IMF concludes consultation with Barbados

Washington, USA — On June 17, 2015, the executive board of the International Monetary Fund (IMF) concluded the Article IV consultation with Barbados.

Real GDP growth remained weak in 2014, weighed down by fiscal drag and stagnant tourism inflows, and unemployment averaged 12.3 percent at end-2014. However, tourism arrivals jumped over the winter season and real GDP is projected to expand by 1.0 percent in 2015 as stronger growth in key markets underpins arrivals. Lower oil prices and new tourism investment will provide a boost to demand, though ongoing fiscal adjustment will dampen the growth upside. Inflation is forecast to fall to 0.9 percent by year end, reflecting lower energy and commodity prices.

The balance of payments improved in 2014. The current account deficit fell slightly to 8.5 percent of GDP as export growth was flat and imports declined slightly, while stronger private capital inflows helped support a small increase in international reserves to US$563 million (3.4 months of imports) at end-March 2015. With oil prices low, the current account deficit is projected to fall to 5 percent of GDP in 2015. Private capital flows are expected to stabilize, leaving foreign reserves at about US$545 million at end 2015 (3.3 months of imports).

The central government deficit fell from 11.2 percent of GDP in 2013/14 (year ending March) to 6.6 percent of GDP in 2014/15, though domestic arrears continued to accumulate. This fiscal outcome represents an adjustment of 5 percent of GDP in the primary balance, as revenue gains mostly from income taxes were met with cuts in the wage bill and transfers. Current revenue growth benefited from improved tax administration and a new municipal waste tax.

While data on government arrears is not complete, the stock is estimated at about 4 percent of GDP, not including arrears of public enterprises or net overdues at the Revenue Authority (BRA). Central government debt excluding securities held by the National Insurance Scheme (NIS) rose to 101 percent f GDP at end-March 2015, up from 76 percent of GDP in March 2011.

Financing of the government in 2014/15 came largely from the central bank (CBB), the nonbank financial sector, and a draw-down in government deposits in the banking system, while commercial banks reduced exposure to the sovereign by 1.5 percent of GDP. Domestic short term interest rates declined to about 2.8 percent on average in the first four months of 2015. The impact on liquidity of central bank lending to the government was offset largely by a rise in excess reserves at the CBB, reflecting the absence of new private sector lending and capital account restrictions.

Executive Directors welcomed the improvement in macroeconomic conditions and the authorities’ commitment to tackle urgently needed reforms. Directors cautioned, however, that the country faces daunting challenges, including external risks, high fiscal deficit and debt levels, and competitiveness challenges. Against this backdrop, they urged the authorities to implement a comprehensive reform program that includes strong fiscal adjustment and structural reforms to foster growth and external and debt sustainability.

Directors commended the authorities’ progress with fiscal consolidation over the past year, and welcomed the direction of policies outlined in the recent budget statement. They stressed the need for continued ambitious adjustment efforts, which could be supported by a simple fiscal anchor as an interim step toward the development of a more comprehensive fiscal rule. Directors underlined the importance of reducing current spending and addressing the stock of government arrears, while securing room to increase public investment.

They welcomed efforts to improve the monitoring and fiscal discipline of public enterprises, and urged the authorities to strengthen their accountability and accelerate their restructuring. Directors stressed the need to improve some universal social programs to ensure they are reaching the most vulnerable. They also encouraged the authorities to consider divesting some state assets in order to lower debt. On the revenue side, directors welcomed the recent tax measures, and encouraged the authorities to broaden the tax base further and remove tax waivers.

Most directors encouraged the central bank to phase out direct financing of the government and reorient monetary policy toward supporting the fixed exchange rate regime. They agreed that, if financing sources are not sufficient, the central bank should allow domestic interest rates to rise to a level that reflects a credible country risk premium.

Directors underscored that the growth strategy should be focused on strengthening the business environment and improving the efficiency and effectiveness of public services. They commended recent efforts to improve the business climate, and encouraged strengthening competitiveness in the tourism sector and preparing a cohesive strategy for the agriculture sector. Directors also advised a review of labor regulations to boost job creation, while preserving workers’ rights.

Directors commended the progress made in implementing FSAP update recommendations, and encouraged the authorities to continue strengthening regulatory and supervisory frameworks. While domestic banks have sound balance sheets, Directors called for continued vigilance and close monitoring of asset quality and potential vulnerabilities in non-bank financial institutions.

Directors noted the inconsistency in GDP data, and encouraged the authorities to quickly resolve these issues, with help from IMF technical experts.

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