## cr18133-barbadosbundle

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---

### Implementation of 2016 Article IV Consultation Recommendations
- Context:
  - Prolonged recession after the global financial crisis and inadequate fiscal policy led to large fiscal deficits, high debt, and low reserves.
  - May 2017 budget aimed to eliminate new funding requirements and reverse the debt trajectory, but would slow growth and increase inflation.
  - Tourism performing well; Human Development Index remains significantly higher than rest of region.
- Recent developments:
  - Growth estimated at 1.6 percent in 2016; growth projected to decelerate to 0.9 percent in 2017 and 0.5 percent in 2018 (see Outlook).
  - Long-stay arrivals increased by 6.2 percent in first three quarters of 2017.
  - Inflation: 3.8 percent at end-2016; 6.6 percent in October 2017.
- External sector and reserves:
  - 2016 current account deficit narrowed by 1.7 percentage points to 4.4 percent of GDP.
  - Net international reserves (NIR) fell to US$340 million, or two months of imports (2016); end-September 2017 NIR US$274.8 million, or 1.6 months of imports.
  - 2017Q3: third-quarter sharp fall in consumer and capital goods imports offset by a 23 percent increase in fuel imports.
- Fiscal performance and debt:
  - FY2016/17 deficit declined to 5.5 percent from 8.9 percent of GDP in FY2015/16.
  - Tax revenues increased by 3.1 percentage points (including a one-off 0.7 percentage points and the 2 percent NSRL introduced in August 2016).
  - Central Government debt (including NIS) increased to 137 percent of GDP, from 135 percent in FY2015/16, up from 99 percent in FY2011/12.
  - FY2016/17 estimates are gross of tax refunds and may be revised down by about 1 percent of GDP following payment of tax arrears.
- May 2017 budget and implementation slippages:
  - Budget measures included NSRL increase (2 to 10 percent), expenditure cuts, interest bill reductions, and privatizations.
  - Underperformance due to: (i) lower NSRL revenues after narrowing base to exclude tourism, IBFS, pharmaceuticals and selected food items; (ii) higher SOE transfers due to supplementary allocations; (iii) postponement of debt liability management operation.
  - Staff project primary surplus to increase to 3.7 percent of GDP from 2.2 percent in 2016/17; fiscal deficit projected to decline to 4.1 percent of GDP from 5.5 percent.
- Implementation progress:
  - Areas of progress: fiscal adjustment measures (Aug 2016 and May 2017), BRA modernization (new IT, Large Taxpayer Unit, Tax Management Unit, TADAT implementation), CBB reduced new government funding, progress on national accounts with IMF TA.
  - Areas of limited/no progress: slow SOE reform; NIS integrity concerns as government issues securities instead of cash for contributions and rents; central government arrears stabilized at about 4 percent of GDP in FY2016/17 but rose to 5.4 percent of GDP in first half of FY2017/18.
- SOE oversight weaknesses:
  - MAU and POC established in 2015 but lack adequate resources, authority, and clear mandates.
- Financing and creditor composition:
  - FY2016/17 gross financing needs about 47 percent of GDP; largely met by CBB and NIS; banks reduced sovereign exposure by 4.8 percentage points of GDP.
  - H1 FY2017/18, commercial bank holdings of government debt increased by about 2.2 percentage points of GDP after increases in statutory minimum holding requirements.
  - CBB raised banks’ statutory minimum requirement for government holdings from 10 to 15 percent of deposits (May 2017); later raised to 18 and 20 percent effective December 1 and January 1 2018 respectively.
  - Rating actions: S&P downgraded to CCC on September 27, 2017 (CCC+ on March 3, 2017); Moody’s downgraded to Caa3 on March 9, 2017.
- Financial sector soundness:
  - Private sector credit growth: 1.1 percent y/y at end-December 2016; 1.5 percent January–September 2017 y/y.
  - NPLs: 8.8 percent in 2017Q2 (down from 9.6 percent a year earlier); provisions covered 64 percent of NPLs.
  - Capital Adequacy Ratio (CAR) at 20.4 percent.
  - Profitability at 1.1 percent of average assets.
  - Banks’ excess reserves at CBB increased by 41.6 percent to B$1.2 billion in 2016; CBB on-lent excess reserves to government, creating additional money and a 67 percent increase in net domestic assets (NDA).
- Political environment:
  - Labor actions over wage demands after nominal wage freeze since 2009 and recent tax hikes.
  - Government collaborating with private sector on Barbados Sustainable Recovery Program (BSRP).
  - Next elections due by June 2018.

### SOE oversight, NIS, and arrears
- Transfers and pensions:
  - Transfers are 37.4 percent of current expenditures in 2016/17.
  - Transfers to SOEs account for over 60 percent of total transfers; public sector retirement benefits represent 25 percent of transfers.
  - Transfers grew from 9.5 percent of GDP in FY2006/07 to a peak of 13.5 percent in FY2013/14; 11.8 percent in FY2016/17.
  - Transfers to SOEs were about 7.4 percent of GDP in FY2016/17.
  - Public sector pensions accounted for 3.1 percent of GDP in FY2016/17.
- SOE reform actions planned:
  - New Financial Management and Audit Act planned early in 2018 to strengthen governance and accountability for entities outside Central Government.
  - Measures: cost recovery, cost reduction, divestment, redesign social benefits delivered through SOEs, possible workforce reduction.
- NIS:
  - 15th Actuarial Review: reserves would be exhausted between 2045 and 2074.
  - Key risks: large holding of government paper (about 75 percent of assets) and shortfalls in liquidity from public sector arrears.
  - Central government arrears estimated at about 5.4 percent of GDP: arrears to private sector 1.7 percent of GDP; public sector arrears 3.7 percent of GDP.
  - Staff recommend government make contributions in cash timely and consider stricter enforcement.

### Progress in revenue administration
- Actions taken:
  - BRA implementing new IT system; establishing Large Taxpayer Unit and Tax Management Unit; incorporating TADAT recommendations.
  - Improve IT systems and electronic payment facilities; eliminate tax arrears management gaps; finalize BRA–Customs integration (stalled).
- Revenue composition and recent policy:
  - Tax-to-GDP recovered to 27.1 percent of GDP in 2016/17 and projected 27.7 percent of GDP for FY2017/18.
  - Major contributors in 2016/17: VAT 34 percent of total tax revenue; Income taxes 28 percent of total tax revenue.
  - Recent base-broadening measures: abolish zero-VAT on certain items, VAT on betting and gaming, excises on airtime and sweetened drinks, phase out some PIT deductions.
  - New taxes introduced: NSRL and Foreign Exchange Fee.
  - Distributional effect: NSRL increase from 2 to 10 percent with exemptions increased tax burden on households and small businesses.

### Key fiscal measures and estimated impacts (selected)
- May 2017 budget selected fiscal impacts (percent of GDP, Jun-17 and Nov-17 estimates; FY17/18 and FY18/19 estimates):
  - Increase in NSRL from 2 to 10 percent: 2.1 (Jun-17), 2.6 (Nov-17) ; FY17/18 1.4 ; FY18/19 1.7
  - Increase in excise taxes on gasoline and diesel: 0.5, 0.6 ; FY17/18 0.5 ; FY18/19 0.6
  - 2 percent commission on FX sales: 0.4, 0.5 ; FY17/18 0.4 ; FY18/19 0.5
  - Tax amnesty for 6 months: 0.3, 0.0 ; FY17/18 0.1 ; FY18/19 0.0
  - Planned cuts in current expenditure: 0.8, 0.8 ; FY17/18 0.3 ; FY18/19 0.3
  - Interest bill reduction (voluntary exchange of debt instruments with NIS and CBB): 0.5, 0.7 ; FY17/18 0.0 ; FY18/19 0.0
  - Additional divestment of government assets: 0.7, 0.0 ; FY17/18 0.2 ; FY18/19 0.0
  - Total estimated change in deficit: (Jun-17) 3.3 percent of GDP; (Nov-17) 4.8 percent of GDP; FY17/18: 1.4 percent; FY18/19: 2.5 percent.
  - Note: Measures do not add up to totals due to other factors and treatment of divestment receipts as financing item.

