Holding On: The Latest Economic Review

One swallow does not make Spring, and one quarter's data do not tell all about economic development. Nevertheless, we all need to take note of what the latest quarterly economic review from the Central Bank of Barbados shows. In trying to see what the signs are, one clear message is that tourism remains under immense strain. I am concerned with the observation that the 'Estimated average expenditure per tourist was lower, and the average visitor stayed fewer days. Hotels have been obliged to discount prices in order to remain competitive in a declining market, and this had an adverse effect on tourist spending.' When hotels are giving lower prices to attract customers and those customers stay less and spend less, this is worrying. The tourists have pocketed most of the gains and the country has taken most of the strain.

The Government has more than a few headaches to deal with this year concerning its debt. Nevertheless, despite the heavy debt service on the lease agreement for the Dodds Prison, this was offset to some extent by funds received from the European Union, and other net capital recorded. People will be happy to read that reserves cover still remained adequate as a result of the financing from abroad, but one needs to know a bit more about the net capital flowing in to understand if it is something that is sustainable or some sort of one-off items.

But just down the road, the Government needs to repay (in June) US$100 million on a loan contracted in 2000 for the purpose of its capital development programme. The central bank reports that 'In order to make this payment without resorting to the use of the country’s foreign exchange reserves, it has been decided to secure new foreign borrowing in an amount of US$200 million. The extra US$100 million will be used to boost foreign reserves in anticipation of the seasonal decline usually observed in the second half of the year'. We will have to see how easily that money can be raised at on what terms.

The central bank confirmed that the Government has committed US$65 million to guarantee loan financing for the Four Seasons Hotel and Villas at Paradise Beach. In its words 'The success of this project should assist in the maintenance of Barbados’ competitive image in the top end of the tourism market. The guarantee is intended to be a catalyst for the negotiation of the remaining funds needed for completion of the project and it provides government with a 20 percent share in the ownership.' While I understand the potential importance of the development and the catalytic nature of the guarantee, the prudent side of me is still nervous until work restarts in earnest on this project because if that guarantee gets called then talk of moving to sustainable path for debt and the budget has to start over.

Add to that the fact that the 'Government has also stated its commitment to a resolution of the affairs of Clico Holdings Barbados and its affiliated companies that does not result in a loss of principal to any member of the public who invested in these companies.' It will be interesting to see how that particular set of commitments can be met, and what if any implications that may have on the public purse.

On budget finance, the Government is trying to follow through on its medium term strategy, which is 'to eliminate the overall fiscal deficit by the year 2016, mainly through containment of fiscal spending and greater efficiency in revenue collection'. In the first quarter of this year, 'current account spending is estimated to have been reduced by 23 percent, compared with last year. Capital expenditure, which had been cut substantially last year, was a little lower this year, even though some roads, housing and other infrastructure remained in progress. Government revenue fell by 22.8 percent, mainly on account of import duties and excises. VAT receipts increased 5.5 percent, and income tax receipts were not much changed, after adjustments for extraordinary items'

Financing the first quarter fiscal deficit of B$132 million (compared with B$156 million in 2009) was wholly by new domestic loans, and bond and treasury bill issues taken up by the public, the NIS and commercial banks. The central bank notes that 'Their appetite for government paper exceeded the government’s needs and the Central Bank reduced its lending to government by B$86 million.' I know that will make the Governor happy. But, as noted above, the real test will come in testing the water of foreign appetite for more government debt.

The Governor is due to take questions from the press today, so I wait to see what if any elaboration that may give.