BRIDGETOWN, Barbados (CMC) — The Central Bank of Barbados (CBB) said Wednesday that the local economy had contracted by an estimated 0.7 per cent during the first quarter of this year and warned that the outlook for the economy “remains challenging”.

CBB Governor, Cleviston Haynes, presenting the financial institution’s review of Barbados’ economic performance in the first quarter of 2018, said that the performance reflects the combined impact of a decline in real output in the tourism sector, the slowing of construction activity, the late start to the annual sugar harvest and the slowdown of domestic demand arising from the budgetary measures announced in the May 2017 budget.

The CBB said that the supply of foreign exchange was more than adequate to meet market demand on a timely basis during the quarter, thus enabling foreign exchange dealers to sell some of their surpluses to the Central Bank.

“However, higher public sector debt service obligations than usual contained the growth of international reserves at the Central Bank to BDS$14 million (One Barbados dollar = US$0.50 cents) for the period,” the CBB said, adding that as a result, the import cover of 6.9 weeks at the end of March remained below the 12-week minimum holding that the bank considers as adequate.

The Central Bank said that the government’s fiscal consolidation efforts during the financial year 2017-2018 led to a modest improvement in the primary balance and an overall reduction in the fiscal deficit from the previous year, but there was a significant deviation from the targeted outcome.

“This outturn is attributable to the delays in the execution of planned divestment activities, the underperformance of revenue, particularly the National Social Responsibility Levy (NSRL) and the Value Added Tax (VAT) and higher interest expenditure than originally envisaged.”

The Central Bank said that decisive stabilisation measures that place the public finances on a sustainable path, alter the trajectory for the international reserves and create the conditions for strong durable growth are now needed in order to deal with the challenges ahead for the local economy.

It said addressing the public finances remains a priority so as to stabilise and ultimately grow the economy.

“Our efforts to date have not resulted in bringing the fiscal deficit to a manageable level. The demand for local Government securities has declined and the excess of external debt service over external borrowings continues to create added financing pressure.

“The impact of these developments in recent years has been a build-up of domestic arrears and increased reliance on Central Bank financing. The current borrowing requirement for fiscal year 2018/2019 therefore needs to be reduced,” the CBB added.

It said that the task at hand is to implement a strategy that reduces the current year deficit, builds the platform for strengthening the public finances over the medium-term and fosters an environment that creates access to external funding.

“In addition, we need to create the fiscal space to enable infrastructural development that promotes long-term growth. In these circumstances, improving the outlook requires Government’s fiscal strategies to embrace durable expenditure reforms, including for state-owned enterprises and improved tax administration.”

But the Central Bank noted that given the estimated downturn in tourism in the first quarter and ongoing delays in project start-ups, it has revised downwards its current growth forecast for 2018 within the range of -0.25 to 0.25 per cent.

“This outturn is likely to be further influenced by the speed and nature of the fiscal adjustment policies and the quantum of new investment. However, the outlook for growth requires an overall policy framework that includes measures to strengthen the business environment, promote competitiveness, spur innovation and encourage emerging sectors, such as alternative energy.”

The CBB said that sustainable growth must be underpinned by an adequate foreign exchange reserve buffer, noting that the “modest reserve growth” in the first quarter and into April needs to be supported by further inflows in light of debt service commitments and the risk of rising international oil prices.

“In this regard, the ongoing uncertainty related to asset sales remains a source of concern. Accessing increased public and private sector capital flows is therefore warranted to strengthen the reserves position,’ the CBB said, warning “achieving these objectives is a major undertaking that requires commitment and focus by all stakeholders”.

In its review of the economy, the CBB said that real value-added in the tourism sector is estimated to have declined by approximately one per cent compared to the 4.5 per cent expansion in the corresponding period of 2017.

It said that long-stay arrivals rose by 5.8 per cent, with data up to February indicating that visitors from the key source markets of the United States, Canada and the United Kingdom were up by 5.1, 10.1 and 6.5 per cent, respectively.

However, the strong growth of shorter staying North American arrivals who now account for 42 per cent of annual arrivals compared to 36 per cent in 2014 was offset by a reduction in the overall average length of stay.

The CBB said that overall traded sector activity was also dampened by the delayed commencement of the sugar harvest, partly because of the late receipt of payments by private cane owners for the prior year’s crop.

The harvest is expected to be slightly above the level of output in 2017, with production occurring during the second quarter of the year.

In contrast to first quarter growth of 2.3 per cent in 2017, activity in the non-traded sectors is estimated to have been flat.

“Following its robust performance during the first quarter of 2017, output in the construction sector weakened, the result of the culmination of mainly tourism related projects that supported activity last year, while new tourism-related projects continued to be delayed.

“Preliminary data suggests that the other non-traded sectors were adversely impacted by the fall-off in domestic demand caused in part by the tightening of fiscal policy,” the CBB said noting that the average unemployment rate for the four quarters ending December 2017 was 10 per cent compared to 9.7 per cent for the previous year-end, but the average level of unemployed persons remained relatively stable.