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FACING THE CRISIS IN EUROPE: REFLECTIONS ON THE CASE OF BARBADOS

I. CRISIS IN EUROPE AND ITS EFFECTS ON BARBADOSDespite a series of policy measures which were adopted, the European economy remained plagued by fi scal and debt problems which posed a major setback to the global economy in general, and small developing countries in particular. In the USA, there is optimism as a result of positive indicators for housing and labour. But the United States still has some downside risks, primarily as a result of fi scal adjustment uncertainties. The economic challenges in Europe and the USA have affected many economies in Latin America and the Caribbean. The Barbados economy has been hit hard by the recent fi scal crisis and this can be explained by the fact that this economy is heavily dependent on tourist arrivals from Europe, the USA and Canada. While the country enjoys one of the highest per capita income in the region, and three-quarts of GDP and 80% of exports come from the services sector (mainly those associated with tourism, offshore fi nance and information services), there is currently a very high public debt to GDP ratio which, if not properly managed, could widen further.

As can be seen from table 1, the performance of the Barbados economy was fl at in 2012, resulting from declines in tourism, other related services and manufacturing. Tourism, the mainstay of the economy, continued to perform below par in 2012. Long-stay arrivals were down by 5%, while cruise passenger arrivals declined by 2.1% in the fi rst three quarters, refl ecting the diffi cult economic conditions in the main source markets of Europe and the United States. This was compounded by reduced airlift to the Caribbean, when regional airline RedJet ceased operations. Manufacturing output declined by a further 4% while agriculture also contracted notwithstanding a 4.4% increase in sugar production. Output in the non-traded sectors grew by a small 1% because of fi scal spending limits and the reduction in the traded sectors. While several tourism related projects remained on-going, foreign investment in the real estate sector declined by 16%.

TABLE 1: Latin America and Barbados: GDP trends and forecasts, 2009-2013

(annual GDP percentage variations)

Institutions 2009 2010 2011 2012 2013

Latin America and the Caribbean -1.5 6.1 4.6

- International Monetary Fund (IMF) 3.0 3.4

- Economic Commission for Latin America and the Caribbean (ECLAC) 3.0 3.5

The Caribbean

- International Monetary Fund (IMF) 2.4 2.2

- Economic Commission for Latin America and the Caribbean (ECLAC) -3.1 -0.1 0.4 0.9 2.0

Barbados

- Central Bank of Barbados -4.1 0.3 0.8 0.0 0.7

- International Monetary Fund (IMF) -4.1 0.2 0.6 0.0 0.5

- Economic Commission for Latin America and the Caribbean (ECLAC) -3.7 0.2 0.4 0.0 0.7

Source: IMF (2013) World Economic Outlook. Hopes, realities, risks (Washington D.C., IMF) ECLAC (2013) Balance económico actualizado de América Latina y el Caribe (Santiago, ECLAC), April Central Bank of Barbados (2012) Economic Press Release (Barbados), December

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N O T E SN O T E SN O T E SILOOn current trends, tourism and the international business sectors are not expected to contribute to GDP in 2013, and not much contribution is expected to come from the rest of the economy. As a result, GDP growth is expected to remain practically stable (0.5 to 0.7%). Efforts are needed to encourage investments and better fi nancing for new business ventures and to reduce government bureaucracy. The fi scal consolidation strategy is expected to be brought back on track in the near future. The fi scal defi cit for 2013 is estimated at 5.3% of GDP.

The poor economic growth trajectory led to a slight decline in infl ation which fell by 2.3 percentage points from the end of 2011 to 7.8% in July 2012, refl ecting the moderation in international food and fuel prices. However, Barbados in general has a higher infl ation rate than those in neighbouring countries, refl ecting higher mark-up and wage productivity gap in the domestic economy. The unemployment situation deteriorated however, as the average unemployment rate for 2012 was approximately 11.6%, compared to 11.3% in 2011 and this refl ected job losses in accommodation, airline and food services subsectors as a result of the activity downturn in the tourism sector. The construction sector also was affected by job losses as a result of a slower performing economy.

