agricultural sector s output increased by 2.6%, with the fisheries sub-sector growing by 3.5% and the crops and livestock sub-sectors both increasing by 2%. Output from the crops sub-sector was affected by unfavourable weather conditions in the early part of the year. Several factors constrain the ability of the crops sub-sector to increase its contribution to GDP, including inadequate water resources for irrigation, ineffective credit, an unattractive investment climate and high labour and other operating costs. 1. RECENT ECONOMIC PERFORMANCE A. Overview Preliminary estimates indicated that the Antigua and Barbuda economy grew by 3.2% in 2005 compared with 5.2% in 2004. Construction, banking and insurance, communications and wholesale and retail trade sectors were the main contributors to economic growth. Total tourist arrivals to the end of November 2005 declined by 10.9% to 594,203, with stay-over and cruiseship passenger arrivals falling by 2.7% and 14.6%, respectively, compared with the corresponding period in 2004. To the end of the year, stay-over tourist arrivals fell by 2.8% to 238,804 compare with the previous year. The consumer price index (CPI) increased by 1.1% in 2005, compared with 2.8% in 2004, mainly because of a fall in the accommodation index, which partially offsets the increases in the other indice.. In the public sector, Central Government s recurrent account and overall deficits to the end of June 2005 increased, compared with the same period in 2004, as growth in recurrent expenditure exceeded that of recurrent revenue receipts. Liquidity in the banking system remained high throughout the year. Meanwhile, on the external account, the overall deficit widened following an increase in merchandise imports, particularly of construction materials. B. Sectoral Performance Agriculture The agricultural and fisheries sector is small and accounts for about 3% of GDP. Fishing is the largest sub-sector, accounting for about 50% of the sector s output. The crops and livestock subsectors account for approximately 27% and 21.5% of output respectively, with the forestry sub-sector accounting for just over one percent. In 2005, the 18 Tourism The tourism and hospitality sector is the central plank in the economy of Antigua and Barbuda. In 2005, the sector accounted for over 50% of GDP. The sector has not recovered fully from the impact of several devastating hurricanes in the latter half of the 1990 s and uncertainty created by the September 11th, 2001 terrorists attacks in the US, and the US military and other related responses to that catastrophe. As a result, stayover tourist arrivals have yet to reach the total achieved in 1994. Total tourist arrivals to the end of November 2005 declined by 10.9% to 594,203, compared with the corresponding period in 2004, with stay-over tourists and cruiseship passenger arrivals declining by 2.7% and 14.6% to 215,920 and 378,283, respectively. In December 2005, stay-over tourist arrivals fell by 4.3% compared with the corresponding period in 2004. Because of the decline in stay-over arrivals in December 2005, total stay-over arrivals fell by 2.8% in 2005 to 238,804. Stay-over arrivals from the USA and Europe, the two largest sources of tourist arrivals declined by 5.5% and 6.9% to 66,644 and 105,735, respectively. A reduction in room capacity following the closure of two major hotels for renovation was a major factor behind the decline in stay-over visitor arrivals. Other factors affecting the sector s performance in 2005 included an unusually active start to the hurricane season; the depreciation of the pound sterling against the US dollar (to which the East Caribbean Dollar is pegged); and the impact of higher fuel prices on the cost of air transport. Stay-over tourist arrivals from Canada and the rest of the world, however, rose by 6.2% and 7.9%, respectively. Airlift capacity was enhanced during the final quarter of the year, with Delta Airlines making its inaugural flight from the USA and Condor Airlines recommencing flights out of Europe. Cruiseship passenger arrivals to the end of November 2005 declined by 14.6% to 378,283
compared with the corresponding period in 2004. The decline in cruiseship passenger arrivals represents a reversion to the trend growth rate, following the 35.5% growth in arrivals recorded in 2004. Cruiseship passenger arrivals in 2004 had benefited from an increase promotional expenditure associated with the opening of the Nevis Street Pier, in St. John s, the capital. Manufacturing The manufacturing sector s contribution to GDP, at 2.3%, is small. Since the mid-1980s when several enclave clothing and electrical enterprises closed because they were unable to attract labour at the then prevailing rates, the sector s performance has been weak. Output from the manufacturing sector increased by 3.5% in 2005, after declining by 4% in 2004. The sector s output comprises the production of beverages, construction materials, paints and varnishes, furniture, condiments and jams and jellies. Increased production of construction materials, paints and varnishes and beverages contributed to the sector s performance in 2005. Financial Services Since 