VZCZCXRO4689
PP RUEHGR
DE RUEHWN #0178/01 0271812
ZNR UUUUU ZZH
P 271812Z JAN 06
FM AMEMBASSY BRIDGETOWN
TO RUEHC/SECSTATE WASHDC PRIORITY 1750
INFO RUCNCOM/EC CARICOM COLLECTIVE PRIORITY
RUEHDG/AMEMBASSY SANTO DOMINGO PRIORITY 5786
RUEHCV/USDAO CARACAS VE PRIORITY
RUMIAAA/HQ USSOUTHCOM J2 MIAMI FL PRIORITY
RUMIAAA/HQ USSOUTHCOM J5 MIAMI FL PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 BRIDGETOWN 000178 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
SANTO DOMINGO FOR FCS 
TREASURY FOR FRANSICSO PARODI 
SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EIND ECPS SENV ENRG PINR BB
SUBJECT: BARBADOS BUDGET - PM PLEDGES TAX CUTS AND ENERGY 
SAVINGS 
 
REF: 05 BRIDGETOWN 149 
 
¶1. (SBU) Summary:  Barbados Prime Minister Owen Arthur 
presented his government's 2006 economic and financial 
policies in a January 16 speech to parliament.  PM Arthur 
pledged to lower energy costs, cut taxes, boost pensions, and 
prop up manufacturing.  Most of the budget seems practical 
and will not greatly increase the country's debt (around 88.0 
percent of GDP).  The only major imprudent expenditure is a 
US$150 million investment into the island's unprofitable 
sugar industry.  End Summary. 
 
¶2. (U) In front of the full parliament and a packed gallery 
(EconOff and PolOff attended), Prime Minister Owen Arthur 
delivered a two and a half hour speech outlining his 
government's economic and financial policies for 2006.  With 
the parliamentary opposition in disarray (septel), a 
confident PM Arthur announced tax cuts, incentives to reduce 
energy costs, increased government investment in the sugar 
industry, loosened foreign exchange controls, and investment 
incentives.  He also promised to increase subsidies to dairy 
farmers, improve education, better manage the risks of 
natural disasters, and prepare the nation for Cricket World 
Cup 2007. 
 
------------------------- 
2005 Economic Performance 
------------------------- 
 
¶3. (U) Arthur began his speech with good news on the 
country's 2005 economic performance.  Gross Domestic Product 
(GDP) grew by 4.1 percent, compared to 4.8 percent in 2004. 
Inflation was 4.0 percent, up from 1.7 percent in 2004, and 
unemployment reached a record low of 8.5 percent.  The 
country's growth is remarkable because the economy expanded 
despite a drop in tourism.  Cruise ship arrivals slid around 
20.0 percent from 534,136 in 2004 to 425,933 in 2005 (January 
- October figures), while long stay visitor numbers stayed 
more or less constant.  Sugar, manufacturing, and 
construction output rose 10.3 percent, 3.0 percent, and 17.6 
percent, respectively.  Exports and domestic investment also 
grew, while foreign exchange reserves slightly increased - in 
contrast to the sharp drop in reserves in 2004. 
 
------------------- 
Government Finances 
------------------- 
 
¶4. (U) Barbados has prudently kept its government spending in 
check over the past few years, and Arthur said the fiscal 
deficit for the 2005-2006 fiscal year (ending in March 2006) 
will likely be just 1.7 percent of GDP, less than the target 
of 2.5 percent of GDP.  Total government spending is US$1.04 
billion, or around 33.0 percent of GDP. 
 
-------- 
Tax Cuts 
-------- 
 
¶5. (U) Currently, Barbadians making less than US$10,000 per 
year pay no income tax.  PM Arthur proposed raising this 
threshold to US$11,250, meaning an additional 6,159 citizens 
would pay no income tax.  This politically savvy measure will 
probably only cost the government US$2-3 million, while 
exempting an additional 2.0 percent of the population from 
income taxes.  Arthur also proposed several other tax cuts, 
including reduced income taxes for international 
businesspeople and a reduction in property taxes.  The Prime 
Minister introduced a temporary tax on non-CARICOM imports in 
September 2005, and he plans to raise this tax from 3.0 to 
6.0 percent to help curb imports and pay for the tax cuts. 
 
