Hard Choices to be Made, Commentary by Anthony Pellechio, Deputy Division Chief, Western Hemisphere Department, IMF

February 10, 2003

Hard Choices to be Made
Commentary by Anthony Pellechio
Deputy Division Chief, Caribbean I
Western Hemisphere Department
International Monetary Fund
Nation (Barbados)
February 10, 2003

LAST FRIDAY , the Executive Board of the International Monetary Fund (IMF) conducted its annual review of the Barbados economy.

The discussion, part of the Fund's regular analysis of its member countries, was aimed at assessing whether Barbados' economic policies are consistent with the goals of achieving sustainable growth and improving the well-being of its citizens.

To get to the bottom line first: There was broad agreement among the IMF's Executive Directors, who represent all 184 member countries, that Barbados is pursuing sound economic policies.

Moreover, the board concluded that its is important for Barbados to accelerate policies to reinvigorate growth and reduce the risks currently facing the economy.

There are encouraging signs that economic growth will resume in 2003.

It is important to keep in mind that Barbados achieved eight years of strong growth during 1993 to 2000 with policies that took advantage of the opportunities offered by the global economy. Specifically, sound spending and wage policies, as well as such structural reforms as the introduction of a value-added tax, reduction of import duties, and strengthening of the financial sector, helped promote tourism and financial services.

As a result, the economy shifted away from a dependence on agriculture and toward tourism and offshore financial services. During this period, the unemployment rate dropped from 23 per cent to almost nine per cent, a very important achievement.

This long economic expansion ended with the downturn of 2001, when tourism declined in the face of the global slowdown and September 11 terrorist attacks on the United States The recession also reflected the impact of the appreciating United States dollar and rising wages since the late 1990s.

These developments weighed against the productivity increases achieved during the economic expansion.

The increase in tourist arrivals in the second half of 2002 is a promising sign of recovery, but the effect on tourism and petroleum prices of a possible Middle East war remains a cause for concern.

The IMF and the government of Barbados agreed that measures adopted over the past two years to stimulate the economy have gone as far as possible.

Thus, it is now time to shift from fiscal stimulus to a period of low budget deficits and new structural reforms, including tax reform to lower tax rates and further trade liberalization.

Such reforms would enable Barbados to remain competitive and lay the foundation for sustainable growth at a rate that can bring economic benefits comparable to the 1990s.

The government policies presented in October 2002 reflect the beginning of such a shift. Indeed, Barbados is to be congratulated for its recently implemented pension reforms, which address the medium and long-term financing issues facing its pension system before problems develop.

In view of the issues currently facing the economy, especially regarding tourism and petroleum prices, and the need to enhance external competitiveness, the IMF recommends stronger measures to control spending, underpinned by public wage restraint.

Although potentially unpopular, this is necessary to ensure that sufficient resources are available to finance critical investments in such key areas as education and health, and economic infrastructure.

The IMF shares the government's concerns about the large deficits in the operations of some public enterprises, particularly the Transport Board, Water Authority, and Hotels and Resorts, Ltd. (Gems project).

Prompt review of the finances of these enterprises is needed with a view to making ends meet by moving them toward pricing structures that cover their costs.

Steps need to be taken to shift publicly owned hotel enterprises to private owners and ease the potential adverse social impact.

The IMF and the government also discussed the hard choices facing Barbados as it meets its commitments to free trade. Protective tariffs may be appropriate for a short period to give some local industries time to become competitive.

However, tariffs raise costs for other industries, especially tourism, and hurt consumers by raising the costs of imported food and other supplies.

That adversely affects Barbados' competitiveness and growth prospects, with high social costs. Protective barriers are often difficult to remove because of vested interests.

In this context, the IMF welcomed the reversal of tariff increases adopted in 2001 and the authorities' intention to continue reducing tariffs over the medium term.

It urges expeditious tariff reduction and removal of protection in the context of the Caribbean Community and the Free Trade Area for the Americas.

Strong financial systems are an essential element of sound economies, and with that in mind, the IMF has initiated a program that assesses the financial sectors of member countries.

These assessments examine the potential risks faced by domestic and offshore banks, insurance companies, credit unions, and other financial institutions.

Barbados welcomed a team from the World Bank and IMF in 2002 that conducted a detailed examination of its financial system. The team concluded that Barbados has done a good job of containing financial sector risks.

Moreover, the government has been effective in observing international standards for financial sector supervision, especially in the areas of domestic and offshore banking, and anti-money laundering.

The planned elimination of the maximum average lending rate is welcome as an important step toward financial sector liberalization in the context of participation in the Caribbean single market and economy.

In sum, the 2002 discussions with the IMF concluded with a cautiously positive outlook on Barbados' economy.

The government has demonstrated a commitment to shift policies in a direction that will build upon the successes of the 1990s.

Anthony Pellechio led the team of IMF staff who collaborated with the Barbados' authorities during the annual discussion of economic policy.


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