1982, the Government of Antigua and Barbuda (GAB) has encouraged the development of the offshore financial services as a means of diversifying the economy. In the late 1990s, GAB strengthened the legislative framework governing the operation of the offshore financial services sector in an effort to combat growing concerns about its possible use for money laundering. The legislative amendments led to the sanitising of the offshore sector. Consequently, the number of registered offshore banks fell to 15 in 2005 from 57 in 1997. Registered International Business Corporations, however, increased from 10,000 in 1997 to 13,000 in 2005. GAB also maintains an offshore ship registry, which generates a valuable source of revenue. In 2005, the ship registry increased its revenue receipts following the strengthening of its management and administrative procedures. In the second half of the 1990s, the offshore gaming sector was one of the most successful nonfinancial offshore services in Antigua and Barbuda. This sector grew at a very rapid pace between 1995 and 1999, after which authorities in the US started to apply legislative pressures. The actions of the US authorities caused a number of enterprises to close. Consequently, the number of offshore gaming enterprises operating in Antigua and Barbuda declined from 120, in 1999, employing over 2,000 persons to 35, employing about 400 persons in 2004. GAB considered the actions of the US authorities in relation to the offshore gaming industry were in violation of commitments made under the World Trade Organisation s (WTO s) General Agreement on Trade in Services (GATS). In 2003, GAB requested the establishment of a WTO Panel to investigate its claim that measures applied in the USA by central, regional and local authorities affected the supply of gambling and betting services had violated commitments under the GATS. The Panel met in 2004, and the report of its findings was circulated in the final quarter of that year. The US authorities subsequently filed an appeal against the panel s findings in early 2005. GAB also appealed certain issues of law and legal interpretations developed by the panel in its findings. In April 2005, the WTO dispute settlement Appellate Body ruled in favour of Antigua and Barbuda. In its ruling, the Appellate Body recommended that the USA bring its measures found to be inconsistent with the GATS into conformity with its obligations under the agreement. The USA stated that it intended to implement the recommendations of the Appellate Body s report, but required a reasonable time to do so. GAB requested that a reasonable time be determined through binding arbitration. An arbitrator was appointed, and subsequently determined that the reasonable time period was eleven months and two weeks commencing April 20, 2005. As a result of GAB s actions, interest in the offshore gaming sector and Antigua and Barbuda as a favoured location was revived. Between April 2004 and November 2005, 14 new offshore gaming licences were approved, of which 11 were for new companies. At least 10 new offshore gaming enterprises are scheduled to start operations in 2006. Construction Growth in the construction sector output increased by 8.5% in 2005, compared with 2.5% growth in 2004. During the year, work on the expansion and rehabilitation of several hotels accelerated in preparation for the International Cricket Council (ICC) Cricket World Cup 2007. Work continued on several private sector financed commercial and business complexes, as well as a number of 19
residential housing projects. In the public sector, with assistance from the Government of the People s Republic of China, activity was focused on erecting a new cricket stadium for the ICC Cricket World Cup 2007. Several road rehabilitation and construction projects relating to satisfying conditions for hosting the ICC World Cup Cricket competition were also started during the year. Other significant public sector projects undertaken during the year included a fisheries project in St. John s, a road project in Barbuda and the partly private sector financed new public library. Work continued during the year on the part Caribbean Development Bank (CDB) financed Basic Education and Airport and Seaport Security Enhancement Projects. C. Prices, Wages and Employment The rate of increase in the CPI slowed to 1.1% in 2005 from 2.8% in 2004. This slowdown in the rate of price inflation was mainly caused by a 7.2% fall in the accommodation index, compared to an increase of 2.4% in the previous year. Although all the other indices, except furnishing, supplies and operations recorded increases, their accumulated total was only sufficient to outweigh the fall in the accommodation index. The fuel and light index reported an increase of 20.4%, compared with an increase of 1.4% in 2004. This increase in the fuel and light sub-index represented the largest for any of the indices. During the year, the electricity services and gasoline price indices rose by 20.5% and 43.3%, respectively, while the LPG and cooking gas index remained unchanged. In the first half of the year, the CPI had declined by 0.5% because of a decline in the accommodation sub-index and GAB s policy of keeping the prices of gasoline, diesel and LPG unchanged at the expense of its revenue receipts. With sharply rising world fuel prices, GAB found this policy to be unsustainable and allowed the prices of gasoline and diesel to increase during the second half of the year. Official employment and wage data were not available for the year. However, indicators suggest that the rate of unemployment declined modestly in 2005 due to the creation of a substantial number of new jobs in the construction and offshore gaming sectors. Partial data, obtained from the Labour Department, suggests that private sector wage increases remained moderate averaging about 3%. In the public sector, wage increases were modest. D. Fiscal Policy and Debt Operations Preliminary data on Central Government s fiscal operations for the first six months of 2005 showed that its performance weakened compared with the corresponding period in 2004. The overall deficit increased to $18 mn, compared with $8.6 mn for the corresponding period in 2004. The Central Government s recurrent account deficit also increased to $7.7 mn from $3.5 mn in 2004. The deterioration in Central Government s fiscal performance was mainly caused by increased expenditure on personal emoluments and goods and services. The increase in personal emoluments reflected the payment of backdated pay awards. For the year as a whole, the recurrent account deficit is projected to decline. The personal income tax is expected to have a significant impact on revenue receipts in the second half of the year. Recurrent expenditure is also projected to fall in the second half of the year because of lower spending on goods and services and reduced interest payments. During the first half of 2005, Central Government s recurrent revenue increased by 5.8% to $92.4 mn over the corresponding period in 2004, with tax receipts increasing by 5.6% to $84.9 mn. Increases in indirect tax receipts were mainly responsible for this improvement in tax receipts. A full assessment of the impact of the re-introduction of the personal income tax is not possible because it became effective in April 2005. In fact, direct tax receipts for the first six months of the year declined compared with the corresponding period in 2004, following a fall in corporation tax receipts. In 2004, the IRD had been successful in collecting a significant amount of arrears in corporation tax. Central Government s recurrent expenditure increased by 10.2% during the first half of the year to $100 mn from $90.8 mn for the corresponding period a year earlier. Personal emoluments and related allowances increased by 8.9% to $49.7 mn. Over the same period, expenditure on goods and services increased by 30.5% to $19.8 mn. Pensions and gratuities also increased by 36.2% to $7.2 mn. An increase in the minimum pension to $278 per month from $185 per month was mainly responsible for the growth in expenditure on pensions and gratuities. Interest payments declined by 4.1% to $16 mn during the first half of the year. Central Government s capital expenditure 20
increased to $17.9 mn in the first half of 2005 from $6.8 mn for the corresponding period in 2004. The growth in capital expenditure mainly reflected the work associated with the construction of the new cricket stadium for the ICC Cricket World Cup 2007, road repairs and maintenance. Total public sector debt, including Government guaranteed debt, increased to $924.2 mn (105.7% of GDP) in 2005 from $839.5 mn (102% of GDP) in 2004. GAB renegotiated two major long-standing external loans that were significantly in arrears in 2004 and obtained over $218.3 mn in debt forgiveness. In 2005, the GAB initiated negotiations with the Government of France to restructure a loan on which significant payment arrears had accumulated. At the end of 2005, external debt (including arrears) totalled $420.6 mn, or 45.5% of public sector debt. E. Financial Sector Commercial bank liquidity remained high in 2005. During the first six months of the year, the narrow money supply (M1) increased by 9.4% compared with the corresponding period in 2004. During this period, the (M2) component increased by 2.8% to $776.5 mn. The demand deposits component of (M1) increased by 14.5%, but was partially offset by a 5.3% decline in notes and coins held by the public. Growth in (M2) was attributable to the increase in (M1) because the quasi-money component only increased by 0.8% to $596.5 mn over the period. Of the main components of quasimoney, savings deposits increased by 5.9%, while time and foreign currency deposits declined by 1.8% and 9.6% respectively. Changes in the money supply can be expected to impact on the real economy in various ways. Generally, an increase in the money supply will lead to an increase in the consumption component of aggregate demand, and this will be reinforced by lower interest rates causing an increase in demand for commercial bank credit to finance consumption and the construction of houses and other asset purchases. Total commercial bank deposits rose by 6.5% to $1,007.6 mn during the first seven months of 2005, compared with an increase of 4% for the