### SOE oversight institutional recommendations
- Strengthen MAU with resources and authority.
- Give POC a clear reform mandate.
- Implement Financial Management and Audit Act to strengthen SOE oversight.
- Prioritize timely implementation of privatizations.

### Financial-sector recommendations
- Continue close supervision of banks and non-bank financial institutions to reduce NPLs and raise provisioning.
- Address credit unions: extend financial safety and resolve two small weak institutions.
- Improve resourcing and regulations for the Financial Service Commission for consolidated, cross-border supervision.
- Amend Central Bank Act to provide greater central bank independence; parliamentary adoption of revised legislation in 2018 would be important.

### Data and statistical improvements
- Fund TA supporting revision of current and constant price-based GDP data; BSS close to publishing new real GDP series.
- BSS should publish real and nominal annual and quarterly GDP series; CBB should publish flash quarterly estimates in press releases.
- Address data gaps, notably external private debt.

### Staff appraisal summary (key fiscal recommendations)
- Staff advise reaching a primary surplus of 7.5 percent of GDP by FY2020/21 (overall budget close to balance).
- Adjustment should be tilted toward expenditure, primarily via SOE reforms and reductions in other current expenditures.
- Broadening the tax base and improving tax administration would allow partial reversal of the NSRL over time.
- Additional measures—asset sales or liability management operations—could be considered to accelerate debt reduction.
- Prioritize staying current on private sector obligations and tax refunds; settle NIS payments in cash rather than government securities.

### Consultation timing
- Recommended that the next Article IV consultation be held on the standard 12-month cycle.

---

### Outlook and risks
- Near-term macro outlook:
  - Growth: 1.6 percent (2016); projected 0.9 percent in 2017 and 0.5 percent in 2018; medium-term growth about 1 percent.
  - Inflation: average 4.5 percent in 2017 and 5.1 percent in 2018 (mainly reflecting NSRL increase).
- Debt and fiscal projections:
  - Baseline: cumulative fiscal adjustment of 2.2 percentage points by FY2018/19 would reduce debt-to-GDP to 86 percent (120 percent including NIS) by FY2022/23.
  - Baseline financing requirements would increase to about 53 percent of GDP.
- Active scenario:
  - Additional fiscal adjustment about 3.1 percentage points of GDP (primary surplus to 7.5 percent of GDP by FY2020/21).
  - Under active scenario: CG gross debt declines to 76 percent (or 106 percent with NIS) by FY2022/23.
  - Financing requirements fall to 41 percent of GDP.
  - Short-term debt accounts for 37 percent of total domestic debt, keeping financing requirements high.
  - Planned liability management operation with NIS and CBB (together hold about 50 percent of total domestic debt) may reduce interest costs; discussions in early stages.
- Reserves and external balances:
  - 2017 CAD projected to narrow to 3.7 percent of GDP.
  - Reserves projected to remain low at US$275 million or 1.7 months of imports, due to weak financial account.
  - With planned privatizations and absent further deterioration, reserves projected to stabilize around 2 months of imports by 2020.
  - NIR projected to fall in FY2021/22 reflecting larger than average external debt repayments.
- Main domestic risks:
  - Weaker growth if fiscal multipliers underestimated or confidence erodes.
  - Fiscal adjustment less than projected due to weaker growth, weak implementation, or policy reversal around elections.
  - Financing challenges if private sector reduces government funding.
  - Reserves may not stabilize if privatizations do not occur, fiscal slippages happen, or private inflows remain low.
  - New CBB funding could erode reserves and jeopardize exchange rate peg.
- External risks:
  - Weaker growth in advanced economies and tighter global financial conditions could reduce tourism arrivals and private investment.
  - Sovereign credit concerns could pressure official reserves despite capital controls.

### Risk Assessment Matrix highlights
- Likelihood definitions: "low" <10 percent; "medium" 10–30 percent; "high" 30–50 percent.
- Global risks with Likelihood = High:
  - Tighter/volatile global financial conditions — Impact: Medium; Policy response: Continue fiscal consolidation.
  - Fed normalization leading to surge in US dollar — Impact: Medium; Policy response: structural measures and contain wage increases.
  - Structurally weak growth in key advanced/emerging economies — Impact: High; Policy response: structural measures to improve competitiveness.
- Country-specific risks with Likelihood = High:
  - Fiscal financing pressures — Impact: High; Policy response: continue fiscal consolidation.
  - Fiscal slippages/higher fiscal multipliers — Impact: High; Policy response: reform social programs, consolidate SOEs, review spending including wage bill.
  - Post-Brexit effects — Impact: High; Policy response: structural measures and adhere to fiscal consolidation.
- Other risks:
  - Reduced financial services by global/regional banks (de-risking) — Likelihood: Medium; Impact: Medium/High; Policy response: strengthen AML/CFT, collective approaches to correspondent banks.
  - Extreme weather — Likelihood: Medium; Impact: High; Policy response: invest in climate resilient infrastructure.

### External sustainability and public external debt
- External public debt:
  - "Relatively low and does not in itself pose solvency risks."
  - Medium-term vulnerabilities from liquidity needs due to sovereign downgrades.
- External-account indicators:
  - Actual current account deficit: -4.4 percent of GDP (2016).
  - Estimated current account norm: -2.9 percent of GDP.
  - Current account gap: -1.4 percent of GDP.
  - REER overvaluation: 4.3 percent (from current account approach).
  - ARA suggests gross reserves should be 2.8 to 4.2 months of imports; 2017Q3 gross reserves covered 1.8 months of import (1.6 months on a net reserves basis).
- Debt dynamics assumptions (selected baseline 2017–2022):
  - Real GDP growth: 0.8, 0.6, 0.8, 1.0, 1.0, 1.0 (percent).
  - Inflation (GDP deflator): 4.6, 4.5, 2.8, 2.7, 2.7, 2.7 (percent).
  - Primary Balance — baseline: 3.7, 4.3, 4.3, 4.3, 4.3, 4.3 (percent of GDP).
  - Effective interest rate: 8.1, 7.4, 7.6, 8.3, 8.4, 8.2 (percent).
- Stress-test considerations include Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock.

### Medium-term macro framework (selected projections and levels)
- Real GDP growth: 0.1, 1.0, 1.6, 0.9, 0.5, 0.8, 1.0, 1.0, 1.0 (2014–2022).
- CPI inflation (average): 1.8, -1.1, 1.5, 4.5, 5.1, 2.9, 2.7, 2.7, 2.7.
- Gross domestic investment (percent of GDP): 7.2, 10.8, 11.9, 10.5, 11.1, 11.3, 11.3, 11.3, 11.5.
- National savings (percent of GDP): 7.2, 10.8, 11.9, 10.5, 11.1, 11.3, 11.3, 11.3, 11.5.

---

### Fiscal outlook, scenarios, and recommended strategy
- Baseline fiscal outlook:
  - In the absence of new measures, fiscal and primary balances are projected to increase to -3.0 and 4.4 percent of GDP in FY2018/19, respectively.
  - Cumulative fiscal adjustment relative to FY2016/17 amounts to 2.2 percentage points of GDP by FY2018/19.
  - Debt-to-GDP would fall to 86 percent (120 percent including NIS) by FY2022/23 under the baseline.
  - Financing requirements would rise to nearly 53 percent of GDP under the baseline.
- Active scenario:
  - Additional fiscal adjustment about 3.1 percentage points of GDP (primary surplus increases from 4.4 percent of GDP under baseline in FY2018/19 to 7.5 percent of GDP by FY2020/21).
  - CG gross debt declines to 76 percent (or 106 with NIS) by FY2022/23.
  - Financing requirements fall to 41 percent of GDP.
  - Short-term debt remains large: 37 percent of total domestic debt.
  - Liability management with NIS and CBB (together hold about 50 percent of total domestic debt) could significantly reduce interest costs; discussions early-stage.
- Composition and focus of fiscal reform strategy:
  - Focus on reducing expenditures while maintaining tax effort.
  - Expenditure measures to include lower transfers to SOEs and other current spending cuts (public sector pensions, containment of wage bill and goods and services).
  - Aim to marginally increase revenues and broaden tax base to allow partial reversal of NSRL over time, conditional on progress in expenditure reforms.
  - Tax revenues projected to reach nearly 30 percent of GDP under reform assumptions.
  - Revenue-side reforms: reduce exemptions (including to tourism), make tax system more progressive, and improve tax policy and administration.

