ANTIGUA and BARBUDA 1. RECENT ECONOMIC PERFORMANCE

ANTIGUA and BARBUDA 1. RECENT ECONOMIC PERFORMANCE A. Overview In 2006, the Antigua and Barbuda economy recorded its best economic performance in the 25 years since independence. Preliminary data show that real GDP grew by 12%, compared with 5.3% in 2005. The construction sector, which benefited from preparatory work associated with the expected Caribbean hosting of the cricket world cup competition (CWC) in 2007 and a return of investor confidence, particularly in the tourism industry, was the main factor behind the improved economic performance. Other sectors contributing to output growth included transportation, communications, and distribution. Total visitor arrivals for the first nine months of the year rose marginally to 498,190, with stay-over arrivals increasing by 4% and cruiseship passenger arrivals declining by 2.3%. During the same nine-month period the consumer price index (CPI) rose by 0.5%, principally because of higher food, electricity, and alcoholic beverage prices. In the private sector, wage awards were moderate, but in the public sector there were indications of substantial pressure for higher wages and salaries. Preliminary data on Central Government s fiscal operations for the year showed that while the recurrent account deficit narrowed from 2005, the overall deficit widened, partly because of increased spending on projects associated with CWC 2007. Commercial bank liquidity remained high during the fi r st nine months of 2006, but there was some upward movement in interest rates. In the external accounts, the current account deficit widened reflecting an increase in the merchandise trade deficit. At the same time, increased foreign direct investment and higher levels of Central Government borrowing resulted in an overall balance of payments surplus. A. Sectoral Performance Tourism Preliminary data suggest that value-added in the tourism industry, as proxied by the hotels and restaurants sector, rose by 5% in 2006, compared with a decline of 1.1% in 2005. While gross tourism revenue amounts to almost 50% of Antigua and Barbuda s GDP, the contribution of Hotels and Restaurants to GDP was about 11%, the fourth largest after the construction, government services and transportation sectors. Total visitor arrivals to the end of September 2006 increased to 498,140 from 497,974 for the same period in 2005, with stay-over arrivals increasing by 4% to 193,571 while cruise passenger arrivals declined 2.3% to 304,569 from 311,799 during the same period in 2005. The strong performance in stay-over tourist arrivals during the first nine months of the year partly reflected increased marketing efforts on the part of the Ministry of Tourism. Stay-over arrivals from the United States of America (USA) rose by 8% to 58,090, partly reflecting increased airlift from that market following the December 2005 start-up of flights by Delta Airlines to Antigua. Stay-over arrivals from Europe declined by 3.9% to 78,254, mainly as a result of.a 5.9% fall-off to 65,345 in visitor arrivals from the UK; although, when visitor arrivals from the UK are excluded, arrivals from Europe actually rose by 5.5% principally reflecting a restart of Condor Airline fl i ghts from Germany. During the first nine months of the year long-stay visitor arrivals from Canada, and from the rest of the world (ie, excluding USA, Europe, and the Caribbean), grew by 1.3% and 14.3%, respectively. While a number of explanations were advanced for the decline in cruise passenger arrivals during the year, including efforts to reduce operational costs, destination selection by cruise lines continued to involve a range of factors, 20 CDB Annual Economic Review 2006 Antigua and Barbuda

including port charges and berthing arrangements, visitor facilities and passenger reactions, the desire to offer a varied cruise experience in a context of significant repeat business, and competition between cruise lines.. As part of its marketing efforts, the Ministry of Tourism was able to secure calls by two additional ships during the 2006/07 winter season. Agriculture Agricultural output increased by 6.5% in 2006. The fisheries sub-sector increased its output by 12%, accounting for most of the growth. Modest increases were seen in output from the crops and livestock sub-sectors because of more favouable weather conditions during the year. Manufacturing There was little growth in Manufacturing during 2006. The manufacturing sector in Antigua and Barbuda is small, accounted for about 2.5% of GDP in 2006, and produced alcoholic and non-alcoholic beverages, construction materials, paints and varnishes, T-shirts, condiments, and jams and jellies. The sector s performance has been weak since the mid-1980s when several enclave textile and electrical assembly operations closed because of inability to match higher wage rates in tourism. Offshore Financial Services As part of the effort to diversify the economy, the authorities in Antigua and Barbuda have been encouraging the development of an offshore fi n ancial services industry. While the industry is not large it remains an important source of employment. Beginning in the late 1990s, in order to combat concerns about the