corresponding period in 2004. Over the same period, loans and advances increased by 2.2% to $724.4 mn because of increased borrowing for the construction and renovation of residential housing and other personal purposes. Commercial bank lending for residential home construction and repairs increased by 15.3% to $124.1 mn, while other personal loans increased by 7% to $97.9 mn. Loans and advances to the tourism, agriculture, manufacturing and distributive trades all declined during this period. During the first half of the year, commercial bank s interest rates remained relatively stable, with the exception of the rates offered on fixed deposits, which ranged from 1% to 6%, compared with 1% to 7% at the beginning of the year. Interest rates on savings deposits ranged from 3-5%, and the prime-lending rate remained unchanged in the range of 10-11.5%. F. External Sector Preliminary estimates of the balance of payments for 2005 indicated that the current account deficit widened to $96.9 mn from $88.5 mn in 2004. This increase in the recurrent account deficit occurred mainly because of a widening in the merchandise trade deficit to $331.5 mn from $323.6 mn in the previous year. At the same time, the surplus on the services account contracted by 2.5% to $265.9 mn mainly because gross tourist receipts remained unchanged at $337.7 mn, despite the decline in tourist arrivals. On the capital and financial account, a surplus of $55.7 mn was recorded compared to a deficit of $54.8 mn a year earlier. The estimated overall balance of payments deficit was $41.2 mn in 2005, compared with $160.7 in 2004. Debt relief obtained on the two large external loans renegotiated in 2004 distorted the overall balance of payments deficit in 2004. 2. MAJOR POLICY ISSUES A. Fiscal Policy Over the years, GAB has accumulated large fiscal deficits and debt repayment arrears, which have adversely affected the country s creditworthiness and its ability to access external funding for its PSIP. In 2004, GAB successfully renegotiated two loans that were in arrears, and in 2005 started negotiations to restructure another loan. Over the next year, GAB will be formulating a debt reduction strategy with the assistance of the Canadian International Development Agency (CIDA)-financed consultants. GAB considers fiscal responsibility fundamental to good governance, and intends to achieve a small recurrent account surplus in 2006 and generate significant surpluses thereafter. To achieve this objective, GAB reintroduced the individual income tax in 21
2005 and plans to introduce the value-added type sales tax (Antigua and Barbuda Sales Tax) in 2006. In addition, GAB intends to continue to curtail discretionary tax waivers and increase the efficiency of tax administration by the main revenue collection agencies. GAB also intends to reduce the size of the Central Government s workforce and tighten expenditure controls in line ministries and departments. In the 2005 Budget Statement, GAB indicated that it would reduce expenditure on personal emoluments by 20%, but this decision was not implemented. The 20% reduction in expenditure on personal emoluments is expected to be substantially achieved in 2006. B. Poor Economic and Financial Databases A general lack of timely data on the financial operations of the Central Government and the state-owned enterprises severely limit GAB s ability to manage its fiscal position. In 2005, GAB acquired the Freebalance Financial Software package. Work has started on the computerisation of the Central Government s accounting system starting with the Accountant General s Department. The computerisation of the Government s accounts will be extended to the other line ministries in 2006 with the implementation of cash management and commitment controls. There is also a need for GAB to strengthen its institutional capacity to collect, record and analyse economic and financial data. C. Lack of Economic Diversification Antigua and Barbuda s economic base is very narrow. The economy is heavily dependent on the tourism industry for foreign exchange earnings, employment and revenue. In an effort to accelerate the diversification of the economy, GAB has established the Antigua and Barbuda Investment Authority. The Investment Authority will serve as a one-stop shop for investors, and will function as an investment promotion and facilitation agency. GAB is also looking at upgrading the Free Trade Zone facilities to encourage the establishment of light manufacturing activities for export. In 2006, the offshore gaming industry is set to expand significantly following the WTO ruling in favour of Antigua and Barbuda in 2005. In the agricultural sector, actions will be taken to increase the fish catch and expand sea-island cotton and pineapple production. D. Infrastructural Services The provision of good quality infrastructural services is very important to economic development. However, over the years, infrastructural services have been severely neglected in Antigua and Barbuda. Most of the infrastructural services have deteriorated because of lack of new investment and expenditure on maintenance. GAB s weak fiscal situation and its unwillingness