BARBADOS CENTRAL BANK: OPPORTUNITIES AND

C O N F I D E N T I A L BRIDGETOWN 000470

SIPDIS

SIPDIS

DEPT FOR WHA/CAR
SOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 04/18/2017
TAGS: EFIN ECON PGOV PREL BB XL
SUBJECT: BARBADOS CENTRAL BANK: OPPORTUNITIES AND
CHALLENGES AHEAD

REF: A. BRIDGETOWN 451

B. 06 BRIDGETOWN 2233

C. BRIDGETOWN 368

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


1. (C) Summary: Central Bank of Barbados (CBB) Senior
Director for Research, Dr. Daniel Boamah, is projecting solid
growth for Barbados' economy in 2007 and no serious impact
from the disappointing Cricket World Cup. The CBB plans to
announce that it has revised its economic growth projections
upward to 4.7 percent. At the same time, the CBB is
grappling with the plans to liberalize Barbados' foreign
exchange controls announced by Prime Minister Owen Arthur in
his budget speech in mid-March. The CBB remains skeptical
about the liberalization and expects a "shock" when the
foreign exchange controls are liberalized for CARICOM
transactions at the beginning of 2008. End Summary.

THE CRICKET EFFECT
--------------


2. (SBU) On April 17, PolOff met with Dr. Daniel Boamah,
CBB's Senior Director for Research. Boamah acknowledged that
countries in the region were struggling with the political
and economic fallout from a less than successful Cricket
World Cup (CWC),which the region expected to be a
significant boost for their economies (ref A). He did note
that Barbados, as the host of many of the CWC semifinal
matches as well as the final, might still do well in terms of
CWC-related tourism and revenue. Nevertheless, Boamah was
pessimistic about Barbados, or any of the other host
countries, being able to recoup their significant investments
in the near term. He suggested that perhaps over the next 10
years the host countries could come out ahead, but only if
they can attract other major events, sporting competitions,
and additional tourists to their expanded and updated
facilities.

BARBADOS ECONOMY DOING BETTER THAN EXPECTED
--------------


3. (SBU) Despite the CWC disappointment, the CBB expects the
Barbadian economy to grow faster in 2007 than in recent
years. Whereas late last year, the CBB was predicting 2007
GDP growth to be in the 3.5 percent range (ref B),Boamah
stated that the CBB will soon revise that prediction upward
to 4.7 percent. In a rare expression of disagreement with
his boss, CBB Governor Dr. Marion Williams, Boamah said that
he was not as optimistic as Williams about the 2007 growth
prospects because the 4.7 percent figure relied on a rosier
CWC scenario than what Boamah expected.


4. (SBU) In discussing the recently presented government
budget (ref C),Boamah agreed that the government offered
almost nothing in terms of raising new revenue to pay for all
the new program proposals. He noted that the 2006 government
budget deficit dropped to 1.5 percent of GDP, from 4.2
percent in 2005. Boamah explained that this drop was mainly
due to strong growth in revenues from the offshore financial
sector, and that the government may be banking on continued
growth in that sector. While Prime Minister Arthur's budget
included a number of proposals to make Barbados a more
attractive offshore destination, Boamah did not think that
there was much room for growth in that sector or that
Barbados would be able to compete with better established
offshore centers, such as Bermuda and the Cayman Islands.

THE FOREIGN EXCHANGE "SHOCK"
--------------


5. (C) Prime Minister Arthur's budget also included a
proposal to liberalize gradually Barbados' foreign exchange
controls, starting with CARICOM transactions by January 1,

2008. In response to a question regarding the CBB's earlier
strong objections to liberalization, Boamah admitted that the
CBB's concerns remain and that the Prime Minister's proposal
generated a "big fight" prior to his March 14 budget speech
to the parliament. The CBB's concerns are three-fold.
First, the CBB is worried that once foreign exchange controls
are lifted, Barbadians will rush to establish foreign
exchange accounts which the CBB will have to cover with
existing reserves. Second, the CBB fears capital flight,
which may be attracted by higher interest rates in Jamaica or
Trinidad. Finally and most importantly, the CBB views the

move toward liberalization as possibly threatening the
country's longstanding fixed exchange rate of two Barbadian
dollars to one U.S. dollar.


6. (C) Boamah is chairing a CBB committee charged with
establishing tripwires that the CBB will use to respond to
any problems once the liberalization comes into effect.
According to Boamah, "there is no thought of letting the
exchange rate float," so careful preparation will be key. In
this context, Boamah noted with some satisfaction recent
growth in Barbados' foreign exchange reserves. He thought
that if this positive trend continued through 2007, the CBB
would be much better positioned to address any threats to the
fixed exchange rate. Nevertheless, he expected some sort of
a "shock" during the first quarter of 2008, when the foreign
exchange controls are eliminated.

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


7. (C) The upcoming CBB review of Barbados' economy and the
planned revision of growth projections should help calm some
of the concerns regarding the region's CWC disappointment.
Based on the discussion with Boamah, the CBB is clearly more
worried about ensuring smooth liberalization of the country's
foreign exchange controls. While this reform is necessary
and will be welcomed by the financial sector, businesses, as
well as Barbadians, it is troubling that the Prime Minister
chose to disregard the CBB's concerns rather than addressing
them and seeking a consensus. Similarly worrisome is the
uncertainty Boamah betrayed when discussing the prospective
liberalization. At various points he said "we are keeping
our fingers crossed" and "we are hoping" with regard to the
implementation and effects of the reform. Boamah, who is
predictably cautious, may be simply hedging his bets. The
CBB's careful planning in this regard is reassuring, as is
the presence at the CBB's helm of Dr. Williams, whose
continued steady leadership should help Barbados' economy
overcome the possible challenges ahead.
GILROY