Public Information Notices
Barbados and the IMF
IMF Concludes Article IV Consultation with Barbados
On November 1, 2000, the Executive Board concluded the Article IV consultation with Barbados.1
Barbados has a stable political system and there is long-standing public consensus on key economic policies, including a fixed exchange rate with the U.S. dollar supported by prudent fiscal and wage policies. Since the foreign exchange crisis of 1991, Barbados has had seven consecutive years of economic growth with low inflation. During the 1990s, economic activity shifted towards services, notably tourism and offshore financial services, while sugar exports declined as an important source of foreign exchange earnings.
In 1999, real GDP growth declined to 2½ percent, down from 4½ percent in 1998, reflecting strong growth in construction for tourism projects and public investment in infrastructure, outweighed by declines in tourism and manufacturing. The contraction in manufacturing reflects strong regional and extra-regional competition as Barbados gradually liberalized trade. Owing to job creation mainly in the private sector, particularly construction, the unemployment rate continued to decline, reaching 9.8 percent at the end of 1999, 2 percentage points lower than a year before. Although the pace of growth increased to 3 percent in the first half of 2000 (compared with a year earlier), it is expected to moderate in the second half with slowdowns in tourism-related construction, manufacturing, and nonsugar agriculture. Inflation was 3 percent in 1999 and eased to 2½ percent in the first half of 2000, while the unemployment rate declined further to 9¼ percent.
The nonfinancial public sector balance is estimated to have shifted from a deficit of ½ of one percent of GDP in FY 1998/99 to a surplus of ½ of one percent in FY 1999/2000 (fiscal years begin in April). The central government deficit remained at about 1¼ percent of GDP in FY 1999/2000, as gains in income tax revenue were offset by shortfalls in other taxes—including the value added tax—while expenditure was restrained. The deficit of the public enterprises declined by half in FY 1999/2000 to approximately one percent of GDP, with some institutions reporting improved revenue performance based on the adoption of more effective collection processes. The surplus of the National Insurance Scheme was about 2¾ percent of GDP.
The external current account deficit more than doubled in 1999, rising to 5 percent of GDP, caused mainly by a strong import demand for consumer and capital goods coinciding with a decline in tourism and sugar receipts. The deficit was more than covered by a capital account surplus, which mainly reflected the government’s external borrowing and private investment flows. By the end of 1999, gross international reserves had reached the equivalent of 2.7 months of projected imports of goods and services, in part because of government borrowing in the regional capital market in April. Further such borrowing by the government in June 2000 raised the level of gross international reserves to about 4 months of imports, with public external debt projected to increase to 23 percent of GDP by the end of the year.
The authorities continued to implement a prudent incomes policy and have extended through 2001 the 1998–2000 social pact signed by representatives of business and labor in 1998. This pact maintained the link between productivity and wages and emphasized issues of job security and training. Progress continued on structural reforms including preparatory work for the privatization of the Barbados National Bank and the Insurance Corporation of Barbados by the end of 2000. A new offshore banking act has been drafted and is expected to be adopted by the end of the year. The government is in the early stages of a project on public pension reform, for which it will receive support from the Inter-American Development Bank. In April 2000, Barbados, honoring its WTO commitments, replaced nontariff barriers with protective tariffs ranging from 20 to over 200 percent. The authorities intend to reduce tariffs annually to reach WTO ceiling levels by 2004.
The authorities’ medium-term strategy aims at stabilizing and restructuring the economy to address ongoing trade liberalization given Barbados’ commitments under the WTO and their desire to deepen integration in the Caribbean region. They see tourism continuing to be the mainstay of the economy, but are optimistic about achieving more balanced growth, citing foreign exchange earning activities outside tourism—in particular, offshore business and financial services. Their main objectives are to have the economy continue growing at an annual real rate of 2½ to 3 percent while keeping inflation at or below 2 percent and the exchange rate fixed. In support of these objectives, fiscal policy will continue to be tight as the central government restrains spending, including current and capital transfers to public enterprises, and the nonfinancial public sector aims to preserve its overall surplus and widen it over the medium term. The authorities are committed to maintaining wage discipline and preserving Barbados’ external competitiveness.
Executive Board Assessment
Executive Directors commended the authorities for their sound fiscal and incomes policies, which in recent years had contributed to price stability, economic growth, and a significant reduction in unemployment. Directors endorsed the authorities’ medium-term economic strategy, which aims at achieving sustained noninflationary growth through further fiscal consolidation and structural reforms geared to enhancing economic diversification and competitiveness. This should position Barbados well to compete in an open global economic environment.