### Structural and institutional recommendations
- Strengthen SOE oversight, resource and authority of MAU, and give POC a clear reform mandate.
- Implement Financial Management and Audit Act (planned early 2018).
- Complete BRA–Customs integration and continue BRA modernization (IT, Large Taxpayer Unit, Tax Management Unit, TADAT).
- Avoid substituting CBB financing for market financing to protect reserves and exchange rate peg.
- Prioritize timely implementation of privatizations to support reserves and reduce financing needs.
- Reinvigorate SOE reform: define clear objectives, pursue divestment and workforce reductions, and reconsider size/form of SOE-supported social programs.
- Reform social programs to better target protection for the most vulnerable as part of SOE and pension reforms.

### Authorities’ views and near-term financing
- Authorities acknowledge growing financing pressures and declining reserves but expect performance to be stronger than staff estimates.
- Planned actions and financing:
  - Committed to completing planned privatization of oil terminal; legal challenges may delay.
  - Plan to accelerate drawdown of project financing in pipeline, about US$280 million over next few years.
  - IDB project on tourism to provide US$30 million in external financing.
- Immediate implementation steps:
  - Strengthen MAU with new staff and improved collaboration with Ministry of Finance budget analysts for main SOEs.
  - Implement the new Financial Management and Audit Act to provide MAU with stronger oversight powers, including ability to issue fines.
- Authorities note limited domestic investment options for NIS and that external investments would reduce limited foreign reserves.

### Growth and structural reform expectations
- Fiscal consolidation will initially lower growth, structural reform expected to improve productivity and medium-term growth potential.
- Active scenario assumes government credibility and funding improvements yield a growth dividend: real growth assumed to be about 1 percentage point higher than baseline after first two years of consolidation and structural reform.
- Authorities consider staff active-scenario growth projections conservative and expect growth closer to 2.5 percent driven by increased confidence.

---

*Source: cr18133-barbadosbundle - 1. Implementation of 2016 Article IV Consultation Recommendations (IMF staff report excerpts).*

### 1. Implementation of 2016 Article IV Consultation Recommendations ____________________________ 6

### 1. Implementation of 2016 Article IV Consultation Recommendations

### Context
- Prolonged recession after the global financial crisis and inadequate fiscal policy left Barbados with large fiscal deficits, high debt, and low reserves.
- May 2017 budget aimed to eliminate new funding requirements and reverse the debt trajectory, but would slow growth and increase inflation.
- Tourism performing well; some competitiveness indicators remain stronger than peers; Human Development Index remains significantly higher than rest of region.

### Recent developments
- Growth and inflation:
  - Growth estimated at 1.6 percent in 2016.
  - After robust 2017H1, growth sharply slowed in 2017Q3.
  - Long-stay arrivals increased by 6.2 percent in first three quarters of 2017.
  - Inflation increased to 6.6 percent in October 2017, after 3.8 percent at end-2016.
- External sector and reserves:
  - 2016 current account deficit narrowed by 1.7 percentage points to 4.4 percent of GDP.
  - Net international reserves (NIR) fell to US$340 million, or two months of imports (2016).
  - At end-September 2017, NIR declined to US$274.8 million, or 1.6 months of imports.
  - In first three quarters of 2017, CAD broadly unchanged year-on-year; third-quarter sharp fall in consumer and capital goods imports offset by a 23 percent increase in fuel imports.
- Fiscal performance and debt:
  - FY2016/17 deficit declined to 5.5 percent from 8.9 percent of GDP in FY2015/16.
  - Tax revenues increased by 3.1 percentage points (including a one-off 0.7 percentage points and the 2 percent NSRL introduced in August 2016).
  - Central Government debt (including NIS) increased to 137 percent of GDP, from 135 percent in FY2015/16, up from 99 percent in FY2011/12.
  - FY2016/17 estimates are gross of tax refunds and may be revised down by about 1 percent of GDP following payment of tax arrears.
- May 2017 budget and implementation slippages:
  - Budget comprised large tax increases (NSRL increase from 2 to 10 percent), expenditure cuts, interest bill reductions, and privatizations.
  - Underperformance due to: (i) lower NSRL revenues after narrowing base to exclude tourism, IBFS, pharmaceuticals and selected food items; (ii) higher SOE transfers due to supplementary allocations; (iii) postponement of debt liability management operation.
  - Staff project primary surplus to increase to 3.7 percent of GDP from 2.2 percent in 2016/17; fiscal deficit projected to decline to 4.1 percent of GDP from 5.5 percent.
- Implementation of 2016 Article IV recommendations (Box 1):
  - Areas of progress:
    - Resuscitate fiscal adjustment: tax measures (Aug 2016 and May 2017) and current spending containment contributed to sizable consolidation, though more is needed.
    - Revenue administration: Barbados Revenue Authority (BRA) implementing new IT system, establishing Large Taxpayer Unit and Tax Management Unit, incorporating TADAT recommendations; integration of Customs and BRA stalled.
    - Monetary policy consistency with peg: CBB reduced new government funding; commercial banks required to increase holdings via higher reserve requirements.
    - Data quality: progress on national accounts with Barbados Statistical Service and IMF TA.
  - Areas of limited or no progress:
    - SOE reform: pace slow; transfers marginally reduced in FY2016/17 but could rise in FY2017/18; Financial Management and Audit Act with Cabinet could strengthen oversight if implemented.
    - Public services and growth impediments: no progress; Government collaborating with private sector on Barbados Sustainable Recovery Program.
    - NIS integrity: government pays contributions and rents to NIS by issuing new securities rather than cash, increasing NIS government debt holdings.
    - Eliminate arrears: central government arrears stabilized at about 4 percent of GDP in FY2016/17 but rose to 5.4 percent of GDP in first half of FY2017/18.
- SOE oversight weaknesses:
  - Management Accounting Unit (MAU) and Parastatal Oversight Committee (POC) established in 2015 but lack adequate resources, authority, and clear mandates.
- Financing and creditor composition:
  - FY2016/17 gross financing needs about 47 percent of GDP; largely met by CBB and NIS; banks reduced sovereign exposure by 4.8 percentage points of GDP.
  - H1 FY2017/18, commercial bank holdings of government debt increased by about 2.2 percentage points of GDP after increases in statutory minimum holding requirements.
  - CBB raised banks’ statutory minimum requirement for government holdings from 10 to 15 percent of deposits (May 2017); later raised to 18 and 20 percent effective December 1 and January 1 2018 respectively.
  - On September 27, 2017, Standard and Poor’s downgraded long-term local currency debt to CCC; March 3, 2017 downgrade to CCC+ by S&P; Moody’s downgraded to Caa3 on March 9, 2017.
- Financial sector soundness:
  - Private sector credit growth: 1.1 percent y/y at end-December 2016; 1.5 percent January–September 2017 y/y.
  - NPLs decreased to 8.8 percent in 2017Q2 from 9.6 percent a year earlier; provisions covered 64 percent of NPLs.
  - Capital adequacy (CAR) at 20.4 percent.
  - Profitability at 1.1 percent of average assets.
  - Liquidity elevated; banks’ excess reserves at CBB increased by 41.6 percent to B$1.2 billion in 2016.
  - CBB on-lent excess reserves to government, creating additional money and a 67 percent increase in net domestic assets (NDA).
- Political environment:
  - Public debate around FY2017/18 budget intensified; labor actions over wage demands after nominal wage freeze since 2009 and recent tax hikes.
  - Discussions with private sector ongoing to finalize Barbados Sustainable Recovery Plan (BSRP).
  - Democratic Labor Party in power since 2008; next elections due by June 2018.

