Transcript of a Conference Call on Barbados
Wednesday, February 12, 2014
Nicole Laframboise, Mission Chief for Barbados, Western Hemisphere Department
Raphael Anspach, Communications Officer, Communications Department
MR. ANSPACH: Hello everybody and welcome to this teleconference on the IMF’s Article IV consultation with Barbados. I trust that everyone was able to access the documents under embargo. Before we start today, let me introduce the speakers this morning. With us today we have Ms. Nicole Laframboise who is the IMF’s mission chief for Barbados. Joining her today are also Mr. Robert Price and Ms. Marie Kim, both economists and members of the IMF mission to Barbados. Before we take your questions, Nicole will make brief introductory remarks and then we’ll be happy to take your questions.
Ms. LAFRAMBOISE: Good morning. Let me just make a few introductory remarks based on our work and our report and then we can open it up for questions. So as you are probably aware, Barbados faces challenging economic circumstances -- low growth, high debt, a large fiscal deficit and declining reserves last year. The authorities recognize the gravity of the situation and are committed to making the fiscal adjustments and other adjustments needed to restore stability to the external and fiscal accounts. Based on their current announced plans, they are undertaking a strong front loaded fiscal adjustment and relying in part on an internal devaluation to help restore sustainable growth and competitiveness. They implemented a fairly successful internal devaluation twenty years ago, and in our consultations with them, they are very aware of the costs and tradeoffs of doing so again. Vigorous and timely implementation of their planned measures is essential. We recommend that any slippages in announced fiscal measures or new unexpected spending items should be offset with other actions, in order to ensure that budget targets are met. Monetary policy should be made more consistent with their macro framework. We have recommended they stop direct financing of the government, which can exacerbate pressures on reserves, and to raise interest rates somewhat to reflect a more credible country risk premium. These would show a cohesive, more consistent monetary policy and also reflect greater independence of the Central Bank.
So if fully implemented, we project that these announced measures, would lower the fiscal deficit to just under five percent of GDP next fiscal year, that’s 2014/15. This is down, from what we estimate could be the deficit this year ending March, at about 9.6 percent of GDP. So that’s almost a halving. This would in the short term reduce demand for foreign exchange and reduce pressures in the market and also help to raise confidence. Output of course would suffer. It would be projected to fall further next year, being pulled down by the fiscal contraction. Growth would recover modestly in the subsequent year but then pick up more in the outer years, helped in part by some of the government’s growth strategy measures, which are based in part on some large capital investment projects. But also being offset positively this year by some pickup and growth in the main tourism markets. Nonetheless, the external outlook and the government’s financing forecasts remain challenging. This reflects what the international experience has shown, that reducing public debt from high levels is not something that takes one year. It’s a long process and in Barbados there are, as well as near term fiscal adjustments, there are structural fiscal policies that need to be pursued as well as other structural policies. And we have laid out some of those in the growth section of our report. So this is basically the broad picture. The key factors then, for going forward, is number one, of paramount importance, is the government’s track record of policy implementation in the coming weeks and months. It is very critical in the short term to reduce financing pressures and raise reserves and really to boost confidence and if the authorities are fully aware and committed to this, and of course on the external side we see how things progress in terms of tourism arrivals and receipts and also with respect to long term private capital inflows, some of which is clearly identified by its association of these large capital projects which are well specified. But of course, these things are also, can be affected by the credibility of policy implementation, so it’s not completely exogenous. So in summary, the authorities are committed to their current measures. They certainly need to implement them and in so doing, generate more momentum and confidence and build a virtuous circle. And the IMF is providing policy advice and technical support and working closely with them.
QUESTIONER: Thank you. You mentioned that if the the fiscal adjustment program is implemented within weeks and months, that’s critical, we should see a lowering of the deficit by about 9.6 percent. Is there a definite timeline though, an exact time that we need to implement all these policies that we outlined?