Directors welcomed the authorities’ commitment to increase public sector savings in order to accommodate adequate levels of investment, and to gradually reduce public debt relative to GDP. They noted that the authorities had borrowed externally on commercial terms, and agreed with them that, in light of the now adequate cushion of international reserves, there was no need to rely further on external commercial borrowing.
Directors welcomed the authorities’ intention to maintain fiscal discipline through a reduction of central government current expenditure relative to GDP, including by limiting transfers to public enterprises. Over the medium term, efforts to strengthen tax administration will also facilitate fiscal consolidation.
Directors noted that the authorities’ strategy to diversify the economy away from traditional agriculture toward services such as tourism and financial services has been successful, although they expressed some concern that the tourism sector is heavily dependent on one source, namely the United Kingdom. Noting that the authorities have taken important steps to create an enabling environment for private sector activity, Directors underscored the need for further structural reforms to enhance the economy’s medium-term competitiveness. They urged an acceleration of ongoing efforts to privatize public enterprises, including those of the Barbados National Bank and Insurance Corporation of Barbados. Directors welcomed the authorities’ plans to review the Bankruptcy and Insolvency Law, which should facilitate the restructuring of the corporate sector. They also welcomed the intention to enhance economic efficiency, including by liberalizing the telecommunications sector and reforming utility prices and the prices of services offered by public enterprises. Directors endorsed the authorities’ efforts to improve the targeting of social programs. They shared the authorities’ concerns about the projected weakening of finances of the public pension system, and urged its timely reform to secure workers’ old age incomes and encourage public savings.
Directors emphasized that continued wage restraint will be critical to maintaining Barbados’ external competitiveness, given the government’s commitment to the current exchange rate peg. Steps to increase labor market flexibility would also enhance external competitiveness.
On monetary policy, Directors advised the authorities to monitor credit conditions closely, and to be prepared to tighten monetary policy if excess demand pressures begin to develop. They endorsed the recent initiatives to increase reliance on indirect monetary instruments, and to implement a gradual liberalization of the capital account supported by a further strengthening of financial supervision.
Directors supported the authorities’ efforts to improve the regulatory framework and supervision of offshore financial centers, in line with the Basel Core Principles for Effective Banking Supervision. In particular, the adoption of a new offshore banking act would be an important step in strengthening supervision. Directors welcomed the double taxation treaties with leading developed countries and also the authorities’ zero-tolerance policy toward money laundering. They supported the authorities’ request to take part in the Financial Sector Assessment Program (FSAP), as well as their interest in receiving technical assistance from the Fund.
Directors welcomed the authorities’ commitment to further open and liberalize the economy in line with Barbados’ commitment to its partners in the Caribbean Community and Common Market (CARICOM) and to the World Trade Organization.
Directors urged the authorities to continue to improve the availability, quality, and timeliness of data provided for surveillance.
|Barbados: Selected Economic Indicators|
|(Annual percentage changes)|
|Output and prices|
|Consumer prices (12-month increase)||3.5||1.7||2.9||2.5||2.5|
|Unemployment (percent of labor force)||12.2||11.8||9.8||...||...|
|Money and credit|
|Net domestic assets 1/||5.9||16.0||7.5||-6.3||5.2|
|Public sector credit (net) 1/||-2.2||-0.7||-0.4||-8.6||0.6|
|Private sector credit||19.6||16.5||14.4||6.1||5.0|
|(In percent of GDP)|
|Public sector operations 2/|
|Public sector balance||-0.7||-0.5||0.5||0.9||0.4|
|National Insurance Scheme||2.2||2.5||2.7||2.7||2.7|
|Savings and investment|
|Gross domestic investment||16.7||18.5||19.4||19.5||19.5|
|Gross national saving||14.5||16.1||14.3||16.0||15.8|
|External current account balance||-2.2||-2.4||-5.2||-3.5||-3.7|
|Public external debt 3/||16.1||16.2||18.8||22.5||22.0|
|Gross official reserves (in months of Imports) 4/||2.6||2.4||2.7||3.9||3.5|
Sources: Barbadian authorities; and IMF staff estimates and projections.
|1/ In relation to broad money at the beginning of the period.|
|2/ Fiscal years (April-March).|
|3/ Refers to central government and government guaranteed debt.|
|4/ Imports of goods and services in the following year.|
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT