Statement by IMF Article IV Mission to BarbadosPress Release No. 11/369
October 17, 2011
An International Monetary Fund (IMF) mission, headed by Therese Turner-Jones visited Barbados from October 3-14 for the 2011 Article IV discussions. At the end of the visit, Ms. Turner-Jones, released the following statement in Bridgetown:
“The Barbadian economy has achieved modest growth only in the face of the prolonged global recession. Real Gross Domestic Product (GDP) growth will be tepid at around 1 percent this year despite higher tourist arrivals, as overall economic activity is subdued. Similar to earlier forecasts, downside risks are mounting, especially as Barbados’ main trading partners face heightened uncertainty, while commodity prices, especially in food and fuel, continue to be at high levels. The team expects negligible growth for at least the next twelve months, as tourism and offshore financial services only gradually improve in the hostile external environment.
“Discussions focused on challenges facing the authorities in light of the low growth, high debt scenario in the context of some increase in unemployment. Staff welcomed the authorities’ efforts to revise the medium-term fiscal strategy, suggesting that public enterprises should be included in the calculations. While recent measures to bolster revenues, including the hike in the Value-Added Tax (VAT) rate were bearing fruit, losses in state owned bodies continue to be a drag, especially on the overall borrowing needs of the public sector, which has become heavily dependent on the National Insurance Scheme (NIS).
“While noting that in the current weak economy, fiscal consolidation will need to consider the need to keep priority social spending intact, additional measures will be needed and implemented quickly if the debt-to-GDP ratio is to stabilize from its high level and be further reduced over the medium term. The team advised adoption of a wage freeze for the next two years to curb current spending and signal wage restraint in the economy generally to help boost competitiveness and lower inflation expectations. Further, the government should look to improve targeting its social spending to the most vulnerable parts of society given its limited fiscal space. Importantly under a fixed exchange rate regime tightening the fiscal stance is essential to guarantee external sustainability and strengthen reserves, especially in light of the lower reserve accumulation so far this year, and the precarious global outlook. The mission encouraged the engagement of the social partnership, a long-standing and effective Barbadian institution, to begin a national dialogue on the appropriate and sustainable level of social entitlements.
“Overall the Barbadian banking system shows resilience with excess liquidity and well capitalized institutions. However, the economic slowdown is beginning to impact some loan portfolios and non performing loans have crept up, which will require higher provisioning if this trend persists. The newly established Financial Services Commission of Barbados should immediately turn its attention to creating a fully functional regulatory environment with priority on the insurance sector, especially against the backdrop of the failure of CLICO Life Insurance, which is yet to be resolved. Staff encouraged the authorities to choose a course of action promptly and to exploit private sector led solutions that minimize fiscal costs. Staff shares the authorities’ concern for the need for a regional mechanism for coordination of crisis resolution in future events to ensure regional financial stability.
“The mission enjoyed open and transparent discussions during the two-week visit and thanks all government officials as well as other Barbadian stakeholders, with whom it had the privilege of meeting and exchanging views.”