BARBADOS' ECONOMY: A PERSPECTIVE FROM THE CENTRAL

C O N F I D E N T I A L BRIDGETOWN 002233

SIPDIS

SIPDIS

DEPARTMENT FOR WHA/CAR
SOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 12/19/2016
TAGS: ECON EFIN ETRD PGOV PREL BB XL
SUBJECT: BARBADOS' ECONOMY: A PERSPECTIVE FROM THE CENTRAL
BANK

REF: A. BRIDGETOWN 2176

B. BRIDGETOWN 2228

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


1. (C) Summary: Barbados' economy continues to grow at a
steady pace and is projected to expand by 3.4 percent in

2006. However, a recent meeting with Central Bank of
Barbados (CBB) Senior Director for Research revealed the
CBB's concerns over the economy's medium to long-term health.
Barbados' economy has been hemorrhaging foreign exchange at
a rate of about BDS200 million per year as a result of
booming consumer and government spending and weak growth in
those sectors of the economy that generate foreign exchange.
On December 15, the CBB raised interest rates for the fifth
time in two years, hoping to contain consumer credit demand
and spending. In the long term, the CBB is calling for a
reorienting of Barbados' economy toward services and
industries that can generate the needed foreign exchange.
PM/Finance Minister Arthur's government, however, is focused
on the shorter-term goal of cultivating electoral support for
probable parliamentary elections after the March-April 2007
Cricket World Cup events. End Summary.

AN ECONOMY STARVED FOR FOREIGN EXCHANGE
--------------


2. (SBU) On December 20, PolOff met with Dr. Daniel Boamah,
Senior Director for Research at the Central Bank of Barbados.
Predictably, Boamah proved to be far less sanguine about the
health of Barbados' economy than Minister of State at the
Finance Ministry, Clyde Mascoll, with whom PolOff spoke
earlier (ref A). The meeting with Boamah came only a few
days after the December 15 interest rate hike, the fifth in
two years, as the CBB continues its efforts to contain
domestic demand. Boamah expressed strong concerns about
continued pressure on the country's foreign exchange
reserves. The economy has been losing about BDS200 million
in foreign exchange a year, and the government has had to
resort to loans in both 2005 and 2006 to shore up its foreign
exchange reserves. Over the past three years, imports have
surged to meet rising consumer spending, driven by an
explosion in the use of credit cards and other consumer
credit loans. The government's extensive capital works
spending, much of it in preparation for hosting the 2007
Cricket World Cup (CWC),has also contributed to the problem.
Boamah noted that the CBB's "preemptive action" on interest
rates may be having some effect, in that recent data indicate
a decrease in credit growth, imports, and current account
deficit.


3. (SBU) Even if the interest rate hikes have the desired
effect, Boamah argued that the country cannot sustain the
continued drain of foreign exchange over the medium to long
term. According to CBB forecasts, the Barbadian economy will
register a 3.4 percent GDP growth in 2006. According to
Boamah, under normal circumstances, a 3.4 percent growth
would be respectable, but in Barbados' case, the economy is
not growing "fast enough," especially in sectors that earn
foreign exchange. Boamah estimated that only one-third of
Barbados' economy is generating foreign exchange at present,
while the other two-thirds are consuming it.


4. (C) Both Boamah and the CBB Governor, Dr. Marion
Williams, have publicly called for structural changes in the
economy to reverse the drain of foreign exchange. While the
government has focused on expanding the country's tourism
sector, Boamah said that relying on this vulnerable sector's
growth alone was insufficient. Boamah also dismissed the
recent surge in land and real estate sales to foreign buyers
as a "shortsighted strategy." While selling land has been
generating foreign exchange and paying the bills for now,
Boamah wondered what would happen when all the land is gone
or, as is more likely, Barbados' real estate bubble bursts.
The government would also like to expand Barbados' off-shore
financial services sector, according to Boamah, but has been
cautious because "the OECD is on our back." In the long
term, the CBB Governor pointed to increased investment and
expansion in export-oriented manufacturing and services as
the only path toward securing Barbados' economic future.

INFLATION SHOULD EASE IN 2007
--------------


5. (C) Although concerns over the rising cost of living

have generated innumerable front-page stories in the local
press and much political infighting, Boamah thought that
inflation would level off in 2007. According to the CBB's
latest statistics, the rate of inflation stood at 7.5 percent
at the end of August 2006, and Boamah expected that rate to
drop slightly for the year thanks to the recent reduction in
energy prices. The CBB's projections for 2007 show inflation
dropping to about 5.5 percent. While he agreed with Finance
Minister of State Mascoll's view that Barbadian consumer
patterns have changed and may be contributing to the rising
cost of living (ref A),Boamah believes that the country's
inflation will continue to be driven mainly by higher energy
costs. Nevertheless, he noted that the recent 10 percent
wage hike approved by the government for Barbados' public
servants will do nothing to help keep prices down (ref B).

BUT GDP GROWTH ALSO LOWER
--------------


6. (C) The CBB's projection of 3.4 percent GDP growth in
2006 is about 0.5 percent lower than earlier forecasts.
Boamah said that the CBB also revised downward its
projections for 2007 and 2008. Even accounting for the
expected economic impact of the CWC, Boamah anticipates
growth of only 3.5 percent in 2007, and 2 percent in 2008 and
thereafter. Boamah clearly did not share the government's
optimism about a significant economic impact of the CWC in
2007 and beyond. To give the country's economy a real
boost, Boamah said, the government should "scale back its
fiscal activities to make room for the private sector."

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


7. (C) That piece of good advice, however, will likely go
unheeded by Prime Minister Arthur's government which is
trying to set the stage for the next parliamentary elections,
expected in 2007. The government's generous wage package for
public servants, a recent cut in the price of gasoline, and
construction projects all over the island are being
interpreted--and parodied in the press--as signs that the
elections are near. Even Boamah at one point indicated that
PM Arthur, who also holds the Finance Ministry portfolio,
initially opposed the CBB's most recent interest rate hike.
While his political instincts were probably telling the Prime
Minister that higher interest rates would not play well with
the electorate, the economist in him eventually must have
recognized the necessity of some belt-tightening. That PM
Arthur will increasingly view key policy decision through the
prism of approaching elections is not surprising. In
practice this will likely mean that needed economic reforms
and policies that may involve some pain will be put on the
back burner until after the elections. Despite the cautious
note sounded by Boamah, PM Arthur may have the luxury of
delaying action because the Barbadian economy remains in
relatively good shape and only a significant external
shock--a spike in energy prices or a sharp drop in
tourism--would necessitate more immediate adjustments.
OURISMAN