FIGURE 1

Evolution of unemployment rate, 2006-2012

0

2

4

6

8

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12

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2006 2007 2008 2009 2010 2011 2012 a

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Source: ECLAC and Central Bank of Barbados

a/ Estimated

II. DIFFERENCES BETWEEN THE CURRENT SITUATION AND 2008

Barbados has been seriously affected by the global fi nancial crisis which has in turn led to a decline in tourism and offshore activity with broader spill-over effects to the rest of the economy. The government relaxed fi scal policy during the recession and focussed its spending on helping to support key industries, as well as to protect jobs and reduce inequality. But economic activity is estimated to have declined by a cumulative 5% between 2008 and 2010 with the weakness severely hurting the labour market. The government responded to the crisis by implementing a number of countercyclical measures. A Tourism Investment Relief Fund was set up in 2009 to encourage the renovation of tourism related facilities and an employment stabilization scheme was introduced to allow employees to

defer for one year their contribution to the National Insurance Scheme contingent on the maintenance of employment levels.

The government also increased spending on capital projects. These included the construction of an offi ce complex, road works and coastal and infrastructure program, as well as a housing programme. Fiscal policy at the time included tax exemptions for essential consumption items, increased capital transfers and subsidies for educational institutions and public infrastructure agencies. Additionally, temporary subsidies for basic food items, like fl our were introduced and there was expansion of welfare grants and pensions and tax exemptions for low income workers. These measures led to a worsening of the fi scal defi cit by 2010 and worsened also the debt –to-GDP ratio.

To stem the rising debt, the authorities developed a Medium Term Fiscal Strategy in early 2010 to reduce the fi scal defi cit, balance the budget over the medium term, reduce the debt-to-GDP ratio to 90.5% by 2014/15 while ensuring moderate growth. The approach proposed a number of revenue and expenditure measures to be implemented during the medium term. Based on this approach, the fi scal defi cit to GDP ratio is projected to decline to 2.1% by 2013/14 and then to return to a balanced position by 2014/15.

Notwithstanding all the attempts at fi scal consolidation to return the economy to a growth trajectory, the diffi cult economic conditions continue to affect Barbados and growth remains anaemic, despite the rebound in tourism. In 2012, real GDP remained fl at. While tourist arrival rebounded, real tourism expenditure declined by about 15% as visitors cut their length of stay and looked for value, limiting the impact of higher headcount, notably on reserve accumulation. And the prolonged adverse economic environment has negatively affected the labour market.

The unemployment rate has almost doubled since 2007 from 6.7% to 11.6% in December 2012. The average unemployment rate in tourism, construction and wholesale and retail trade sectors increased from 9.8% in June 2007 to 16% by the corresponding period in 2011. The fi scal position continues to be cause for concern, as fi scal defi cit is estimated to be around 6.4% of GDP. However, the banks maintained capital positions well above the statutory requirements and remain highly profi table, with adequate levels of liquidity. However, there has been deterioration in credit quality and the servicing of loans on time.

Real economic growth for Barbados is forecasted at 0.7% in 2013 by the Barbados Central Bank, but the IMF forecasts growth of 0.5%. These projections are based on improvements in consumer expenditure in source markets. In addition, private capital infl ows of $ 600 million are anticipated for activity in the tourism and construction sectors. No signifi cant gains in employment are expected and domestic infl ation is projected at 5% for 2013.

III. POSSIBLE AREAS OF INTERVENTIONGiven the uncertainty as mentioned above in Barbados, it is useful to review labour market policy instruments in the country to see if they can respond in a timely manner if and when the economic situation worsens. Some instruments don’t respond automatically, but require a long time to implement.

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N O T E SN O T E SN O T E SILOIt is necessary to understand these policies to ensure their effectiveness.

a) Improving protection against unemployment

Unemployment insurance (UI) in its basic form provides income support for recently laid-off workers as they try to fi nd new employment. The major motivation for unemployment insurance schemes is consumption stabilisation as benefi ts are paid to workers whose consumption is likely to contract in the event of unforeseen severance.

Unemployment insurance also acts as an automatic fi scal stabilizer although this objective is dependent on its coverage of the labour force and the suffi ciency of the Scheme’s reserves.

The Unemployment Benefi t Scheme was introduced in July 1981 as a branch of the National Insurance and Social Security Scheme. At the time of its introduction, the UI scheme was unique in the Caribbean and rare in the developing world. Workers and employers in Barbados paid into the new UI system for about one year in order to build up its reserves after which workers were then eligible to receive benefi ts the following year. The objective of the Scheme is to provide fi nancial relief to employees, who because of total separation, lay-off or short time, suffer total or partial loss of earnings.

