Outlook for the Barbados Economy

The economy is expected to register strong growth for 2023 in the region of 4 to 5 percent. Continued expansion in tourism and private sector investments are key to driving this performance for the rest of 2023, while the Government’s ongoing public investment programme should provide further impetus to the economy.

Downside risks to the outlook include a possible slowing of the global economy should policymakers fail to get the right balance between containing inflation and impeding global demand. An intensifying of geopolitical tensions with possible adverse effects on supply chains also pose a risk to the growth projection. On the upside, improvements in the cost of air travel will strengthen the performance in tourism, further accelerating growth.

Inflation is expected to moderate over the remainder of the year as improvements in international commodity and oil markets filter into the domestic market. The latest World Economic Outlook report (WEO, April 2023), projects a decline in fuel prices in the region of 24 percent in 2023. The continuation of the social compact should serve to further contain price increases. Nevertheless, upward inflationary pressures are likely to come from the increased local demand for services as the economy continues to expand. Additionally, significant headwinds remain with the recent OPEC+ announcement to cut oil production.  

The Government of Barbados recently concluded its budget for FY2023/24 that projects a primary surplus of 3.5 percent of GDP, consistent with the target under the BERT-2022 IMF-supported programme. The administration did not impose any new taxes but instead focused on growing the economy through structural reforms. The budgetary measures, in tandem with the initiatives to mitigate inflation that have been extended by Government (the extension of the VAT free basket and the reduction in VAT on electricity), and the parliamentary estimates for FY2023/24 should aid in achieving the desired primary surplus. This outturn is in line with the primary balance path that underpins the long-term debt anchor of 60 percent of GDP.

The achievement of the 3.5 percent primary surplus is predicated on continued growth for the remainder of the year, tempered inflationary pressures, and ongoing structural reforms. In this polycrisis world, a shock such as a natural disaster or the like could derail the growth prospects, resulting in lower revenues and the need to adjust expenditures. Continued emphasis on public sector reform is also essential in mitigating Government’s exposure to contingent liabilities while freeing up revenues for necessary investment. The planned transformation of a number of SOEs that pose financial risk reflects Government’s commitment to restrain unplanned spending on transfers.

Government’s overall fiscal position for FY2023/24 is projected to be a deficit of 1.6 percent of GDP, which is to be funded mainly by inflows from multilateral development institutions. At the same time, there is a renewed effort to revitalise the domestic capital market with a second issuance of the BOSS+ bonds and the introduction of innovative instruments such as reverse options.

The external position is expected to remain buoyant with international reserves maintaining a more than adequate import cover and providing a buffer against external shocks. On the outflows side, lower prices for imports, particularly in the food & beverages and fuel categories should temper the reserve losses, although such savings are likely to be offset by a pick-up in domestic demand given the acceleration in economic activity. At the same time, the continued revival of the tourism industry should boost travel receipts, which, along with multilateral financing and tourism-related projects, should bolster reserve accumulation.

Over the medium term, strengthening our external position would necessitate mitigating external vulnerabilities, which hinges on boosting competitiveness, ensuring food security and building resilience to climatic events and other shocks. The path toward renewable energy is necessary to reduce the dependence on fossil fuels, while at the same time redirecting foreign exchange outlays from fuel purchases towards the green-transition of the economy. Additionally, the focus on renewable energy and climate resilience creates the impetus for further domestic credit expansion as households and firms access green financing.

With the continued expansion in the economy, non-performing loans should maintain a downward trajectory. Capital and liquidity levels should remain well above prudential benchmarks, providing adequate buffers to safeguard against shocks stemming from global events, which is particularly important following the failures of Credit Suisse and Silicon Valley Bank in March of this year.

Our ability to achieve the projected economic growth and continue to lower the debt-to-GDP ratio is in part dependent on the aforementioned external factors. However, as individuals, businesses, and collectively as a nation, we have a significant role to play. We must increase productivity and improve the ease of doing business to enhance our international competitiveness. We must convert the recovery we have achieved into sustained and inclusive growth that will lead to general economic development, which will redound to the benefit of us all.