IMF Executive Board Concludes 2010 Article IV Consultation with BarbadosPublic Information Notice (PIN) No. 10/159
December 15, 2010
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 2010 Article IV Consultation with Barbados is also available.
On November 29, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Barbados.1
The global economic crisis has hit Barbados particularly hard, by adversely impacting all of its key economic activities, including tourism, financial services, and real estate investment. After contracting by almost 5 percent in 2009, output is expected to continue its decline in 2010, albeit at a slower rate. The weak economy has led to a steady increase in the unemployment rate which reached 10.7 percent in the second quarter of 2010, up from 7.4 percent in 2007. While average inflation fell in 2009, it has picked up in 2010 and is expected to end the year at about 5 percent, fueled by higher energy prices, before receding again. Lower government revenues and higher expenditures are contributing to persistently large fiscal imbalances. Thus, the nonfinancial public sector deficit is expected to remain at around 7 percent of GDP in Fiscal Year 2010/11 (April to March), only marginally lower than in the previous two fiscal years. As a result, public debt continues to grow and could approach 115 percent of GDP by the end of the current fiscal year.
The external current account deficit narrowed in 2009 to 5.5 percent of Gross Domestic Product, down from almost 10 percent in the previous year, thanks to a recession-induced contraction of imports and lower petroleum prices. Lower tourism receipts, the near-stop in foreign direct investment inflows in 2009, and a US$100 million bond repayment in mid-2010 put the country’s reserves under severe pressure. However, the Special Drawing Rights allocations of US$85 million in 2009, in addition to two foreign bond placements in 2009 and 2010, totaling US$220 million, boosted international reserves, which are expected to end 2010 above US$700 million.
Executive Board Assessment
Executive Directors noted that the global crisis severely impacted the Barbados economy, especially its key sectors—tourism, financial services, and real estate. The economy is expected to rebound gradually but downside risks persist mainly from the uncertain global economic environment.
Directors commended the authorities for adopting a Medium-Term Fiscal Strategy aimed at generating a balanced budget and reducing the high public debt-to-GDP ratio. They welcomed the recent measures to raise VAT rates and public transportation tariffs, while boosting spending targeted at vulnerable segments of society. Directors emphasized that to place public debt on a sustainable path, additional measures will be necessary. They encouraged efforts aimed at broadening the tax base, making the VAT increase permanent, raising corporate tax rates, and streamlining government operations, while continuing to rein in current spending. Prioritizing expenditure would also make room for moderate increases in capital spending to support medium-term growth.
Directors observed that the peg to the U.S. dollar has provided a valuable anchor to Barbados. Noting that Barbados’ real exchange rate may have become somewhat overvalued, they called for decisive fiscal adjustment to safeguard the viability of the peg. Directors viewed the current monetary policy stance as broadly appropriate. They recommended maintaining spreads between the minimum deposit rate and policy rates in core economies at levels consistent with prevailing market conditions.
Directors noted that banks in Barbados remain healthy. While nonperforming loans have increased, robust capital bases provide effective cushions against future losses. They commended the authorities for strengthening bank oversight, including by creating a financial stability unit in the central bank. Implementing the recommendations of the 2008 FSAP Update and more detailed data collection on banks’ loan portfolio will further strengthen supervision and stress-testing exercises.
Directors welcomed the authorities’ efforts to improve the supervision of nonbank financial institutions, an area of weakness highlighted by the recent demise of two insurance companies. They called for timely action to consolidate nonbank financial supervision into the Financial Services Commission and underscored the need to resolve the problematic insurance companies to lift market uncertainty and provide clarity on contingent fiscal costs.
Directors acknowledged the relatively good business environment in Barbados. However, in light of the country’s weak productivity growth, they saw merit in further streamlining government agencies and procedures, and looking for ways to broaden growth sources.