Coverage is provided to employed persons between sixteen and sixty-four years. However, permanent government employees and self -employed persons are not eligible for unemployment benefi ts and hence are not required to contribute to the Scheme. To qualify for unemployment benefi t from the Barbados National Insurance Scheme requires an individual to be actively insured for at least thirty-two weeks, as well as to have at least twenty contributions paid or credited in three consecutive quarters ending with the quarter, or one before that, in which the individual became unemployed. Given the start of a claim, one is not allowed to reclaim until a period of fi fty-two weeks has passed.

In order to claim for unemployment insurance the worker must have been contributing to the unemployment fund usually when he/she is employed (that is partial insurance premium), which goes towards the income the employee receives on becoming unemployed. An individual is required to complete a claim form, register at the National Employment Bureau and report to the Unemployment Section every two weeks after qualifying. Funds are not paid to an individual during the fi rst three days of unemployment unless the person is unemployed for three weeks or more. The current daily rate of unemployment benefi t is 60% of a person’s average insurable earnings divided by six days per week as benefi t is received for each day excluding Sundays for a maximum of twenty-six weeks providing the individual remains unemployed. Effective 4th January 2010, the maximum monthly insurable earnings limit increased from $ 3720 to $ 3900.

With the overall rate of joblessness fl uctuating between 11%- 12.5%, Barbadians have been fi ling for unemployment claims by the hundreds. For December 2011, close to 500 new and returning individuals turned up at the National Insurance offi ce to make a claim. Throughout the existence of the Barbados scheme, claims have been rising steadily, as shown by recent studies. The sectors of the economy giving rise to the greatest number of claims are manufacturing and tourism. Tourism has

taken over in recent years. Females have made much higher numbers of claims than males. In 2011, the government of Barbados, in an attempt to improve the UI, approved the temporary extension of unemployment benefi ts, moving it from 26 weeks to 40 weeks which was paid at an adjusted rate and designed to assist out-of-work Barbadians to survive while they continued to search to fi nd employment. The measure was designed to alleviate distress of those persons who lose their jobs and experience diffi culty in securing other employment. While attempts are therefore in train to improve the scheme, issues of capitalization should also be addressed before it is too late.

b) Including employment variable in assessment of public work

During the crisis, as we have already seen, many countries increased their expenditure in public investment to partially offset the fall in private investment. Barbados also increased public works, but like most countries, suffered from implementation in terms of project planning and execution. It is important to know which capital projects can be undertaken and which can be postponed based on project delivery. Also important is a mapping of job intensive projects. Necessary mechanisms must also be put in place to minimize administrative times for start-up of new projects. This is important, since non income earning projects in the long run only add to the fi scal challenges.

c) Credit to small enterprises

In Barbados, access to venture capital is very limited. However, a few government-affi liated institutions and a handful of private fi rms have stepped in to try to fi ll the funding gap. These entities principally provide debt and equity fi nancing to help launch micro-enterprises; fund the incubation of new businesses; and assist small businesses in expansionary efforts.

The terms of equity fi nancing differ, depending on the level of involvement of the venture capitalist, the size of the investment and the business’ prospects of success. With the exception of the Enterprise Growth Fund Limited, which can provide fi nancing in excess of BB$ 5 million to certain businesses in the tourism sector, lending limits generally range from BB$ 50.000 to BB$ 1 million, and tenors ranging from 5 to 10 years.

The major players in venture capital and equity fi nancing in Barbados are:

• The Enterprise Growth Limited

Enterprise Growth Fund Limited (EGFL) provides small and medium-sized Barbadian companies in the productive sectors with debt and equity fi nancing, business advisory services and technical assistance. EGFL serves as the Fund Manager offering for the following Funds which fall under its purview:

✓ Loans & equity for small & medium-sized businesses

✓ Small hotels investment fund

✓ Tourism loan fund

✓ Agricultural development fund

✓ Industrial, investment and employment fund

✓ Innovation fund

✓ Export promotion and marketing fund

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N O T E SN O T E SN O T E SILO• Barbados Business Enterprise Corp. (BBEC)

Barbados Business Enterprise Corporation (BBEC) is a partnership between the Caribbean Business Enterprise Trust (CBET), the Government of Barbados and the private sector. BBEC manages the Barbados Entrepreneurs’ Venture Capital Fund (BVCF) and the Barbados Quick Response Revolving Seed Capital Fund (BQRRSCF). These funds channel equity fi nancing to recipients through BBEC, which also provides advisory and technical support to participants via the CBET’s proprietary shepherding model.