### Outlook and risks
- Near-term macro outlook:
  - Growth projected to decelerate to 0.9 percent in 2017 and 0.5 percent in 2018, reflecting fiscal adjustment and policy uncertainty.
  - Average inflation projected at 4.5 percent in 2017 and 5.1 percent in 2018, mainly reflecting NSRL increase.
  - Medium-term growth picks up to about 1 percent, below historical average due to low reserves and lingering uncertainty.
- Debt and fiscal projections:
  - Estimated cumulative fiscal adjustment of 2.2 percentage points by FY2018/19 would reduce debt-to-GDP to 86 percent (120 per cent including NIS) by FY2022/23.
  - Despite decline, debt remains high; gross financing needs would increase to about 53 percent of GDP.
- External balance and reserves:
  - 2017 CAD projected to narrow to 3.7 percent of GDP.
  - Reserves projected to remain low at US$275 million or 1.7 months of imports, due to weak financial account.
  - With planned privatizations and absent further deterioration, reserves projected to stabilize around 2 months of imports by 2020.
  - NIR projected to fall in FY2021/22 reflecting larger than average external debt repayments.
- Main domestic risks (Annex I):
  - Growth could be weaker if fiscal multipliers are underestimated or if confidence erodes.
  - Fiscal adjustment could be less than projected due to weaker growth, weak implementation, or policy reversal around elections.
  - Financing challenges could intensify if private sector reduces government funding.
  - Reserves may not stabilize if planned privatizations do not occur, fiscal slippages happen, or private inflows remain low.
  - New CBB funding could erode reserves and jeopardize exchange rate peg.
- External risks:
  - Weaker growth in advanced economies and tighter global financial conditions could reduce tourism arrivals and private investment.
  - Sovereign credit concerns could pressure official reserves despite capital controls.

### Policy discussions and priorities
- Policy focus areas:
  - Build on recent fiscal adjustment to achieve fiscal and debt sustainability.
  - Accelerate SOE reforms to allow enduring reduction in transfers.
  - Rebuild external buffers and stabilize international reserves.
  - Support economic recovery while maintaining financial stability.
  - Address data shortcomings.
- Authorities’ stance:
  - Authorities remain committed to maintaining the exchange rate peg.
- Fiscal specifics discussed:
  - Staff project the primary surplus to increase to 3.7 percent of GDP from 2.2 percent in 2016/17; fiscal deficit projected to decline to 4.1 percent of GDP.
  - May 2017 budget measures (selected fiscal impacts, percent of GDP, Jun-17 and Nov-17 estimates):
    - Increase in NSRL from 2 to 10 percent: 2.1 (Jun-17), 2.6 (Nov-17) ; FY17/18 1.4 ; FY18/19 1.7
    - Increase in excise taxes on gasoline and diesel: 0.5, 0.6 ; FY17/18 0.5 ; FY18/19 0.6
    - 2 percent commission on FX sales: 0.4, 0.5 ; FY17/18 0.4 ; FY18/19 0.5
    - Tax amnesty for 6 months: 0.3, 0.0 ; FY17/18 0.1 ; FY18/19 0.0
    - Planned cuts in current expenditure: 0.8, 0.8 ; FY17/18 0.3 ; FY18/19 0.3
    - Interest bill reduction (voluntary exchange of debt instruments with NIS and CBB): 0.5, 0.7 ; FY17/18 0.0 ; FY18/19 0.0
    - Additional divestment of government assets: 0.7, 0.0 ; FY17/18 0.2 ; FY18/19 0.0
    - Total estimated change in deficit (Jun-17): 3.3 percent of GDP; (Nov-17): 4.8 percent of GDP; FY17/18: 1.4 percent; FY18/19: 2.5 percent.
  - Note: Budget measures do not add up to total estimated change in deficit due to other factors and treatment of divestment receipts as financing item.
- Key structural and institutional recommendations implied by discussions:
  - Strengthen SOE oversight, resource and authority of MAU and give POC a clear reform mandate.
  - Implement Financial Management and Audit Act to strengthen SOE oversight.
  - Complete BRA–Customs integration and continue BRA modernization (IT, Large Taxpayer Unit, Tax Management Unit, TADAT implementation).
  - Avoid substituting CBB financing for market financing to protect reserves and exchange rate peg.
  - Prioritize timely implementation of privatizations to support reserves and reduce financing needs.

*Source: cr18133-barbadosbundle - 1. Implementation of 2016 Article IV Consultation Recommendations*

### 15.      Further fiscal consolidation is needed to address persistent large budget deficits and

### 15.      Further fiscal consolidation is needed to address persistent large budget deficits and high debt.

### Fiscal outlook and baseline projections
- In the absence of new measures, the fiscal and primary balances are projected to increase to -3.0 and 4.4 percent of GDP in FY2018/19, respectively.
- The cumulative fiscal adjustment relative to FY2016/17 amounts to 2.2 percentage points of GDP by FY2018/19.
- The debt-to-GDP ratio would fall to 86 percent of GDP (120 including NIS) by FY2022/23 under the baseline.
- Financing requirements would rise to nearly 53 percent of GDP under the baseline.
- The DSA highlights sizable risks: low growth, continued significant recourse to short-term debt, rising arrears, contingent liabilities, and vulnerability to unfavorable shocks from real interest rates.

### Active scenario and additional adjustment
- The active scenario envisages an additional fiscal adjustment of about 3.1 percentage points of GDP: i.e., an increase in the primary surplus from 4.4 percent of GDP expected under the baseline in FY2018/19 to 7.5 percent of GDP by FY2020/21.
- Under the active scenario:
  - CG gross debt declines to 76 percent (or 106 with NIS) by FY2022/23.
  - Financing requirements fall to 41 percent of GDP.
- Even with the active scenario, financing requirements remain high because short-term debt accounts for 37 percent of total domestic debt.
- The planned liability management operation with the NIS and CBB — which together hold about 50 percent of total domestic debt — may significantly reduce interest costs and financing requirements; discussions are in the early stages.
- Additional measures (further asset sales or liability management operations) could be considered to achieve a faster reduction in the debt-to-GDP ratio and address large financing requirements.

### Composition and focus of the fiscal reform strategy
- The reform strategy would be focused on reducing expenditures while maintaining the tax effort.
- Expenditure measures under the proposed adjustment would include:
  - (i) lower transfers to SOEs, including a reversal of recent increases and further cuts based on structural reforms; and
  - (ii) other current spending cuts, including a reduction in public sector pensions and containment of the wage bill and goods and services.
- The strategy would aim to marginally increase revenues and broaden the tax base to accommodate a partial reversal in the NSRL over time, conditional on progress in (i) and (ii).
- Tax revenues are projected to reach nearly 30 percent of GDP.
- Revenue-side reforms would include widening the tax base by reducing exemptions, including to tourism, while making it more progressive, and improvements to tax policy and tax administration.

### SOEs, transfers, and public pensions
- Transfers are the single largest expenditure category—37.4 percent of current expenditures in 2016/17.
- Transfers to SOEs account for over 60 percent of total transfers; public sector retirement benefits represent another 25 percent.
- Transfers grew from 9.5 percent of GDP in FY2006/07 to a peak of 13.5 percent in FY2013/14, and were 11.8 percent in FY2016/17.
- Transfers to SOEs were about 7.4 percent of GDP in FY2016/17.
- Public sector pensions accounted for 3.1 percent of GDP in FY2016/17.
- SOE reforms recommended and planned actions:
  - New Financial Management and Audit Act (planned early in 2018) to strengthen governance and accountability for entities outside Central Government.
  - Further measures: cost recovery, cost reduction, divestment, redesign of social benefits delivered through SOEs, and possible reduction in the workforce.
- Risks: such reforms could have a larger adverse impact on growth than suggested by the fiscal multiplier and will require reform of social programs to better target protection for the most vulnerable.