 
-------------- 
Energy Savings 
-------------- 
 
¶6. (SBU) As one of two Caribbean leaders (PM Patrick Manning 
in Trinidad is the other) to publicly reject Venezuela's 
PetroCaribe concessionary oil financing offer, PM Arthur 
faces pressure to reduce his country's nearly US$200 million 
 
BRIDGETOWN 00000178  002 OF 003 
 
 
annual fuel import bill.  His solution is a slew of tax 
incentives on everything from diesel cars to fluorescent 
bulbs to home energy audits.  In addition, the government 
plans to increase domestic oil production by 50.0 percent (up 
from 1,000 to 1,500 barrels per day) and use more natural 
gas.  Arthur announced that the electric company, Barbados 
Light and Power, will construct a wind farm capable of 
producing 26 million kilowatt hours (KWh) of electricity 
annually, and a sugar cane-powered 30 megawatt plant (see 
paragraph 8). 
 
-------------------- 
BioNote - PM Arthur 
-------------------- 
 
¶7. (SBU) According to a senior Bajan official, PM Arthur, an 
economist by training, cloisters himself away from his office 
for several weeks to focus on the national budget, even 
refusing to meet high level visitors.  (Note:  General 
Craddock of SOUTHCOM visited during Arthur's budget 
preparations and the Prime Minister declined to meet with the 
General.  End Note.) 
 
¶8. (SBU) At the Embassy's Martin Luther King Jr. reception, 
Dr. Marion Williams, Governor of the Central Bank, hinted to 
EconOff that she did not agree with many of the Prime 
Minister's measures to liberalize foreign exchange controls. 
(Comment:  Unlike the Federal Reserve in the United States, 
the Central Bank of Barbados is not independent from 
political control.  If this private difference of opinion 
results in public sparring, the opposition could use the 
well-respected Central Bank Governor's words to cast doubt on 
the sagacity of the Prime Minister's economic policies.  End 
Comment.) 
 
---------------------- 
Wasting Money on Sugar 
---------------------- 
 
¶9. (U) PM Arthur announced plans for a US$150 million 
facility including a 30 megawatt power plant and sugar cane 
processing facilities to annually produce 12,000 tons of 
refined sugar for the domestic market, 10,000 tons of 
specialty sugar for the export market, 5,000 tons of 
specialty sugar for the local market, and 14 million liters 
of ethanol for the domestic market.  The Prime Minister has 
presented the facility, scheduled for completion in 2008, as 
the salvation of the local sugar industry, now that the 
European Union is dropping its subsidized sugar price by 36.0 
percent over the next two years, from 523.7 Euros/ton to 335 
Euros/ton.  Even at 523.7 Euros/ton, Barbados loses money on 
every ton of sugar it exports.  According to Erskine 
Griffith, the Barbados Minister of Agriculture, the Barbados 
yield ratio of 21 tons of sugar per acre of sugar cane is, 
"the lowest of any sugar producing nation."  Griffith went on 
to say that producers in Brazil get up to 80 tons per acre. 
 
 
¶10. (U) The sugar for the local market is to be called 
"Muscovado Gold" and will retail for US$1.46 per kg, compared 
to US$.77 for imported sugar (usually from Guyana).  (Note: 
Guyanese sugar products are also imported in large quantities 
to produce "Barbadian" rum.  End Note.)  Barbados cannot 
protect its local sugar market from CARICOM competition, 
given the free movement of goods provisions of the CARICOM 
Single Market and Economy.  The government apparently will 
depend on nationalism to induce people to pay twice as much 
for local sugar as imported sugar. 
 
------- 
Comment 
------- 
 
 
¶11. (SBU) This massive investment in the sugar industry 
defies logic and sours an otherwise prudent budget.  The cost 
of producing sugar on a small island with high labor costs 
and limited mechanization is astronomically higher than in 
Brazil or other major sugar producers.  Barbados is probably 
one of the least efficient sugar producers in the world and 
cannot compete within CARICOM, much less on the world market. 
 
BRIDGETOWN 00000178  003 OF 003 
 
 
 Instead of exporting bulk sugar to the European Union at 
inflated prices, Barbados will be selling its sugar 
domestically at inflated prices.  Sugar is so intrinsic to 
their national identity, however, that Barbadian taxpayers 
apparently support this fiscal profligacy. 
 
¶12. (SBU) The true purpose of the US$150 million investment 
is not to protect the environment or to reduce energy costs, 
but to give sugar a future.  If Barbados were serious about 
protecting the environment and reducing its energy import 
bill, then the country could more cheaply accomplish both 
these goals by importing sugar cane ethanol from Brazil.  No 
matter what use for sugar cane Barbados comes up with, almost 
every other sugar producing country can grow it cheaper, 
harvest it cheaper, and process it cheaper.  Instead of 
pouring more money into sugar, the Government of Barbados 
would be better served letting the industry die a peaceful 
death, as St. Kitts did in 2005.  End Comment. 
KRAMER