to price public utilities in a manner to recover costs contributed to the poor quality of infrastructural services. The quality and delivery of electricity supplied by Antigua Public Utilities Authority (APUA), in particular, has deteriorated considerably in recent years, because its electricity generating plants are old and need considerable maintenance. Currently, the APUA Electricity Division only supplies a portion of the country s electricity needs. A privately-owned company meets the balance. Even with the privately supplied electricity, Antigua and Barbuda suffers from frequent power outages because of breakdowns at the APUA power generation plants. APUA intends to upgrade its power generation facilities, but its financial situation is very weak. Growing concerns about APUA s governance by its Commissioners, whose appointments had earlier been terminated, led GAB to appoint a sole investigator to look into its operations. The investigation was limited to its governance and management commencing from the appointment of the commissioners. The report has been presented to GAB and is currently being reviewed. In the transportation sector, GAB has undertaken considerable road rehabilitation work. With the current focus on preparation for ICC World Cup 2007, improvements at the airport and to the roads are highlighted. E. Human Resource Development Antigua and Barbuda s education and health sectors compare favourably with other countries in the Caribbean. Over the years, the educational infrastructure has been neglected. As a result, the performances of students have not maintained the desired standard. GAB recognises that the general level of education and skills training need to be improved and is undertaking a concerted effort to improve their delivery. The CDB-financed Basic Education Project, which is still ongoing, is aimed 22
at improving the quality and effectiveness of basic education. At the tertiary level, the EU financed expansion of the State College will allow that institution to enrol more students. In the health care sector, GAB is renovating the Holberton Hospital. GAB secured technical assistance from the Pan American Health Organisation (PAHO) in 2004 to develop a master plan for its renovation. Work on the master plan was completed in 2005, and the recommendations are being reviewed. GAB is also looking to complete construction work on the new Mount St. John Hospital with additional funding from the People s Republic of China. GAB is looking for a joint venture partner to operate the new hospital. In addition to the infrastructural development in the health sector, GAB continues to implement its strategy to reduce the incidence of HIV/AIDS. The strategy is geared towards controlling the spread of the disease by undertaking voluntary counselling and the provision of anti-retrovirals. F. Poverty No poverty assessment has been undertaken in Antigua and Barbuda in recent times. In 1994, it was estimated that 12% of the population lived below the poverty line. GAB has introduced several measures to assist the poor including the provision of taxpayer financed school uniforms, school meals and increases in the minimum pension. These actions were taken without the benefit of a poverty assessment. To obtain a better picture of the extent of poverty in Antigua and Barbuda, GAB with assistance from CDB, initiated a poverty assessment in 2005. It is expected that when the poverty assessment is completed, in the first half of 2006, GAB will have relevant information to identify and develop policies and targeted programmes to reduce the extent of poverty. G. Environment In a small country, like Antigua and Barbuda, it is a major challenge to maintain a balance between economic growth and environmental sustainability because of limited natural, technical and financial resources, and the urgency of expanding the economy to create productive employment opportunities. There are very strong indications that coastal degradation is taking place. If left unchecked, the coastal degradation is likely to have an adverse impact on the tourism sector, which is the lifeblood of the economy. While there are laws and regulations in place, enforcement is a major deficiency because of institutional weaknesses. 3. PUBLIC SECTOR INVESTMENT PROGRAMME A. Development Objectives GAB s draft National Strategic Development Plan (NSDP) outlines its vision to create a dynamic and efficient economy by strengthening its role in the provision of social services, developing a closer relationship with the private sector and emphasising human resource development. Over the medium-term GAB expects to: (i) reform the public sector; (ii) reduce the debt to GDP ratio to sustainable levels; (iii) introduce measures to alleviate poverty; and (iv) reduce vulnerability to natural disasters. B. Public Sector Investment Programme 2004-07 The PSIP for the period 2004-07 is dominated by projects to improve infrastructure and facilities related to the hosting of ICC World Cup 2007. These projects include the improvement of the V.C. Bird International Airport, construction of a new cricket stadium, the construction and repair of roads, and the