Ms. LAFRAMBOISE: Okay, just to clarify, the current estimate for the Central Government deficit for this fiscal year which ends in March, is, approximately 9.6 percent of GDP, so that’s how high the deficit will be. If the authorities implement all the measures that they have announced last year in August and December, we estimate that the fiscal deficit next year, so March 2015, will be reduced to about 5 percent of GDP. So that’s an adjustment of about 5 percent of GDP in one year. And that’s the number we’re looking at. And what’s very important is, and both from a cash flow perspective but also from confidence perspective, is that these things take time and that implementation has to be monitored vigorously and transparently on a monthly basis. And I know that the authorities have set up a monitoring framework internally, but also the minister did present to Parliament last month, his stock taking of the progress that they had achieved between September and the end of the year. And we have some very specific recommendations on actual reporting, preparation of documentation, calendar of release on budget execution and these are all the kinds of things that need to be pursued and that the authorities need to implement and that the various institutions in the country, including opposition, need to follow up on. But the main number we’re talking about is making sure every quarter that the authorities are on track to reach those gains, budget gains, and to meet the deficit target, which they have very explicitly stated for March of 2015.
QUESTIONER: Just a quick question on the proposed layoffs. How crucial is reducing three thousand employees from civil service and to lowering the budget and getting Barbados on track, and then secondly, do you think that these layoffs are happening fast enough? I know they announced three thousand in December and they just recently began firing workers.
Ms. LAFRAMBOISE: From a dollars perspective, cash flow, this is an important measure. The wage bill is one of the three or four key items that they have control over in the near term and that they need to address. And the authorities were very clear about this. In terms of progress, the [Finance] minister stated in December that they would reduce the workforce by three thousand people in the first quarter of this year. And they have so far laid off approximately two thousand people by the end of January and indicated that the remaining thousand would be done by the end of March. And they also expect over five years to pursue attrition and they estimated another five hundred for this calendar year. So that’s a total of thirty five hundred, which is about ten percent of the size of the public service, which is not insignificant. The cash flow impact in the very near term is not likely to be felt until starting in the next fiscal year because there’s a delay, and there’s a severance package, which will affect the wage bill for this year, so we’re not expecting to see as much as was originally planned in this year. To answer your question, this is an important element of the government’s current strategy.
QUESTIONER: And just a quick follow-up, I’m not sure that I understood. Do you think it’s happening fast enough, because they said the original goals were pretty stringent? I think they’ve only fired the initial forty people so far. Do you think it’s moving quickly enough?
Ms. LAFRAMBOISE: Well we don’t have the same numbers. We’ve been informed by the authorities that approximately 1800 people were let go and received formally that notice by January 31st and that the remaining 1200 would occur by March 31st. A lot of these are coming from the public enterprises, not only from the Central Government. So I’m not sure where you have your information from.
QUESTIONER: One of the reports talks about how there may be scope for tax revenue increases by getting rid of some exemptions. Could you talk a little bit more about what those exemptions are for and whether there would be any, kind of maybe negative impact on economic growth if basically you have in effect another tax increase there?
Ms. LAFRAMBOISE: Well, okay, there is a view that in some quarters that the yield on the tax side is maxed out, but the analysis and the work that we did suggested otherwise. But it’s not as obvious, I guess, as the reasons that you might think. First, we found that in general, the tax system isn’t working that well -- the structure of the domestic taxation but also more administratively, both on the revenue and on the customs side, in terms of administration and collection. For example, in the customs and excise department, we estimated that revenues foregone based on exemptions and waivers, under the existing structure could be as high as, or over five percent of GDP. And there are other elements of the tax system which contribute to that also. But we also found that there was scope for improvement in terms of collection when we looked at simple things like the tax base, the registered tax base and compared that with the tax collected from the internal revenue directorate. And even in that respect, there are some major gaps which are unexplained. So, and the situation has deteriorated more in recent years because the tax base has been eroded so much over the years with discretionary and other types of waivers, that the buoyancy of the system is -- has deteriorated and in fact as the economic cycle has turned down, there have been no stabilizers in that respect. So we have recommended a comprehensive, and the authorities have asked for a comprehensive, view of the domestic taxation system and we are going to be providing that to them sometime this year, hopefully sometime within the first six months of the year. And the overall goal will be to broaden the tax base, improve the equity in the system, reduce the scope for discretion and certainly improve the tax yield. We also provided technical assistance last year, twice, and provided an action plan from a very operational side on how to improve customs administration and operations at the port, which are a significant -- there are significant problems and delays and that’s also something that’s been cited by the private sector as a major impediment. So it’s a question of raising revenues somewhat. We’re not talking about a huge increase in revenue over the next five years, but equally important will be the efficiency gains and equity gains in the system, that should help to improve productivity and resource allocation.
