IMF Executive Board Concludes 2008 Article IV Consultation with Barbados

Public Information Notice (PIN) No. 08/111
August 28, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Barbados is also available.

On July 25, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Barbados.1


Barbados' economy benefits from strong institutions and social and political stability. The country has one of the highest per capita incomes in the region, compares favorably on a wide range of social, political, and competitiveness indicators, and enjoys an investment grade rating. These factors have helped Barbados become a prime location for high-end tourism and offshore financial services. As a small and open economy, however, Barbados lacks scope for diversification and is vulnerable to external shocks. The country's trade openness and dependence on tourism and a few other services expose it to geopolitical tensions and cyclical swings. Moreover, while the 33-year peg to the U.S. dollar enjoys strong support and credibility, vulnerabilities arise from high public debt and a sizeable current account deficit.

Barbados has weathered the global financial turmoil well, thus far, but a deteriorating external environment is posing significant challenges to the new government, elected in January. Fairly solid growth in 2007 continued through the first quarter of 2008, driven by strong tourism activity and helped by improved competitiveness vis-à-vis Europe and Canada. However, as the global slowdown is increasingly taking hold of Barbados' main trading partners, economic growth is expected to decline by 1 percentage point to 2¼ percent in 2008. Inflation, which was kept low by price controls, is projected to accelerate this year. The spike reflects record high import prices, particularly for oil and food, in conjunction with the recent adjustment in controlled fuel prices, which had been kept unchanged since late-2006. As a result, inflation is projected to rise to 9 percent this year from 4 percent in 2007. At the same time, the rising import bill and the slowdown in tourism will widen the current account deficit to a projected 8½ percent of GDP from 7 percent in 2007.

Executive Board Assessment

Executive Directors noted that Barbados has benefited from strong institutions and social and political stability. Directors observed that the Barbadian authorities are faced with a significant challenge of balancing conflicting risks to inflation, growth, and medium-term sustainability. While direct spillovers from the financial turmoil have been contained, Directors cautioned that weaker global demand could affect the Barbadian economy primarily through its important tourism sector, at a time when inflation has been pushed up by rising food and fuel prices. With the exchange rate pegged to the U.S. dollar and fiscal space constrained by high public debt, Directors stressed the importance of addressing these challenges through a coordinated policy response.

Directors saw the main task for fiscal policy in identifying savings to finance targeted support to the most vulnerable groups, while containing risks to medium-term sustainability. They welcomed the recently revised budget, which combines a reduction in the central government deficit with well-identified revenue measures to finance additional social and other priority spending. Directors encouraged the government to make additional efforts to generate a modest overall public sector surplus over the medium term, to reverse unfavorable debt dynamics and put public debt on a firmly declining trajectory. As fiscal savings could take time to materialize, Directors advised the authorities to identify specific revenue and expenditure measures early on. They welcomed the recent adoption of an automatic fuel price adjustment mechanism as an important step in this direction.

Directors saw the main role for monetary policy in containing the risk of entrenching inflation expectations, and deemed the current policy stance as appropriately tight. However, a reduction in interest rates may become necessary should a more severe slowdown in economic activity be accompanied by easing of inflationary pressures. Directors also encouraged the authorities to advance preparations for introducing indirect monetary policy instruments, to be ready for their implementation once global financial markets have calmed.

Directors viewed the outcome of wage negotiations as critical in determining the effectiveness of the overall policy response to the current challenges. Wage moderation was needed to minimize second-round effects of the oil and food price shocks and thereby help the economy adjust in the least harmful way. Directors warned specifically about the risks of wage indexation to currently high headline inflation rates.

Directors agreed that the 33-year peg of the exchange rate to the U.S. dollar enjoys strong support and credibility and has served the economy well. The real effective exchange rate is currently not far from its estimated equilibrium, and there are no apparent signs of competitiveness problems in the dominant tourism sector. Directors stressed, however, that adjustments in domestic policies will be important in the medium term to contain external imbalances.

Directors welcomed the Financial Sector Assessment Program (FSAP) update finding that the financial system remains resilient in the face of the global turmoil. To ensure that Barbados' financial sector continues to thrive, they encouraged the authorities to address the identified weaknesses in its prudential oversight and to implement the key recommendations of the FSAP update mission. In addition to a number of important provisions to strengthen banking regulation and cross-border cooperation, Directors recommended that priority be given to removing the gaps in the supervision of the nonbank sector.

Barbados: Selected Economic Indicators

        Prel. Proj.


2004 2005 2006 2007 2008 2009
  (Annual percentage change)

Output and prices


Real GDP

4.8 4.3 3.3 3.3 2.3 2.0

Nominal GDP

4.5 6.7 6.2 6.8 11.2 7.8

Consumer prices

1.4 6.1 7.3 4.0 9.0 5.9

Money and credit


Net domestic assets

43.5 14.1 14.2 9.3 0.2 15.8

Of which: private sector credit

16.7 21.7 13.2 6.4 2.5 7.8

Broad money

17.4 6.9 11.3 13.2 2.8 13.7
  (In percent of GDP, unless otherwise indicated)

Public sector operations 1/


Overall balance

1.4 -3.6 -3.7 -5.0 -4.0 -3.0

Central government balance

-2.5 -1.3 -2.0 -4.0 -2.2 -2.2

Off-budget activities

1.3 -1.9 -3.9 -2.0 -2.0 -1.8

National Insurance Scheme balance

3.6 3.7 4.2 4.2 3.8 4.3

Public enterprises balance

-1.0 -4.2 -2.0 -3.3 -3.6 -3.3

Primary balance

4.5 -0.1 0.0 -1.4 -0.1 0.7

Public sector debt 2/

87.1 91.6 92.8 94.6 95.7 96.7

External sector


External current account balance

-12.4 -12.8 -8.7 -7.2 -8.5 -8.3

External debt 3/

27.3 28.9 27.6 24.2 26.0 25.6

Gross international reserves (in millions of U.S. dollars)

595 619 598 775 800 781

Memorandum item:


Nominal GDP (in millions of Barbados dollars)

5,634 6,010 6,382 6,818 7,582 8,173

Sources: Barbadian authorities; and IMF staff estimates and projections.
1/Fiscal year (April-March).
2/Includes central government and government guaranteed debt.
3/Includes public sector and nonfinancial private sector debt; end of fiscal 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.


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