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Contributor: James Ogunleye
Farewell To Recession?

Owen Seymour Arthur, Barbadian prime minister, could well change his middle name to `Lucky'. A year after taking over the tenancy of the State House, the 45 year old University of West Indies-educated economist has every reason to thump his chest for running an economy that is skipping its way out of recession, albeit the turnaround was started by his predecessor, Lloyd Erskine Sandiford. If the latest economic figures are anything to go by, the island seems to have safely sailed through the turbulence and bidden farewell to the recession of the early 1990s.

Barbados started 1990 on a relatively dismal economic note - with gross domestic product growth, a key economic barometer, touching a negative 3.3 per cent. The GDP figures for the next two years were even worse: -4.0 per cent in 1991 and -5.3 per cent in 1992. All that is now history as the economy returned a growth of 1.0 per cent in 1993. By December 1994, the country had recorded a GDP of 4.1 per cent, its highest in 5 years. In serious money, that's a cool $836.8 million.

Other macroeconomic variables like inflation have also improved. The inflation rate of 6 per cent in 1991 was amazingly whittled down to 1 per cent by December 1994. One thing that helped cut domestic inflation, according to the government, was the "lack of significant imported inflation [mainly from the United States and western Europe]" in 1994. On the external front, balance of payments current account, boosted by an increase in sugar earnings, rose sharply from $143 million in 1993 to $167 million in 1994. An overall payments account surplus of $143 million was recorded during the same period. The inflow of capital- mainly into the tourism sector - was "steadied" and a positive net capital inflow of $62.5 million has been estimated for 1994. The country's external cash reserves position also improved significantly: It rose from $334 million in 1993 to $412 million by the end of March 1995.

Sectorally, Barbadian economic growth in 1994 seemed to have been all-rounded. Tourism expanded by 10.3 per cent - the largest increase since 1988 and due mainly to long stay tourism. The industrial sector performed better than expected as industrial output surged by 5.3 per cent, thus reversing four years of decline. Manufacturing output during the same period grew by 6.1 per cent as sub-sectors like food production recorded improved performances.

One of the main election pledges of Owen Arthur in 1994 was to get many of the jobless back to work. The premier seems to be succeeding on this front as unemployment among the 264,000 resident population was reduced from 27.9 per cent (its peak) in March 1994 to 21.9 per cent by December 1994. Indeed claimants of unemployment benefit during 1994 fell by 28 per cent.

One interesting thing about Barbados' economic recovery programme is the relatively independent manner in which the programme was implemented by the Bridgetown authorities - even though it was a product of an 18-month Standby Agreement signed with the International Monetary Fund in 1991. Unlike many countries in Africa and the Caribbean where governments sleep and wake with the IMF, Barbados' contact with the Fund has been minimal. With such a record of sound economic management behind it, Bridgetown has never shied away from telling the Washington hawks where to stick their advice if it runs counter to government thinking. For example early this year as the government was putting together estimates for expenditure figures for the 1995/96 budget, the IMF stepped in and asked Barbados to go for a surplus budget. The premier listened to the IMF, thanked it for its concern but did what he considered prudent under the circumstances: he only slashed fiscal deficit from 2.5 per cent of the GDP in 1993 to 1 per cent, instead of a surplus budget demanded by the Fund.

This, of course, is not to downplay the contribution of the IMF in Barbados' recovery process. For one, the stabilisation programme, a product of the aforementioned Standby Agreement, was designed with a little help from the Bretton Woods institution. The programme set a range of macroeconomic targets for the government - then headed by Erskine Sandiford.

The programme called for a deep cut in government spending, and, by extension, a virtual elimination of fiscal deficit - which was running at 6 per cent of the GDP in 1991. Other policy-objectives included privatisation of state-owned enterprises and tax reforms. The Standby Agreement, in short, demanded tighter fiscal and monetary control. Sandiford stuck religiously to the programme but was kicked out of office before he could reap the fruits of his labour. The fall out from the IMF's prescriptions was so severe that electorate simply deserted him in droves and he lost a confidence vote in parliament.

So the celebration is being enjoyed by Owen Arthur - and he is savouring the moment. But as champagne glasses continue to clink in Bridgetown, economic observers believe a number of hard decisions still lie ahead if the economic recovery is to stay the course. One of such decisions is how soon the government should bring in the already-planned Value Added Tax, to replace a consumption and hotel tax. The VAT was originally pencilled in for April 1994 and has the potential to eliminate the country's perennial fiscal deficit - currently running at an estimated 1 per cent of the GDP. Also, the government's lifting of import duties on raw materials last October would certainly lead to a rise in imports in 1995/96 as the economy expands. Although this removal of tariffs will no doubt reduce factory production costs and consequently prices on the supermarket shelves, without a sustained corresponding rise in future exports, Barbados' trade deficit will widen.

Perhaps the most important economic question still to be addressed is the issue of Barbados' over-valued currency: which continues to distort resource allocation and upset general price systems in the economy. Although the Democratic Labour Party under Sandiford talked of liberalising the foreign exchange regime to make the Barbadian dollar exchange rate more flexible and competitive, the BLP's defeat in the 1994 general election by the Arthur-led Barbados Labour Party (BLP) meant that the forex liberalisation initiative was not implemented. And given the BLP's anti-devaluation manifesto commitment, the current policy of fixed exchange rate is likely to remain in force for sometime. That's bad news for Barbadian exporters, especially those in the productive sectors of the economy.

In spite of this dilemma, the main objective now is to ensure that there is "economic momentum created in this country that can carry this economy to higher heights," affirmed Owen Arthur, a day after his election victory last September. One year on, Arthur's government is building on that momentum, but how high this would carry the Barbadian economy remains anyone's guess.
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