Small Open Economies:  The Case of Barbados
by 
Daniel Boamah

Central Bank of Barbados 
Abstract 
Since the establishment of the Central Bank in 1972, the Barbados economy was for almost two decades characterized by relative fiscal dominance where persistent fiscal deficits were financed by either monetary accommodation or borrowing.  This led to a build up of public debt which rose form a relatively low figure of 20% of GDP in 1971 to about 70% in 1991.  This period was also marked by moderate to strong inertia of inflationary expectations and declining level of competitiveness, leading to expanding current account deficits and unsustainable losses in foreign exchange reserves.
Following a major recession in 1991-1992, Barbados instituted a strong programme of macroeconomic stabilization and adjustment, supported by the International Monetary Fund during the period 1992-1994.  The centre piece of the programme was a significant fiscal adjustment to correct for the relatively large fiscal disequilibrium that had characterized the economy.  Government expenditure was sharply reduced, aided in part by a cut in public servants nominal wages along with a reduction in public sector employment. 
The main objective of this paper is to assess the relative impact of the programme on the overall economy.  Trend movement of key macroeconomic indicators such as real growth rate, inflation, public debt, fiscal and external current account balances in the pre and post adjustment periods have been carefully examined. 
The programme was deemed to have been generally successful in laying the foundation for subsequent sustained economic growth within an environment of stable prices.  Nevertheless, the economy is still faced with a number of macro-fiscal challenges.  The paper discusses some of these challenges and makes suggestions about possible strategies to deal with them.