BARBADOS' ECONOMY: A PERSPECTIVE FROM THE FINANCE

C O N F I D E N T I A L BRIDGETOWN 002176

SIPDIS

SIPDIS

DEPARTMENT FOR WHA/CAR
SOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 11/27/2016
TAGS: ECON PGOV PREL PINR BB XL
SUBJECT: BARBADOS' ECONOMY: A PERSPECTIVE FROM THE FINANCE
MINISTRY

REF: BRIDGETOWN 1902

Classified By: CDA Mary Ellen T. Gilroy for reasons 1.4 (b) and (d).


1. (C) Summary: With the economy becoming a central issue
in the early stages of Barbados' parliamentary campaign
(reftel),Prime Minister Arthur's government is under
increasing pressure to defend its record management. In a
recent meeting, Minister of State in the Finance Ministry
Clyde Mascoll admitted that the size of Barbados' debt,
inflation, and current account deficit could be cause for
concern, but was generally optimistic about the country's
economic prospects. While Barbados' economy remains one of
the stronger performers in the Eastern Caribbean and the
region as a whole expects a significant revenue boost from
next year's Cricket World Cup, Barbados' economic challenges
will require more of the government's attention and possibly
some belt-tightening.

DEBT: NUMBERS DON'T TELL THE FULL PICTURE
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2. (C) During a November 28 meeting with PolOff, Minister of
State in the Finance Ministry Clyde Mascoll offered a
generally upbeat assessment of Barbados' economy. Although
Mascoll admitted that the size of the debt could be a
concern, he stressed that the structure of the debt should
also be considered. According to Mascoll, Barbados'
sovereign debt is around 70 percent of GDP, but if one were
to include government guarantees, the debt to GDP ration
would rise to 92 percent. However, argued Mascoll, with only
30 percent of Barbados' debt being external, the pressures on
the country's foreign exchange reserves are not as severe as
one would expect or as the opposition alleges. While the
government has committed to reduce the country's debt to GDP
ratio to 60 percent by 2015, Mascoll admitted that the
government chose not to follow the IMF's call for a faster
timetable because it would have been politically too
difficult.


3. (C) Mascoll further noted that the debt may in fact be a
much smaller percentage of the country's GDP. He is
convinced that Barbados underestimates the size of its
economy for two reasons: 1) the last time Barbados rebased
its GDP estimates was in 1974 and a rebasing is therefore
long overdue; and 2) Barbados' informal sector, not included
in official GDP estimates, could be as much as 30 percent of
the country's GDP. Mascoll said that the government would
likely include rebasing of the GDP on its agenda after the
election. Noting ruefully that the country's debt has become
a political hot potato, Mascoll said that any attempts at a
GDP rebasing now would be tarred by the opposition as a
"cooking the books" exercise.

INFLATION: FEWER HOME COOKED MEALS?
--------------


4. (C) Inflation, another issue which has featured
prominently in the opposition's attacks on the government,
has become so politicized, according to Mascoll, that no one
is focusing on the causes for the rising cost of living.
Barbados' inflation has been hovering around 7 percent, and
much of the recent inflationary pressures are attributable to
high energy costs. However, Mascoll acknowledged that food
costs have been rising even faster than energy costs and have
hit the average Barbadian household especially hard, since 34
percent of the average household's budget is spent on food.
The government has sought to calm the public's discontent
over high food prices by promising not to renew the 6-percent
cess, or import surcharge, when it expires in the spring of

2007.


5. (C) In a show of some political independence, Mascoll
recently stated publicly that eliminating the cess would have
little impact on the rising food costs. He reiterated this
point during the meeting, stating that the real culprit
behind the rising food costs was a change in Barbadians'
lifestyle. Mascoll told PolOff that he conducted an informal
study of the issue and was surprised to learn that "eating
away from home" made the single highest contribution to the
rise in the cost of food index. He therefore thought that
any changes to taxes or duties on food would do little to
change this fundamental shift in consumption patterns.

TAMING IMPORTS VS. UNLEASHING EXPORTS

--------------


6. (C) Mascoll also said that he disagreed with Prime
Minister Arthur's focus on the country's rising levels of
imports. In a number of recent speeches, Prime Minister
Arthur and other members of his government have sounded alarm
bells about imports, which have risen by almost USD500
million to USD1.6 billion over the past two years. In
Mascoll's view, the government should stop raising questions
about imports and should instead focus on generating foreign
exchange earnings by encouraging growth in tourism and
financial services sectors. These sentiments have been
recently echoed by the Governor of the Central Bank of
Barbados, Dr. Marion Williams, who has expressed concerns
about the fact that Barbados' economic growth has been driven
largely by a boom in sectors, such as construction, that
generate no foreign exchange earnings.

BIOGRAPHIC NOTE
--------------


7. (C) Clyde Mascoll assumed his current position as
Minister of State in the Finance Ministry in January 2006,
when he resigned as the leader of the opposition DLP and
crossed the parliamentary floor to join Prime Minister
Arthur's governing Barbados Labour Party (BLP). Mascoll's
party switch was unprecedented in Barbadian politics. While
politicians have crossed the parliamentary floor before, no
party leader had ever done so. This controversial move
continues to fuel attacks on Mascoll by the DLP, which uses
every opportunity to quote Mascoll's contradictory
pronouncements on the state of the Barbadian economy made
before and after the party switch. Unfortunately for
Mascoll, who is an economist by training and profession,
there is much ammunition available for DLP's use because
Mascoll, while leading the opposition, prided himself on
keeping the BLP government's feet to the fire on economic
issues. While he has generally toed his new party's line on
economic issues, he has shown here and there some refreshing
glimpses of independent thought.


8. (C) Although some have speculated that Mascoll may
dislodge Deputy Prime Minister Mia Mottley as Prime Minister
Arthur's protg, he has yet to distinguish himself in his
new position within the BLP and on the public stage. He has
not been given much visibility by the BLP, a fact that the
DLP occasionally brings up to argue that Mascoll could have
gotten a better deal from the BLP had he been more competent
and savvy. Peter Wickham, a political advisor and
commentator closely connected with the DLP, described Mascoll
as an unimpressive politician and uninspiring campaigner.
Following a September 2006 poll, which showed that only 4
percent of the respondents would prefer Mascoll as their next
prime minister, Wickham predicted that Mascoll would not even
be able to get reelected to his parliamentary seat in the
next general election.

COMMENT
--------------


9. (C) Last month, Barbados celebrated the 40th anniversary
of its independence, an event that politicians of all stripes
seized on as an opportunity to extol the country's
accomplishments and, if possible, link those accomplishments
to their party's leadership and vision. That Barbados has
achieved much economic progress over the past four decades is
undeniable. For most of that period, Barbados enjoyed steady
economic growth that has improved life for all social strata.
Barbados has also weathered the financial crisis of the
1990's and more recently the brief recession following 9/11
without serious, long-term consequences. These successes,
however, do not necessarily insulate Barbados from future
problems. Concerns about Barbados' rising debt, inflation,
and current account deficit are being raised by an increasing
number of observers, both domestically (e.g., the Central
Bank of Barbados) and internationally (e.g., the IMF).


10. (C) Prime Minister Arthur's government will therefore
need to revisit some of its economic policies. At this time,
the government is focusing on preparations for the 2007
Cricket World Cup (CWC). Consequently, course corrections in
the government's economic policies will be on hold until
after the CWC, especially since the government is hoping for
a significant economic boost as a result of the CWC. The
CWC, however, will unlikely be the panacea that Barbados

expects. While the government hopes to translate the CWC
into a long-term boom in its tourism sector, it will probably
have to adopt some belt-tightening measures in the second
half of 2007 to address the three problems discussed here.
That the economy is shaping up to be the central theme for
the next parliamentary elections, now expected after the
March-April CWC, is a good sign. Both major parties will
have to focus their campaigns on the key economic issues
facing the country and develop action plans to keep Barbados
on a path of steady economic growth.
GILROY