It said preliminary data suggest that the expansion in real economic output continued into the second quarter, primarily reflecting sustained growth in tourism activity and that the fiscal deficit narrowed moderately in the first quarter of fiscal year 2017/18, partially the result of the fiscal consolidation measures implemented in the previous fiscal year.
“However, the stock of international reserves fell below 10 weeks of import cover, owing in part to expected external debt service obligations and the on-going delays in securing planned foreign investment inflows”.
The CBB said that the context for this outturn is that the Barbados economy has underperformed in the aftermath of the global financial crisis, as evidenced by low growth and significant fiscal and external imbalances.
In its release of the “Barbados Current Economic Performance,” the CBB said that the short to medium-term outlook is for a sustained stabilisation effort by government to facilitate the restoration of public finances, the rebuilding of international reserves and providing the platform for long-term growth, adding that tighter fiscal policy will remain at the centre of the adjustment effort.
“Government’s programme for FY 2017/18 has been based largely on increased taxation and one-off divestments, but a potential for a substantial reduction in government’s current borrowing requirement in the context of elevated rollover risks, the containment of the Central Bank financing and the slower accumulation of debt.
“In addition, capping the level of public sector arrears, with a view to eliminating them, is critical to the restoration of confidence,’ the CBB said, noting however “there are significant downside risks, including those associated with implementation delays and the potential contractionary impact of the new fiscal measures on economic growth”.
It said in addition, these measures are expected to have a short run inflationary bias, notwithstanding the announced exemptions approved by the Freundel Stuart government to preserve the social safety net and to cushion any potential adverse impact on external competitiveness.
The CBB said that given the size of the tax adjustment and the expected impact on prices, the fiscal measures are likely to dampen consumption, particularly for imported goods, towards the end of 2017 and into 2018.
“For 2017, the continued strong performances in the tourism and construction sectors are expected to mitigate the dampening effects on growth in the short-term and the forecast for real GDP growth is expected to be in the region of 1.3 per cent to 1.8 per cent, compared to earlier estimates of 1.5 per cent to two per cent,” the CBB added.
The Central Bank said that a stronger adverse impact on consumption is anticipated for 2018, but a more positive outlook for growth is feasible if the implementation of foreign-funded projects is accelerated.
“This is critical to help mitigate any potential negative spill-over effects on employment and to contribute to the gradual rebuilding of international reserves,” it said, adding “more durable adjustment effort will require enhanced efficiency in tax collection and expenditure reforms, particularly for the state-owned enterprises.”
The bank warned that attaining the fiscal target set out in government’s fiscal budget creates the potential for a substantial reduction in government’s current borrowing requirement in the context of elevated rollover risks, the containment of the Central Bank financing and the slower accumulation of debt. In addition, capping the level of public sector arrears, with a view to eliminating them, is critical to the restoration of confidence.
In its report, the CBB said the government’s fiscal deficit continued to be financed domestically during the first quarter of the fiscal year, as foreign capital inflows, though higher than in 2016, remained inadequate to cover external amortisation payments.
It said commercial banks, which reduced the amount of lending to the government in 2016, increased their funding during the current quarter by BDS$205.9 million (One BDS dollar =US$0.50 cents) , largely because of the policy decision by the Central Bank to raise the securities requirements for commercial banks.
“This policy change enabled the Central Bank, which had provided almost BDS$300 million in additional financing during the corresponding quarter of 2016, to reduce its lending by BDS$19.4 million in the current quarter.
“The National Insurance Scheme also lent less to Government during the quarter. The Central Government’s indebtedness, inclusive of debt to the Central Bank and the National Insurance Scheme, represented 143.6% of GDP, compared to 142.3 per cent of GDP one year earlier.”
The CBB said excluding the debt owed to these entities, the gross indebtedness of the broader public sector stood at 96.6 per cent of GDP compared with 102.9 per cent of GDP in 2016.
The bank said that the average 12 month unemployment rate for the four quarters ending March 2017 was recorded at 9.7 per cent, down from 10.2 per cent in the previous year, mainly due to job gains in the construction, wholesale and retail trade, business and other services and tourism industries.
In addition, the labour force participation rate grew moderately, to 65.5 per cent for the first quarter of 2017.
The rate of inflation stood at 3.2 per cent at the end of April 2017, compared to a general reduction in retail prices of one per cent as at end April 2016.
“The reversal in the inflation trend was partly attributable to a rebound in international oil prices at the beginning of 2017, an increase in vegetable and fish prices, and the impact of the implementation of the National Social Responsibility Levy (NSRL) in September 2016,” the CBB noted.
- Countries: Barbados