### National Insurance Scheme (NIS) and arrears
- The 15th Actuarial Review indicates that the NIS has a strong financial position; the report shows that reserves would be exhausted between 2045 and 2074.
- Key risks to the NIS: large holding of government paper (about 75 percent of its assets) and shortfalls in liquidity from public sector arrears on contributions and rents.
- Staff urge the government to make its contributions in cash in a timely manner and consider stricter enforcement to prevent employer evasion of contributions.
- Central government arrears are estimated at about 5.4 percent of GDP:
  - Arrears to the private sector are 1.7 percent of GDP (including pending payments for goods and services and VAT and other tax refunds).
  - The bulk of arrears (3.7 percent of GDP) is due to the public sector—authorized transfers to SOEs and statutory bodies, and payments to NIS (mainly payroll contributions and rents).
- The government should net out intra-agency arrears and agree with the private sector on a concrete repayment program; staying current on obligations should be a priority.

### Authorities’ views and near-term financing
- Authorities recognize the budget deficit will be larger than planned but expect performance to be stronger than staff estimates; they note revenue performance is weaker because of lower imports and larger exemptions for the NSRL, while corporate tax is doing better.
- Authorities acknowledge growing financing pressures and declining reserves.
- Planned actions and financing:
  - Committed to completing the planned privatization of the oil terminal; delay may be unavoidable due to legal challenges.
  - Plan to accelerate drawdown of project financing in the pipeline, about US$280 million over the next few years.
  - The recently approved Inter-American Development Bank (IDB) project on the tourism sector should provide US$30 million in external financing.
- Authorities agree a higher primary balance is necessary but stress the strategy and speed of adjustment need careful design; comprehensive SOE reform strategy to be presented to Cabinet in December reflecting the BSRP.
- Immediate implementation steps:
  - Strengthen the Management Accounting Unit (MAU) with new staff and improved collaboration with Ministry of Finance budget analysts for main SOEs.
  - Implement the new Financial Management and Audit Act to provide MAU with stronger oversight powers, including the ability to issue fines.
- On NIS holdings of government debt, authorities note limited domestic investment options and that external investments would reduce limited foreign reserves.

### Growth, structural reform, and confidence
- Fiscal consolidation will initially lower growth, but structural reform would help improve productivity and growth potential in the medium-term.
- Key structural impediments: public sector inefficiencies, bureaucratic delays, slow clearance times at immigration and customs, and delays in issuance of construction permits; need to reform legal processes and improve CAIPO services.
- Labor law modernization is recommended to increase labor market flexibility and incentives.
- The active scenario assumes an improvement in government credibility, credit ratings, and increases in external official and private funding, yielding a growth dividend from reforms:
  - Real growth is assumed to be about 1 percentage point higher than in the baseline after the first two years of consolidation and structural reform.

*Source: Barbados — IMF staff report (excerpts).*

### 28.      The active scenario also faces high risks. It will require exceptionally high political

### 28.      The active scenario also faces high risks. It will require exceptionally high political

### Risks to the active scenario
- Requires exceptionally high political commitment and will entail challenging adjustments.
- Growth may be lower than projected due to a higher than estimated fiscal multiplier.
- SOE reforms are difficult to implement and there is a risk that the projected primary surplus will not be sustained.
- Recovery in confidence and private inflows may not materialize if the government’s reform effort is not perceived as credible or sufficient to restore fiscal and debt sustainability.

### Authorities’ views on near-term outlook and growth
- Authorities agree broadly with staff but attribute slowing mainly to external factors and ongoing fiscal consolidation.
- They note it is too early to assess the May budget impact because some measures were implemented only in August and September 2017.
- BSRP includes a strategy to reform business facilitation processes to promote growth.
- Authorities consider staff active-scenario growth projections too conservative; they view the fiscal multiplier as smaller and expect growth closer to 2.5 percent driven by increased confidence.

### Financial sector and exchange rate peg (Financial and External Stability)
- Eliminating new CBB funding of the government is critical to preserving the exchange rate peg.
  - Two years of large direct CBB financing contributed to the decline in international reserves and considerable credit risk on the CBB balance sheet.
  - CBB raised securities reserve requirements for banks, increasing commercial banks’ exposure to sovereign debt; this financial repression may harm the business climate.
  - Adhering to fiscal targets and eliminating reliance on CBB financing is necessary to support the peg; progress toward fiscal sustainability would allow the CBB to roll back reserve requirements.
- Supervision and sector vulnerabilities
  - Close supervision of banks and non-bank financial institutions should continue to reduce NPLs and raise provisioning.
  - Credit unions: loans account for three-quarters of credit unions assets and show robust growth, but face low returns on assets, liquidity below prudential standards, low provisioning, and relatively elevated but declining NPLs.
  - Government should extend financial safety to credit unions and quickly resolve two small weak institutions (FSAP recommendation).
  - Insurance sector has assets of 36 percent of GDP, has been stagnating, and profitability has been mixed; the Financial Service Commission needs better resourcing and regulations for consolidated, cross-border supervision—particularly of regional systemically important institutions.
  - Exposure to sovereign risk remains a major concern.
  - Amendments to the Central Bank Act have been drafted to provide greater central bank independence; parliamentary adoption of revised central bank legislation in 2018 would be important.
- IBFS sector
  - Long-term prospects of the IBFS sector are uncertain; the sector remains a vital source of foreign exchange, employment, and tax revenue.
  - Recovery has been slow after the global financial crisis and changes in Canadian tax legislation; global banks’ withdrawal of correspondent banking relationships has had a negative impact.
  - Recent changes in UK corporate taxation led to a modest recovery in newly-licensed entities in 2016.
  - Limited information hampers accurate assessment; the sector would benefit from enhanced monitoring, transparency, communication, and corrective action on AML/CFT Mutual Evaluation Report deficiencies.
- Capital flow management and reserves
  - Consistent implementation of ambitious fiscal consolidation is needed to strengthen the financial account and rebuild international reserves.
  - The recently introduced FX fee (FEF) of 2 percent on all FX sales is treated as a CFM under the IMF’s Institutional View and is seen by staff as a crisis measure with limited impact on reserves; the FEF should be eliminated as the reserve position strengthens.
  - External competitiveness assessment: current account gap estimated at -1.4 percent, translating into a 4.2 percent REER overvaluation.
  - ARA methodology suggests gross reserves should be about 2.8 to 4.2 months of import, whereas the 2017Q3 level of gross reserves cover was 1.7 months of import (1.6 months on a net reserves basis).
  - In the active scenario, reserves increase to about 2.5 months of imports with a strengthening of private sector inflows; reserves could strengthen further if multilateral banks increase lending in response to improved macroeconomic conditions.

### Authorities’ views on CBB financing, reserves, and legislation
- Authorities committed to reducing reliance on CBB for new government financing to preserve the peg.
- They view increased banks’ statutory requirements as temporary while fiscal consolidation proceeds, noting historical precedent in the 1990s when requirements were increased then reduced after recovery.
- Authorities are exploring options to fortify reserves, following up on FSAP recommendations, and have drafted legislative amendments to increase CBB independence; awaiting Chief Parliamentary Counsel confirmation.

### Data weaknesses and statistical improvements (Other Issues)
- Data inadequacies continue to hamper understanding of macroeconomic developments and complicate policy prioritization and monitoring.
- Fund TA is supporting revision of current and constant price-based GDP data and addressing large inconsistencies between the two series; the Barbados Statistical Service is close to publishing the new real GDP series (Box 3).
- Maintaining appropriate staffing and adequate resources, and timely data sharing among agencies, is critical to improving data quality; additional TA may be needed.

### Staff appraisal: key findings and fiscal recommendations
- Real sector and inflation
  - After stagnation, relatively robust GDP growth occurred in 2016 due to tourism recovery and pickup in domestic investment.
  - Economy is slowing due to fiscal consolidation and political uncertainty; headline inflation is picking up.
  - Staff estimate real growth will slow to 0.9 percent in 2017 from 1.6 percent in 2016.
  - Inflation is estimated to rise to 5.5 percent by end-2017, from 3.6 percent at end-2016, reflecting tax increases.
  - Despite a halving of the current account deficit since 2014, reserves continue to deteriorate due to weak official and private capital inflows.
- Fiscal outcomes, debt, and financing
  - Fiscal deficit declined from 8.9 to 5.5 percent of GDP between FY2015/16 – 16/17, driven by improved revenue (including NSRL and one-offs) and containment of current spending.
  - Central government debt further increased to 101 percent of GDP (or 137 percent including NIS).
  - Successive credit downgrades and high debt have reduced private willingness to hold government securities, increasing reliance on CBB funding.
  - Government’s May 2017 budget aimed to significantly reduce the deficit, eliminate need for new funding, and increase international reserves, relying on a large NSRL increase, other taxes and fees, and privatization.
  - Weaker-than-expected revenue performance—narrowing of NSRL base, lower imports, and less-than-planned reduction in transfers—suggest the government will miss its target.
  - Staff estimate the fiscal deficit in FY2017/18 to be 4.1 percent, excluding privatization proceeds, and a primary surplus of 3.7 percent of GDP.
  - In the absence of planned privatizations, reserves will continue to decline and further endanger the peg.
- Recommended fiscal path and structural reforms
  - Staff advise reaching a primary surplus of 7.5 percent of GDP by FY2020/21, corresponding to an overall budget close to balance.
  - Adjustment should be tilted toward expenditure, primarily supported by SOE reforms and reductions in other current expenditures.
  - Revenue improvements could come from broadening the tax base, including reducing exemptions, allowing a partial reversal of the NSRL increase over time.
  - Additional measures—asset sales or liability management operations—could be considered for a faster reduction in the debt-to-GDP ratio.
  - SOE reform must be reinvigorated: define clear objectives, pass the Public Financial Management and Audit Act, strengthen the MAU and the POC, reconsider size and form of SOE-supported social programs, pursue divestment and workforce reductions as needed.
- Arrears and payments
  - Continued accumulation of arrears hinders private and public sectors and may lower tax compliance.
  - Government should prioritize staying current to the private sector and especially tax refunds.
  - Payments to the NIS should be settled in cash rather than government securities to avoid undermining its liquidity.
- Private sector and competitiveness
  - Accelerate reforms to improve public services and reduce inefficiencies and delays; reform legal processes and improve CAIPO services.
  - Update labor laws to increase flexibility, improve incentives, and raise productivity.
- Monetary and financial policy stance
  - CBB should continue to refrain from providing new funding to the government; direct CBB financing represents a significant macro-financial risk and is incompatible with a fixed exchange rate.
  - The increase in statutory requirements for banks to hold government assets should be eased as fiscal consolidation reduces financing needs.
  - Banking sector remains well capitalized and NPLs continue to decline, but low profitability and financial repression pose risks; vigilance and follow-up on FSAP update recommendations (notably credit unions and AML/CFT) are needed.
- Reserves and actions to bolster them
  - Low international reserves are a critical vulnerability; indicators point to a modest REER overvaluation.
  - Authorities should complete planned privatizations and improve capacity to drawdown project financing already in the pipeline to bolster reserves.
- Statistical and publication recommendations
  - Progress in national accounts is notable, but more is needed: BSS should publish real and nominal annual and quarterly GDP series; CBB should publish flash quarterly estimates in press releases.
- Consultation timing
  - Recommended that the next Article IV consultation with Barbados be held on the standard 12-month cycle.

*International Monetary Fund staff summary based on the supplied chapter text.*

### 3.3 percent in 2016, slightly higher than in 2015.

### cr18133-barbadosbundle - 3.3 percent in 2016, slightly higher than in 2015.

### Financial sector developments
- Private sector credit growth: remains weak; private sector credit trends in tables show:
  - Private sector credit (Table 6, end-of-period percent of GDP): -4.60, 0.5, 1.1, 3.6, 4.4, 3.8, 3.3, 3.2.
- Excess liquidity: banks’ liquid assets to total assets have increased; excess liquidity parked at the Central Bank.
- Central Bank and reserves:
  - Central Bank net foreign assets (Table 5, US$ millions or BBD millions depending on series): 1,052, 926, 681, 551, 663, 659, 705, 599, 461.
  - Net international reserves (memoranda): 526, 463, 340, 275, 332, 329, 352, 299, 231; in months of imports: 3.0, 2.7, 2.0, 1.7, 1.9, 1.9, 2.0, 1.6, 1.2.
- Interest rates and reserves behavior:
  - T-bill and deposit rate charts indicate a period of low/negative real T-bill differentials and an “Elimination of minimum deposit rate” event (chart annotation).
- Banks’ balance-sheet indicators (Table 7):
  - Capital Adequacy Ratio (CAR): 19.3, 21.0, 19.7, 20.5, 18.9, 19.8, 19.7, 20.4.
  - Liquid assets, in percent of total assets: 12.0, 14.6, 18.0, 20.3, 25.3, 27.4, 26.3, 27.8.
  - Non-performing loans ratio: 11.1, 12.9, 11.7, 11.5, 10.6, 8.9, 8.7, 8.8 (commercial banks); alternate series shows 7.1, 8.2, 8.4, 9.4, 9.0, 7.6, 7.1, 7.8 (credit unions).
  - Return on Assets (ROA) for commercial banks: 1.0, 1.1, 0.8, 0.7, 0.9, 1.0, 1.1, 1.1; credit unions ROA: 1.4, 1.4, 1.1, 0.9, 0.9, 1.1, 1.1, 1.3.

### Social development indicators
- Public social spending trends (2000–2014 series shown):
  - Public social spending (Percent of GDP) time series charted for Health, Education, Overall; levels in 2014 show Overall public social spending near the top among comparator countries.
- Comparative indicators (2015–2016):
  - Life expectancy, 2015: Barbados 64/68/72/76/80 series plotted; label shows BRB among highest (specific numeric life expectancy in Table 1: Life expectancy at birth in years (2013) 75.3).
  - Human Development Index ranking (2015): Barbados rank in chart (Table 1: Rank in UNDP Development Index (2014) 57).
- Selected household and social statistics (Table 1):
  - Population (2016 est., thousand) 280.4.
  - Adult literacy rate 99.7.
  - Per capita GDP (2016 est., US$ thousand) 17.0.
  - Poverty rate (individual, 2010) 19.3.
  - Gini coefficient (2010) 47.0.
  - Unemployment rate (2016 est.) 9.9.
  - Main products, services and exports: tourism, financial services, rum, sugar, and chemicals.

### Competitiveness and tourism
- Exchange rates and tourism:
  - Nominal and real effective exchange rates indexed to January 2000=100 show real effective exchange rate started depreciating in 2017.
  - Visitor expenditure and stayover arrivals: Stayover Tourist Arrivals 2016 (y/y percent change) for Barbados 6.7%, Jamaica 2.8%, ECCU 2.3%, Trinidad and Tobago -7.0%.
  - Visitor expenditure and stayover arrivals rising; tourism market share of selected Caribbean countries increasing for Barbados.
- Global/doing-business rankings:
  - Doing Business: Distance to Frontier, 2017 — Barbados score shown among comparators; regional average provided in chart (Distance to Frontier: Region Average 52.9, Barbados 55.2 etc. in chart).
  - Tourism Competitiveness Index Ranking and Global Competitiveness Index Ranking: Barbados ranking has deteriorated between 2014-15 and 2016-17 (charts show declines).
- Exports and capital flows:
  - Exports of goods and services show increase: 2014–2017 exports series (Table 4): Exports 1,894, 1,954, 2,081, 2,076, 2,127, 2,181, 2,238, 2,302, 2,370 (millions US$).