use of the industry for money laundering, the authorities have strengthened the legislative framework and have intensified operational oversight. As a result, the number of registered offshore banks fell from 57 in 1997 to 16 in 2006, while registered international business corporations fell to 8,000 in 2006 from over 15,000 in 1997. Antigua and Barbuda also maintains a ship registry, which is located in Europe. Offshore Gaming As part of the business development effort, the authorities have promoted the development of an offshore gaming industry. Significant growth in industry operations occurred until the US introduced legislation in the late 1990s which had significant adverse effect on operations, reducing the number of enterprises from about 120 in 1999, employing some 2,000 persons, to about 30 in 2006, employing some 375 persons. The Antigua and Barbuda authorities took the matter to the World Trade Organization (WTO), claiming it had suffered loss because of the actions of the US authorities to prohibit the cross-border supply of gaming and betting services, and obtained a favourable ruling. However, despite further appeals to the WTO and further favourable rulings by that organisation, the authorities in Antigua and Barbuda have continued to report that ongoing US actions have continued to restrict operations in the industry. the US has continued. The authorities have re-stated their commitment to the development of the industry, and at year-end were continuing to pursue the matter at the WTO. Construction In 2006, output in the construction sector increased by 35%, compared with 19.5% in 2005. This reflected the large number of projects being undertaken by the public and private sectors, partly in preparation for CWC 2007, and a return of investor confidence. In the private sector, work continued on several tourismrelated projects. B. Prices, Wages and Employment At the end of September 2006, prices as measured by the consumer prices index (CPI) were 0.5% higher than twelve months earlier, compared with a rise of 1.5% over the corresponding period ending September 2005. Increases in the sub-indices for food, beverages, and fuel and lighting were mainly responsible for the marginal increase, with fuel and lighting recording the largest increase (3.5%), reflecting an upward movement in the fuel surcharge on electricity. Official employment data were not available for the year, but other indicators suggest that the rate of unemployment declined significantly. Partial data indicated that private sector wage increases were in the 3% to 4% range, while there were requests in the public sector for increases ranging from 10% to 40%. C. Fiscal Policy and Debt Operations Preliminary data on Central Government s fi s cal operations in 2006 show that the recurrent account deficit narrowed to $23.7 mn from $28.7 mn in 2005. However, the overall deficit widened to $66.1 mn from $49.1 mn in 2005. In 2006, Central Government s recurrent revenue increased by 23% to $224.7 mn, with tax receipts increasing by 26.5% to $213 mn, compared with the previous year. Indirect tax receipts rose by 17% to $164.8 mn from $140.9 mn a year earlier, while direct tax receipts were boosted by collections of $13.2 mn of arrears and the first full year s contribution from the re-introduced personal income tax. As a result, direct tax receipts rose by 75.2% to $48.2 mn, compared with $27.5 mn in 2005. Angtigua and Barbuda CDB Annual Economic Review 2006 21

Central Government s recurrent expenditure rose by 14.4% in 2006 to $248.4 mn from $217 mn in 2005. Expenditure of wages and salaries, the largest component of recurrent expenditure, increased by 5% to $98 mn, while expenditure on goods and services increased by 28.4% to $53.3 mn because of additional spending associated with CWC. Expenditure on pensions and gratuities increased by 4% to $14.6 mn and interest payments rose by 28.4% to $53.3 mn from $41.5 mn in 2005. Central Government s capital expenditure rose by 119% to $76.4 mn in 2006 from $34.9 mn in 2005. This growth in capital expenditure mainly reflected increased expenditure on projects associated with CWC 2007. Total public sector debt, including governmentguaranteed debt, increased to $1,030 mn (109% of GDP) in 2006 from $968.1 mn (111% of GDP) at the end of 2005. During the year, the Central Government raised $55.9 mn from Treasury Bills and bond issued on the ECCU regional government securities market (RGSM). The funds raised from the securities issues, which were oversubscribed, were earmarked for financing infrastructure development projects; civil service reform via voluntary separation packages and early retirement programmes; the retirement of high cost debt; and for reducing outstanding payments arrears. In July 2006, Antigua and Barbuda became the first ECCU country to issue a US dollar denominated security on the RGSM. D. Financial Sector Liquidity in the banking sector remained high throughout the first three-quarters of 2006, with the ratio of liquid assets to total liabilities and the loans to deposit ratio increasing. The rate of growth of the narrow money supply (M1) slowed to 4.3% compared with 6.1% for the same period in 2005, while the volume of broad money (M2) increased by 7% compared with 3.4% during January to September 2005. During the nine months to September 2006, M1 increased to $202.9 mn from $194.6 mn at the start of the year, with demand deposits rising by 6.1. M2 increased by 7% to $865.2 mn, compared to an increase of 3.4% for the same period in 2005, as savings deposits and foreign currency deposits increased by 10% and 21.7%, respectively, to $302.1 mn and $61.7 mn. Time deposits rose by 3.3% to $298.1 mn. During the first nine months of 2006, there were some upward movement in commercial banks interest rates. The maximum rates offered on savings and time deposits rose by 50 and 125 basis points to 4.75% and 7%, respectively, from the beginning of the year. The increase in the maximum interest rate offered by the commercial banks on savings and time deposits was mainly driven by competition from one of the large insurance companies. The prime-lending rate, however, remained unchanged in the range 10 to11.5%. E. External Sector Preliminary balance of payments estimates indicated that the current account deficit widened to $282.7 mn from $139.3 mn in 2005. This increase in the current account deficit was attributable to the widening of the merchandise trade deficit to $510.4 mn from $396.9 mn in 2005. Travel receipts increased by 4.9% to $343.3 mn, but were not large enough to prevent a 2.6% overall decline on the services account. On the capital and fi n ancial account, the net surplus more than doubled to $293.6 mn from $130.4 mn in 2005. Increased foreign direct investment in the tourism sector and Central Government s borrowings were mainly responsible for the increase in the net surplus on the financial and capital account. Net errors and omissions were estimated to increase by 104.7% to $253.3 mn. As a result, Antigua and Barbuda is estimated to have recorded an overall payments surplus of $16.3 mn in 2006, up from $7.1 mn in 2005. 2. MAJOR POLICY ISSUES A. Fiscal Policy The public sector in Antigua and Barbuda has experienced large fiscal deficits and debt repayment arrears for several years, resulting in a significant debt overhang and in substantial difficulty in accessing credit markets. The new administration, which assumed office in 2004, has initiated a strategy to address the public fi n ance and debt issues. In relation to debt issues it has engaged a firm of debt advisors to design and assist in the implementation of a programme of debt reduction. The public finances reform programme has included the reintroduction of a personal income tax during 2006, and a transactions-based tax is expected to be introduced early in 2007, to be followed by a restructuring of the property tax arrangements. On the expenditure side, the authorities have introduced measures to reduce discretionary tax waivers and increase the efficiency of tax administration in its main revenue collection agencies (the Customs and Excise, and Inland Revenue Departments). As part of a public sector reform initiative which is integral to the expenditure reduction efforts, the authorities have indicated their intention to reduce 22 CDB Annual Economic Review 2006 Antigua and Barbuda

the Central Government s workforce using voluntary severance and early retirement programmes; and significant tightening of expenditure controls in the line ministries and departments is expected. Given the size of the public debt servicing requirements, however, the sustainability of the public sector finances reform efforts will depend substantially on the achievements with respect to debt. B. Poor Economic and Financial Databases The inability of the authorities to manage the public fi n ances effectively in the past has, in part, reflected a general lack of accurate and timely data on the financial operations of the Central Government and the stateowned enterprises. As part of the fiscal reform effort a currently ongoing programme to automate public sector accounting systems was started in 2005. In 2007, the computerisation of Government s accounts will be extended from the Ministry of Finance (MOF) to the other line ministries. The situation regarding non-central Government public sector entities is still to be resolved, but available information suggests that, in terms of revenue, the rest of the public sector is as large as the Central Government. Effective central oversight and control of the public finances is a critical requirement of public finances reform in Antigua and Barbuda given the current situation and the manner in which that situation has evolved over time. Matching the weakness in public financial management has been a low level of institutional capacity to track economic and social developments in a comprehensive and timely enough manner to inform policy-making adequately. The difficulties relate both to technical capacity issues and a shortage of financing to address the situation. Continuation of the situation will affect the capacity, not only to identify and address domestic needs, but to place those needs in a broader subregional and regional integration context, particularly where external assistance might be available to address particular issues. C. Lack of Economic Diversification Antigua and Barbuda s economic