Press Release No. 17/455

IMF Staff Completes 2017 Article IV Mission to Barbados

November 22, 2017

• Continued strong growth in long-stay tourism has supported Barbados’ economic growth, but fiscal consolidation is contributing to a slowdown.
• The adjustment strategy should focus on addressing the high transfers, containing other current expenditures and maintaining a strong revenue effort.
• Urgent structural reforms are needed to support growth and improve the business climate for domestic and foreign investment.

An International Monetary Fund (IMF) team led by Judith Gold, visited Barbados during November 7-21 to conduct the 2017 Article IV Consultation discussions. At the conclusion of the visit, Ms. Gold issued the following statement:

“Continued strong growth in long-stay tourism has supported Barbados’ economic growth, but the fiscal tightening is contributing to a slowdown. Following last year’s improved performance of 1.6 percent, real growth is projected to slow to 0.9 percent for the year, reflecting ongoing fiscal consolidation efforts. Long-stay tourist arrivals continue to expand at a healthy pace. Inflation is projected to rise by year end to 5.5 percent, from 3.6 percent at end-2016. While credit growth remains subdued, financial soundness indicators suggest a relatively healthy banking sector.

“Although the current account balance is improving, net international reserves (NIR) have fallen further. The current account deficit narrowed to 4.4 percent of GDP in 2016, and it is expected to narrow further in 2017, as non-oil imports fall in response to the May 2017 budget measures. However, NIR continue to decline as government debt service exceeds new funding, and private foreign inflows remain weak. At end-September, NIR stood at B$550 million.

“Fiscal performance in FY2016/17 improved but the deficit remains large. The fiscal deficit declined more than anticipated in FY2016/17 to 5.5 percent of GDP reflecting improvement in revenue performance, including one-off factors and lower current expenditure. Central government debt increased to 137.1 percent of GDP, up from 134.7 percent in FY2015/16 and 99.4 percent of GDP in FY2011/12. Excluding NIS holdings, central government debt was 101 percent of GDP in FY2016/17.

“With the growing financing challenges and falling reserves, the government introduced an ambitious budget on May 30, 2017 aimed at significantly reducing the fiscal deficit and shoring up international reserves. However, exemptions to the NSRL, lower-than-expected non-oil imports, shortfalls in some other revenues, and high transfers indicate that the government is likely to fall short of its target. Staff estimate that the deficit will decline to 4.1 percent in FY2017/18 without divestment proceeds. The larger than expected fiscal deficit is increasing funding challenges. While the central bank significantly reduced its funding of the government in the first half of FY2017/18, the commercial banks’ reserve requirements for holding government securities have been increased.

“Substantial further fiscal effort is needed to decisively place the debt on a downward trajectory. Given the urgency in addressing funding, balance of payment risks, the high debt, and the limited policy options, the fiscal adjustment must continue, with a focus on accelerating SOEs’ reforms to facilitate a significant and durable reduction in transfers. Staff recommend that the government seeks to increase the primary surplus from the 4.4 percent of GDP expected in FY2018/19 to 7.5 percent of GDP by FY2020/21, corresponding to an overall budget close to balance. The sizable fiscal adjustment would put the debt-to-GDP ratio on a clear downward path toward debt sustainability.

“The adjustment strategy should focus on addressing the high transfers, containing other current expenditures and maintaining a strong revenue effort. Reforms of state owned enterprises should include improved management, cost recovery, reduced services, mergers, closures, and privatization. Containing other current expenditures including the wage bill and government pensions is also critical. Tax policy should be reviewed with a view to broadening the tax base and improving its progressivity, while efforts to strengthen tax administration must continue. Further, arrears to the private sector should be cleared, and remaining current should be a government priority. A concentrated effort to improve implementation capacity, including by providing clear direction and clarifying expectations, is also needed. In this regard, staff commend the authorities’ intention to shortly enact a new Financial Management and Audit Act, which could help address some of the implementation gaps.

“Structural reforms to support growth and improve the business climate for domestic and foreign investment are also urgent. These reforms would aim to improve business processes, such as significantly reducing clearance times for immigration and customs, accelerating approval of building permits, and streamlining legal procedures. Staff welcomes progress in formulating the Barbados Sustainable Recovery Program (BSRP), which is being drafted in consultation with the Social Partnership, and encourages the authorities to continue to closely collaborate to develop a consensus on a strategy for reform.

“The IMF stands ready to assist the Government of Barbados, including through continued policy dialogue and technical assistance. The team would like to thank the authorities, technical staff, representatives of civil society, and the private sector, for their open discussions and constructive dialogue.”

The mission met with Minister of Finance Christopher Sinckler, Acting Central Bank Governor Cleviston Haynes, Minister of Industry Donville Inniss, the leader of the opposition Mia Mottley, senior government officials, and representatives of the private sector, labor organizations and academia.