in Tourism
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4. After two years of exceptional growth (averaging 8.1
percent) the number of tourists visiting Barbados declined in

2005. The number of tourists staying overnight in Barbados
dropped by 1.1 percent, while the number of cruise ship
tourists plummeted by 22.7 percent. Rising fuel prices
forced many cruise lines to compress ship itineraries to save
money on fuel, leaving farflung Barbados off the schedule.
The newly renovated Hilton Hotel (opened in May 2005) enjoyed
immediate success and hosted many high profile events,
including the CARICOM-Cuba Summit in December 2005. The
tourism-friendly west and south coasts of the island are
thickly built up, leaving the country with little available
land for coastal tourism development. Future growth in this
sector may depend on extracting more money per tourist rather
than increasing the number of tourists.

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Possible Pitfalls
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5. The IMF and Standard and Poor's have both warned Barbados

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to keep a close eye on its trade deficit, fiscal deficit, and
debt load, all of which have been increasing. These factors
have led to a decline in foreign exchange reserves that
could, if unchecked, threaten the stability of the economy
and the viability of the longstanding currency peg of two
Barbados dollars to one U.S. dollar. The country has thus
far been able to balance these possibly destabilizing
influences. The Central Bank steadily raised interest rates
throughout the year and the Ministry of Finance put an
additional tax on imports in September 2005. These measures
have helped dampen imports and reduce the foreign exchange
outflow. The government will likely increase its fiscal
deficit through 2006 and 2007 to pay for hosting Cricket
World Cup. The country has invested extensively, both in the
public and private sectors to prepare for this sporting
event, and the government is gambling that these investments
will continue to bear fruit long after the games are over.


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Comment
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6. Overall, Barbados is a stable, growing economy in a
vibrant, free democracy. The country is trying to make the
leap from a high-income developing nation to the ranks of the
developed world, but tourism alone will not likely get them
there. Near-shore call centers and business services coupled
with niche exports such as crafts and food products, along
with a small but surviving assembly sector, could help the
country earn more foreign exchange and promote a healthier
balance of payments. Successive generations of political
leaders have kept the country free from excessive debt, high
inflation, currency instability, and runaway unemployment.
Prime Minister (and Finance Minister) Arthur appears to be
following the same wise path by promoting private investment
and encouraging regional economic integration. In the years
to come Barbados should enjoy similar economic growth to that
of 2005.
KRAMER