base is narrow, with the economy heavily dependent on tourism and externally oriented services for employment and income.. In the past, GAB has targeted the offshore fi n ancial services and gaming industries for expansion; however, unfavourable international developments have slowed growth in these areas. While possibilities exist in the development of linkages between tourism, and agriculture and fishing, the country s proximity to lower-cost agricultural producers will limit the growth potential except in niche areas, and other opportunities which emphasise the areas where the country has competitive advantage will have to be identified. Significant effort will need to go into the preparation of a longer-term development strategy for the country. D. Physical Infrastructure The provision of good quality physical infrastructure is critical for social and economic development. Over the years, neither the extent nor the quality of physical infrastructure in Antigua and Barbuda has kept pace with requirements. The situation has been contributed to by the weak fiscal situation of the public sector and by the failure to price public utilities in a manner that would allow for full cost recovery and for some contribution to capacity expansion. In particular, substantial and urgent attention needs to be paid to the electricity supply arrangements, given the critical importance of electrical power to all aspects of social and economic activity, and to the generation and expansion of incomes. In the transportation sector, the authorities have has undertaken considerable road rehabilitation work in recent times, particularly in anticipation of CWC 2007; but much more remains to be done to bring the road transport system up to an acceptable standard. As part of the ongoing effort to restructure the management of the public finances, considerable effort will be required to incorporate development planning into a functioning process that integrates public sector investment programming, debt and borrowing programme management, and multi-year public sector planning and budgeting; and in which investment in physical, social, and institutional capacity development is informed by an overall development vision for the country. E. Human Resource Development While the performance of Antigua and Barbuda s education and health sectors is generally comparable with those of other countries in the CARICOM region, the educational and health infrastructure has been neglected over the years, and overall performance has not maintained the desired levels. In education, the autrhorities recognise that the general level of capacity development and skills training needs to be improved and is undertaking a concerted effort to enhance delivery. In recent times, an influx of labour from other Caribbean countries has meant an increasing number of children in the system, some for which English is not the primary lanuage. Initiatives are currently underway to address some of the secondary and tertiary-level Angtigua and Barbuda CDB Annual Economic Review 2006 23

deficiencies, and to strengthen technical and vocational education. However, significant challenges still need to be addressed. Dealing with health sector issues has posed major challenges for the authorities. At the level of hospital care, the existing facility (the Holberton Hospital) is in need of extensive rehabilitation; while a new facility on which considerable resources have been expended over the past 10 years is still unfinished and not yet in service. In 2005, the authorities secured technical assistance from the Pan American Health Organisation (PAHO) to develop a master plan for rehabilitating the Holberton Hospital. The recommendations of the master plan are currently being reviewed. The authorities are also seeking to complete the work on the new Mount St. John Hospital, with additional funding from the People s Republic of China. The authorities continue to implement the country s strategy to reduce the incidence of HIV/AIDS by trying to control the spread of the disease through counselling and providing anti-retrovirals. While there have been some successes, the number of people being infected by the virus is still increasing, although at a slower pace than in the recent past. F. Poverty The last estimate of the incidence of poverty was undertaken by PAHO in 1994. That study estimated that 12% of Antigua and Barbuda s population was living below the poverty line. Since 2004 the authorities have been implementing a number of programmes to help the poor, including providing school uniforms, school meals, and increases in the minimum pension to qualifying retired persons. However, these actions were taken without the benefit of an up-to-date poverty assessment. With assistance from CDB, work on a new poverty assessment was underway at yearend, following start-up delays related to the need for institutional strengthening of the country s statistics capacity; and comprehensive information to inform poverty-reduction policy-making is expected to become available during 2007. G. Crime In recent years there has been an increase in the incidence of violent crime, particularly crime involving the use of firearms. This is an area for