BBEC only provides equity fi nancing to legal entities which have at least 51% Barbadian ownership. All BBEC equity agreements include a buy-back clause. The Corporation has indicated that the use of the shepherding model precludes the need for BBEC’s involvement in recipients’ boards of directors.

Presently, BBEC may invest up to BD$ 500.000 in equity fi nancing to any venture. Through its mentorship programme the Corporation also works with funding recipients and lending institutions to secure debt fi nancing.

• Caribbean Financial Services Corporation

A private sector initiative, CFSC has a long track record of providing loans and equity fi nancing to small and medium-sized businesses that have the potential to earn foreign exchange and create jobs. The Corporation sources funds from international development banks and agencies. Additionally, CFSC frequently acts as a catalyst in attracting additional fi nancing from other institutions, including commercial banks.

CFSC also manages the Barbados Investment Fund (BIF), which is a facility that is co-funded by the Central Bank of Barbados. The BIF provides equity fi nancing ranging from BD$ 100.000 – BD$ 1 million to small and medium-sized businesses in Barbados.

• Government sponsored credit facilities

The Central Bank of Barbados has set up several credit facilities that are designed to stimulate the growth of output, employment and foreign exchange.

One such facility is the Industrial Credit Fund (ICF) which was established by the Government of Barbados in September 1983 with funding from the International Bank for Reconstruction and Development (World Bank) and the Central Bank of Barbados. Since then additional funding has been provided by the World Bank under its Agricultural Development Project and by the European Investment Bank under its Global Loan Contract.

The ICF is administered by the Central Bank of Barbados and ICF provides medium and long-term credit to productive enterprises operating mainly in the private sector. Funding is channelled to

benefi ciaries through qualifi ed fi nancial intermediaries operating in Barbados.

Potential benefi ciaries fi rst approach a fi nancial intermediary with a project proposal. The intermediary in turn submits a proposal to the ICF for funding. The ICF may advance up to 90% of the requested loan amount; however, the commercial bank retains all of the credit risk of the loan. The Fund’s resources may be used to fi nance fi xed assets (excluding real estate purchases), working capital (primarily raw material purchases) and technical assistance.

In general, only Barbadian nationals whose primary residence is in Barbados may qualify for funding under government affi liated schemes. Corporate bodies, headquartered and operating in Barbados, must demonstrate the capacity to improve output and employment as well as earn foreign exchange.

Although these facilities have provided employment for a few persons, there is some concern that these avenues are also not being fully utilised. One reason for this might be due to a lack of knowledge by businesses of the various sources of fi nancing and technical assistance. This explains why some establishments were not getting badly-needed practical advice on suitable ways to manage their business operations to improve the quality of their product. While attempts have been made to make fi nancing more accessible to small businesses, high interest rates remain an issue. In addition, the tendency for commercial banks to mostly fi nance larger loans, only exacerbates the problem of affordable fi nancing for small businesses. The alternative, equity fi nancing, is only provided by a few organisations, for example, the Barbados Investment Fund and the Barbados Youth Business Trust. However, for this type of assistance to be truly benefi cial to small fi rms, a change in the scope of equity fi nancing programmes will be needed. Equity facilities also tend to favour larger investment projects. Clearly, it would be more meaningful to have these programmes invest in smaller businesses where funds for start-up costs and working capital are needed. This should only be done, however, upon the presentation of a feasible project proposal.

Since 2011, tripartite constituents in Barbados have been involved in an ILO project entitled the Creation of an Enabling Environment for Sustainable Enterprises (EESE). This project has provided evidence based recommendations on how to improve the business environment in Barbados. The areas requiring the most attention were the creation of an appropriate legal and regulatory framework, education, training, and life-long learning, and entrepreneurial culture. Within these areas we expect the design of appropriate policies, one of which will be access to credit for SMEs.

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