QUESTIONER: I guess if I could follow up on that, is there -- when you say the improvement -- there’s scope for improvement and collection -- it sounds like a lot of the things with the waivers you’re talking about are maybe customs excise taxes. Is that where just sort of the simple improvements would be, or is it also like a VAT issue? And I guess totally separately, was there any discussion about possible or benefits of restructuring some of the external debt?
Ms LAFRAMBOISE: Well, I think it’s, in terms of the tax issue, it’s more the former of what you just described. Operationally, it’s nuts and bolts, it’s staffing and experts and registries and all these other things where there’s a lot of scope for improvement. The other issue which we mention in the report, which is potentially a big issue on this topic, is arrears. The arrears from the government to private sector, between the government and state enterprises and between state enterprises and in terms, on tax refunds, are causing a blockage in the system. And that could be one of the factors behind this fairly rapid decline in revenues. So it’s on both of those issues.
QUESTIONER: Was there any discussion of benefits of restructuring the external debt or internal debt?
MODERATOR: Basically what we talked about was the biggest priority and the best thing that authorities can do at this stage is to implement their very much needed urgent fiscal consolidation to restore stability and growth. This is not an issue that’s up for consideration.
QUESTIONER: The measures that were outlined -- just to give a little background on it. The government said it would be laying off workers in these three months, January to March this year. However they delayed what they first said, and is it possible that if they delay implementing, because you’re saying that the biggest priority now to restore goal is implementation. If they delay, is devaluation of the dollar anything possible for consideration from the IMF, or suggestion to us?
Ms. LAFRAMBOISE: The authorities are committed to their plans and to the policies that they’ve announced. In fact, I don’t think it’s a fair characterization. It’s true they delayed by a couple weeks some of the layoffs. But when I look at what the minister said in December, he’s actually still reasonably on track. March 31st will be a critical time to see whether the three thousand number is achieved. But I mean the most important thing to keep in mind is not the number as much as the wage bill. That remains the critical decisive policy implementation, but not only on the fiscal and the supporting monetary policy and also on the structural side, that the measures that we’ve outlined to reduce the costs of business and labor and promote growth. Those things that may take longer to actually materialize need to be started immediately. So what the authorities have to do is as they stated, stick with their reform plan. They said in the past that the exchange rate regime in Barbados has served the country well. Unfortunately in the last few years, their macro policies and structural have not been sufficiently supportive. But the authorities are committed to addressing this and we are providing them with the policy and technical support that they’ve asked for and that we think they need to achieve their goals.
MR. ANSPACH: If there are no more questions, would you like to make some concluding remarks before we end this call?
Ms LAFRAMBOISE: Sure, I think that the IMF is an institution of its members, for its members. We have to, on the one hand, provide support and analytical advise to our members, but at the same time, we have to be as candid and straight forward as we can, and we hope that we’ve done that in this report. We had very good engagement with the authorities and very good discussions and we worked with them. We are in continuous engagement with them. In terms of the package that the authorities are focused on this fiscal year, it’s important that we don’t get too hung up on one or other specific items. I’m talking for example, of the layoffs. In fact, we discussed with the authorities a lot of different options in terms of how to lower the wage bill, including different approaches, like attrition, which wouldn’t produce the near term cuts in expenditures as the layoffs would but would achieve as much or more over the medium term and the authorities were very receptive to that, but at the same time, they had very clear objectives and pressing ones, and we didn’t want to discourage those. It’s very unfortunate for full time employees that don’t get a lot of advance notice and we’re very regretful of that, but we recommended that the authorities make sure that these employees get access to unemployment benefits and retraining, and we do know that the ministry of labor has programs in place for that. And so with some positive external factors and with steadfast implementation, hopefully they can generate a virtuous circle here and break the debt dynamic that they have gotten into.
MR. ANSPACH: Thank you Nicole. With that we’ll conclude this teleconference Thank you again for joining.