### Economic performance in regional context
- Growth and current account:
  - Real GDP growth (2005–2016 chart): Barbados’ growth picked up relative to peers; Table 6 shows Real GDP (annual percentage change) 0.1, 1.0, 1.6, 0.9, 0.5, 0.8, 1.0, 1.0, 1.0.
  - Current account (percent of GDP) trend (Table 6): -9.3, -6.1, -4.4, -3.7, -3.0, -2.7, -2.6, -2.6, -2.3.
- Reserves and external position:
  - Reserves in months of imports, 2016: Barbados 2.0 months; comparator countries: Bahamas 4.1, ECCU 5.4, Jamaica 6.5, Trinidad and Tobago 9.5 (chart).
  - Net international reserves (US$ millions): 526, 463, 340, 275, 332, 329, 352, 299, 231.
- Fiscal consolidation and debt:
  - Barbados lagging in fiscal consolidation; general government gross debt-GDP ratio, 2016:
    - Barbados 137%, Jamaica 112%, ECCU 74%, Bahamas 68%, Trinidad and Tobago 39% (chart).
  - Central government gross debt (excludes NIS holdings) (Table 3, percent of GDP): 93.4, 101.0, 100.9, 97.2, 93.8, 92.5, 91.9, 89.3, 85.5.
  - Central government gross debt (includes NIS holdings) (Table 3, percent of GDP): 125.4, 134.7, 137.0, 132.8, 128.7, 127.1, 126.5, 123.8, 119.8.

### Public finances and fiscal projections
- Key fiscal aggregates (Table 1 and Tables 2a/2b; fiscal year April–March):
  - Central government revenue and grants (percent of GDP): 25.7, 26.1, 28.5, 29.1, 29.8 (2014/15–2018/19 series).
  - Total expenditure (percent of GDP): 33.3, 35.0, 34.0, 33.1, 32.8.
  - Fiscal balance (percent of GDP): -7.5, -8.9, -5.5, -4.1, -2.9 (2014/15–2018/19).
  - Primary balance (percent of GDP): -0.5, -1.8, 2.2, 3.7, 4.4.
  - Interest expenditure (percent of GDP): 7.0, 7.1, 7.7, 7.7, 7.3.
- Central government operations (Table 2a, in millions of Barbados dollars):
  - Total revenue (Est. columns): 2,407; 2,458; 2,749; 2,962; 3,196; 3,315; 3,439; 3,567; 3,700 (2014/15–2022/23).
  - Total expenditure (Est. columns): 3,112; 3,302; 3,279; 3,376; 3,510; 3,670; 3,839; 3,976; 4,076.
  - Central government gross debt (excl. NIS) (millions BBD): 8,739; 9,522; 9,744; 9,901; 10,048; 10,266; 10,584; 10,672; 10,592.
  - Central government gross debt (incl. NIS) (millions BBD): 11,728; 12,692; 13,230; 13,526; 13,779; 14,116; 14,569; 14,793; 14,840.

### Balance of payments and external flows
- Current account (millions of US$) and projection (Table 4):
  - Current account: -433, -289, -208, -184, -157, -150, -150, -152, -139 (2014–2022).
  - Exports of goods and services (millions of US$): 1,894; 1,954; 2,081; 2,076; 2,127; 2,181; 2,238; 2,302; 2,370.
  - Imports of goods and services (millions of US$): 2,115; 2,032; 2,035; 2,000; 2,059; 2,105; 2,158; 2,218; 2,285.
  - Services (net) (millions of US$): 639; 659; 752; 773; 794; 809; 834; 859; 886.
  - Capital and financial account (millions of US$): 362; 213; 388; 421; 414; 81; 739; 970; 0.
  - Net international reserves (US$ millions) in Table 4 memoranda: 526, 463, 340, 275, 332, 329, 352, 299, 231.

### Medium-term macro framework highlights
- Macroeconomic projections (Table 6, percent of GDP or annual percent change):
  - Real GDP growth: 0.1, 1.0, 1.6, 0.9, 0.5, 0.8, 1.0, 1.0, 1.0 (2014–2022).
  - Nominal GDP growth: 0.0, 0.5, 1.5, 5.4, 5.6, 3.7, 3.7, 3.7, 3.7.
  - CPI inflation (average): 1.8, -1.1, 1.5, 4.5, 5.1, 2.9, 2.7, 2.7, 2.7.
  - Gross domestic investment (percent of GDP): 7.2, 10.8, 11.9, 10.5, 11.1, 11.3, 11.3, 11.3, 11.5.
  - National savings (percent of GDP): 7.2, 10.8, 11.9, 10.5, 11.1, 11.3, 11.3, 11.3, 11.5.

*Source: IMF staff compilation and Barbados authorities as presented in the provided content.*

### Annex I. Risk Assessment Matrix (RAM)

### Annex I. Risk Assessment Matrix (RAM)

### Overview
- The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- Likelihood definitions (staff’s subjective assessment): "low" indicates a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability between 30 and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

### Global Risks (Source of Risks, Likelihood, Impact, Policy Response)
- Tighter and volatile global financial conditions.
  - Likelihood: High
  - Impact: Medium
  - Policy response:
    - Continue with fiscal consolidation to significantly reduce debt-to-GDP ratio and rebuild credibility, thereby increasing investors’ confidence.

- Fed normalization leading to surge in the US dollar.
  - Likelihood: High
  - Impact: Medium
  - Policy response:
    - Structural measures to improve competitiveness and boost attractiveness to tourists.
    - Strengthen social compact and contain wage increases to reduce competitiveness problems.

- Structurally weak growth in key advanced and emerging economies (tourism sensitivity to Canada, the U.K., and the U.S.).
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Structural measures to improve competitiveness and support development of other sectors.

- Reduced financial services by global/regional banks (“de-risking”).
  - Likelihood: Medium
  - Impact: Medium/High
  - Policy response:
    - Strengthen AML/CFT framework, adhere to best practice and enhance monitoring of the sector.
    - Explore alternative mechanisms; collectively approach potential correspondent banks with other Caribbean countries to increase business volume.

### Country-specific risks (Source of Risks, Likelihood, Impact, Policy Response)
- Fiscal financing pressures (high borrowing costs, possible monetization of the deficit raising the risk of a liquidity crisis and/or imperiling the currency peg).
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Continue with fiscal consolidation to substantially reduce the debt-to-GDP ratio, to reduce financing requirements and strengthen creditworthiness assessments.

- Fiscal slippages/higher fiscal multipliers (would reinforce market concerns about fiscal sustainability and undermine private sector confidence necessary for investment).
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Reform social programs and consolidate state owned enterprises sector to reduce transfers envelope; review other spending, including public sector wage bill and rationalize tax systems to reduce tax compliance cost and tax avoidance.

- Post-Brexit (adverse impact on tourism and investment from uncertainties and economic spillovers associated with U.K. negotiations with the E.U.).
  - Likelihood: High
  - Impact: High
  - Policy response:
    - Structural measures to improve competitiveness and boost attractiveness to tourists.
    - Adhere to fiscal consolidation strategy, and accelerate growth-promoting structural reforms to boost investor confidence.

- Extreme weather conditions (Barbados located outside the hurricane zone but impact can be large; risk of other natural disasters such as flooding).
  - Likelihood: Medium
  - Impact: High
  - Policy response:
    - Invest in climate resilient infrastructure that could mitigate disaster risk.

*Source: Annex I. Risk Assessment Matrix (RAM) in the provided IMF content.*

### 8.      External public debt is relatively low

### 8.      External public debt is relatively low

### Main findings
- External public debt "is relatively low and does not in itself pose solvency risks."
- Medium-term vulnerabilities arise from liquidity needs caused by the repeated downgrading of Barbados’ sovereign rating, which:
  - will make future access to external financing difficult;
  - reduces the probability of rollover of existing debt; and
  - increases financing costs substantially.
- Lack of data on external private debt prevents a full quantitative assessment of the economy’s external position.

### External sustainability and external-account indicators
- Overall external position: "moderately weaker than the level consistent with the medium-term fundamentals and desirable policies."
- Current account:
  - Actual current account deficit: -4.4 percent of GDP (2016).
  - Estimated current account norm: -2.9 percent of GDP.
  - Current account gap: -1.4 percent of GDP.
- REER:
  - REER overvaluation: 4.3 percent (from the current account approach).
  - REER depreciated by about 5 percent in 2017Q3, reversing a 4 percent appreciation in 2016.
- ARA/Reserves:
  - ARA suggests gross reserves should be in the range of 9.9 to 14.8 percent of GDP, corresponding to 2.8 to 4.2 months of imports.
  - 2017Q3 gross reserves: 5.9 percent of GDP, covering 1.8 months of import (1.6 months on a net reserves basis).
  - Staff projection: gross reserves stabilize at about 2.1 months of imports (1.9 months net) over the next 3 years but would fall further because of large debt service bullet payments in FY2021/22.