development of a sewage system in St. John s, the capital. Proposed expenditure for the period amounts to $288.2 mn, of which $147.9 mn represented ongoing projects and $140.3 mn new projects. Of the proposed expenditure on the PSIP/infrastructure projects account for over 60%. External resources will be used to finance $116 mn and domestic resources the remainder. Expenditure on the PSIP increased by 75.5% to $35.7 mn in 2005 from $20.4 mn in 2004, partly because of the impact of the Stabilisation Fund on GAB s finances. Proceeds from the personal income tax are deposited in the Stabilisation Fund, which is used for development and maintenance of physical infrastructure and for the procurement of goods and services, among other things. In 2006, expenditure on the PSIP is expected to increase significantly because of the need to have the infrastructure in place for ICC World Cup 2007. Financing for some of the projects included in the PSIP has not been fully identified. These projects include the V.C. Bird Airport Improvement Project and the St. John s Sewerage Project. It is 23
expected that funds obtained from the Airport Facilitation Charge will be used to finance the Airport Improvement project. During the year, work continued on the CDB-financed, Airport and Seaport Security Enhancement Project. Economic service projects represent a small portion of the PSIP. The development of a Japanese financed fisheries complex in the Point area of St. John s is the most important economic services project. Other projects in the agricultural sector include the rehabilitation of buildings, construction of mini dams for irrigation and the upgrading of the cotton division. In the tourism sector, there is a project to renovate and upgrade historical sites. In the social sectors, expenditure is expected to take place on the completion of the new Mount St. John s Hospital, a new science block at the State College, a school of excellence and the new cricket stadium. The Government of the People s Republic of China will be financing the completion of the new hospital and the construction of the new cricket stadium. The work at the State College will be financed by the EU. The ongoing CDB financed Basic Education Project will be moving into its final phase in 2006. 4. MEDIUM-TERM ECONOMIC PROSPECTS Antigua and Barbuda s medium-term economic prospects are improving. In the absence of any natural disaster, or major external shock, the economy is expected to grow by 5-6% per annum over the medium-term. In 2006, stay-over tourist arrivals are expected to rebound significantly, with the reopening of two major hotel properties that were closed in 2005 for refurbishment and rehabilitation. In addition, several new hotel properties are scheduled to open in time for the ICC Cricket World Cup 2007. These projects will significantly increase the number and quality of available hotel rooms. Construction sector growth is expected to increase from 18% in 2006 before slowing down in 2007, following the completion of preparation activities for the ICC Cricket World Cup 2007. The international airport development project, various road projects, new hotels and hotel expansion and refurbishment projects, as well as several commercial projects, are central to the growth in the construction sector. Inflation is projected to remain modest throughout this period, despite increases in fuel prices. Generally, the inflation rate is expected to reflect the low inflationary climate in most of the country s major trading partners. On the external account, exports of goods and services are projected to increase at a rate in excess of growth in nominal GDP. However, imports of goods and services are also expected to grow at a rate marginally faster than that of nominal GDP in 2006 and 2007, reflecting the need for additional imports of construction material in preparation for World Cup 2007. As a result, the current account deficit on the external account is expected to widen from 11.4% of GDP in 2005 to 12.3% GDP in 2007 before starting to decline in 2008. Over the medium term, GAB s fiscal performance will be of particular concern. GAB needs to raise additional revenue if it is to service its debts and increase its PSIP. In the last two budget presentations, GAB introduced several new revenue raising measures, including the personal income tax in 2005, and a value-added type sales tax in 2006. These measures are expected to increase Central Government s revenue receipts significantly over the medium term. At the same time, GAB will be reducing its recurrent expenditure by undertaking a comprehensive public sector reform programme, which is expected to result in a 20% reduction in Central Government employment. Over the medium term, GAB s capital expenditure will be contingent on its ability to obtain additional finance to fund the implementation of the PSIP. Given the impact of the major revenue raising initiatives taken in 2005 and 2006, recurrent revenue receipts should improve. This coupled with a projected reduction in recurrent expenditure, particularly on wages and salaries should result in GAB being in a much better position to service its debts. 24