great concern because of its potential to undermine the social and economic fabric of the country, but also because of its potential impact on tourism. Rising crime levels are thought to be related to the use of Antigua and Barbuda for the trans-shipment of illegal drugs, and to the illegal importation of firearms to protect the illegal drug trade. Male youth marginaliation, rising income inequality, and lifestyle preferences are thought to be contributory factors. The situation is also complicated by an infl u x of migrant labour and convicted nationals deported from other countries, mainly the US. A programme to strengthen the country s security systems, including expansion of the police force, advanced training for police officers, and the upgrading of police stations and the prison, is expected to be implemented beginning in 2007. H. Environment Small countries, like Antigua and Barbuda, have to preserve a delicate balance between economic growth and environmental sustainability. This is a significant challenge because damage to the environment is not always immediately obvious, and the political pressure for social and economic improvement remains substantial. However, there is increasing evidence of coastal degradation in a context where incomes are substantially based on the quality of the natural environment. Enforecemnt of existing legislation has been adversely affected by weak institutional capacity The authorities have announced that projects to rehabilitate the North-west coastline, which has suffered from beach erosion, and instal a central sewerage system for the capital, St. John s, will get underway in 2007. In Barbuda, a ban was placed on sand mining in mid-2006. 3. PUBLIC SECTOR INVESTMENT PROGRAMME The PSIP is increasingly being driven by the vision outlined in the country s draft national development plan (NDP) to create an effective and efficient economy, through sustainable development, thereby providing a superior quality of life for all Antiguans and Barbudans, now and in the future. The draft NDP also stresses strengthening the role of the Central Government in providing social services, and lists the development objective as: (a) (b) improving the country s socio-economic base; reforming the public sector; (c) sustaining and conserving the country s biodiversity; 24 CDB Annual Economic Review 2006 Antigua and Barbuda

(d) reducing the national debt/gdp ratio to sustainable levels; (e) alleviating poverty; (f ) reducing vulnerability to national disasters; (g) strengthening the relationship between the inhabitants of the islands of Antigua and Barbuda; and (h) enhancing private and public sector partnerships. With support from Caribbean Regional Technical Assistance Centre (CARTAC), the authorities are in the process of establishing a system for developing and overseeing the PSIP. The system is currently limited to the investment programme of the Central Government. However, once the system is fully in place, the intention is to extend it to cover the entire public sector. Planned spending on the PSIP, excluding purchases of motor vehicles, computers, furniture and fittings, and other capital goods over the period 2007-2010 is estimated to total $157.9 mn. Of this total, ongoing projects amount to $127.9 mn, while new projects total $30.1 mn. 4. MEDIUM-TERM ECONOMIC PROSPECTS If the country s fiscal and institutional capacity challenges are successfully addressed, the mediumterm economic prospects are favourable. Based on a continuation of global economic growth, tourism is expected to continue to drive domestic economic expansion. Hotel plant has been substantially upgraded, and the Ministry of Tourism s strong marketing efforts are programmed to continue. The Ministry expects to complete work on a tourism development master plan with support from the Commonwealth Secretariat. While activity in the construction sector is expected to slow somewhat following the completion of work in connection withfor CWC in 2007, a number of new tourism-based projects are expected to start in late 2008 and early 2009; and these together with the public sector s capital programme are expected to maintain a substantial level of activity in the sector. The rate of inflation is expected to remain modest over the medium-term despite the expected short-term inflationary impact of introducing the transactionsbased tax (ABST) in 2007. Fiscal performance is likely to be the major source of attention over the medium term. The authorities will need to raise extra revenue from a reformed tax system to service debt and to to fund critical public investment. The introduction of the ABST and the reform of property tax arrangements scheduled for 2007, together with the 2006 re-introduction of the personal income tax, comprise, along with the ongoing automation exercise, the main components of revenue reform. The programme to reduce the size of the public service is an important element in the expenditure reduction arrangements, as is the ongoing effort to reduce debt and the cost of debt servicing. On current projections, however, substantial fi s cal defi c its will continue to characterise medium-term performance. Angtigua and Barbuda CDB Annual Economic Review 2006 25