### Debt dynamics and public debt projections (selected indicators and assumptions)
- Baseline fiscal/real economy assumptions (samples shown in document):
  - Real GDP growth (2017–2022 baseline): 0.8, 0.6, 0.8, 1.0, 1.0, 1.0 (in percent).
  - Inflation (GDP deflator, percent): 4.6, 4.5, 2.8, 2.7, 2.7, 2.7.
  - Primary Balance (percent of GDP) — baseline: 3.7, 4.3, 4.3, 4.3, 4.3, 4.3.
  - Effective interest rate (percent): 8.1, 7.4, 7.6, 8.3, 8.4, 8.2.
- Change in gross public sector debt (cumulative, projections): shows declines in most projection years with cumulative change -15.2 (through 2022, as shown in table).
- Identified debt-creating flows (cumulative in table): -7.9 (through 2022, as shown in table).
- Primary deficit (projections, percent of GDP): 0.7, 1.8, -2.2, -3.7, -4.3, -4.3, -4.3, -4.3, -4.3, -25.3 (table entries).
- Primary (noninterest) revenue and grants (percent of GDP, historical/projections): 26.6, 26.1, 28.5, 29.1, 29.8, 29.8, 29.8, 29.8, 29.8, 178.1 (table entries).
- Primary (noninterest) expenditure (percent of GDP): 27.2, 27.9, 26.3, 25.4, 25.5, 25.5, 25.5, 25.5, 25.5, 152.9 (table entries).

### External debt sustainability (Table 1 highlights)
- Baseline external debt levels (percent of GDP, selected years shown): 44.7, 47.5, 47.8, 47.4, 44.8, 41.4, 38.6, 37.0, 36.2, 33.3, 29.4.
- Change in external debt (percent of GDP, 2012–2022 row example): -3.3, 2.8, 0.3, -0.4, -2.6, -3.5, -2.8, -1.5, -0.9, -2.9, -3.9.
- Current account deficit, excluding interest payments (percent of GDP): 6.4, 6.7, 6.7, 3.7, 1.9, 1.4, 0.9, 0.8, 0.8, 0.8, 0.8 (2012–2022 sequence in table).
- Gross external financing need (in billions of US dollars): 0.5, 0.5, 0.5, 0.4, 0.3, 0.3, 0.3, 0.2, 0.2, 0.3, 0.4.
- Gross external financing need (percent of GDP): 10.0, 10.0, 10.6, 8.7, 6.8, 6.3, 5.2, 4.5, 3.7, 5.3, 6.5.
- External debt-to-exports ratio (percent): 105.3, 113.1, 118.0, 113.9, 102.6, 100.0, 96.2, 93.4, 92.2, 85.6, 76.3 (2012–2022 sequence).

### Stress tests and risk assessment
- Stress tests run include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock.
- Baseline and stress-assumption examples:
  - Baseline primary balance (percent of GDP): 3.7 (2017), 4.3 (2018–2022).
  - Real GDP growth shock path shown: 0.8, -0.7, -0.5, 1.0, 1.0, 1.0 (percent).
  - Real interest rate shock (effective interest rate examples): 8.1, 7.4, 10.9, 12.0, 12.6, 12.8 (percent) in the shock scenario.
  - Combined shock effective interest rate trajectory example: 8.1, 7.5, 10.8, 11.9, 12.5, 12.7 (percent).
- Risk heat map and thresholds used:
  - Bond spread thresholds: 200 and 600 basis points.
  - External financing requirement thresholds: 5 and 15 percent of GDP.
  - Change in share of short-term debt thresholds: 0.5 and 1 percent.
  - Public debt held by non-residents thresholds: 15 and 45 percent.
  - Share of foreign-currency denominated debt thresholds: 20 and 60 percent.

### Competitiveness and external-account developments
- Current account and trade: Current account -9.3 (2014), -6.1 (2015), -4.4 (2016) percent of GDP. Trade balance of goods: -18.4 (2014), -15.7 (2015), -14.8 (2016) percent of GDP.
- Exports and imports of goods and services (percent of GDP): Exports 40.5 (2014), 41.6 (2015), 43.7 (2016); Imports 45.3 (2014), 43.3 (2015), 42.7 (2016).
- Services and travel receipts (percent of GDP): Services 13.7 (2014), 14.0 (2015), 15.8 (2016). Travel credits 23.6 (2014), 24.6 (2015), 26.2 (2016). Travel debits 19.0 (2014), 20.2 (2015), 21.8 (2016).
- Tourism performance:
  - Long-stay arrivals: +14 percent in 2015; +6.7 percent in 2016; through September 2017 arrivals increased +6.2 percent relative to the same period last year.
  - Tourism spending in the first half of 2017 estimated to have grown by 7.3 percent.
  - Despite arrivals growth, tourism spending on accommodations showed a cumulative decline of 11 percent through end-2016 in three years, while long-stay arrivals cumulatively increased 24.2 percent.
- Competitiveness indicators nuance:
  - The REER measure uses 2004-2005 merchandise trade weights and excludes trade in services, potentially underrepresenting competitiveness developments for a services-oriented economy such as Barbados.
  - Public sector wages have not increased since 2009; cumulative inflation during 2009 to 2017H1 was about 27 percent (with deflation in 2015).

### Policy-relevant implications and vulnerabilities
- Although public external debt levels do not indicate immediate solvency risk, liquidity risks are material and rising because of:
  - Sovereign downgrades increasing spreads and financing costs;
  - Lower probability of debt rollover; and
  - Depressed official and private capital inflows weakening reserves.
- Reserve shortfalls and projected large FY2021/22 debt-service bullets imply the need to mitigate external liquidity pressures and rebuild reserves.
- Data gaps (notably on external private debt) limit the completeness of external vulnerability assessments and should be addressed.

*Source: IMF staff; "8.      External public debt is relatively low" (Barbados country chapter).*

### Annex IV. Barbados Revenue Mobilization

### Annex IV. Barbados Revenue Mobilization

### Overview: tax levels and international comparison
- Barbados tax-to-GDP ratio is relatively high compared to the Caribbean region and similar tourism-based economies; it is exceeded only by Seychelles.
- In 2015, Barbados’ tax effort was between average ratios for Advanced Economies (25.5 percent of GDP) and Emerging and Developing Europe (22.3 percent of GDP).
- 2015 is the latest available data for worldwide country group comparison.

### Recent trends and revenue composition
- The tax-to-GDP ratio deteriorated to 24 percent of GDP in the aftermath of the financial crisis, recovered in 2016/17 to early 2000s’ levels, to 27.1 percent of GDP, with a further improvement to 27.7 percent of GDP projected for FY2017/18.
- Since 2013/14, the tax-to-GDP ratio increased by 4 percentage points and was projected to rise by a further 0.6 percent in 2017/18.
- The major contributors to tax revenue in 2016/17:
  - VAT: 34 percent of total tax revenue
  - Income taxes: 28 percent of total tax revenue
- Notes on measurement:
  - Income taxes registered the largest decline earlier, partly reflecting a sharp deterioration of CIT receipts from the offshore sector.
  - The tax-to-GDP ratio captures some non-tax receipts (e.g. proceeds from various registration and license fees, and sundry levies), which implies that the actual tax ratio is lower.
  - Revenue data for 2016/17-2017/18 is reported on a gross basis, i.e., including prospective tax refunds.

### Recent tax policy changes implemented by authorities
- Base-broadening measures:
  - Abolishing the zero-VAT rate on certain items
  - Imposing VAT to betting and gaming
  - Subjecting airtime and sweetened drinks to excise taxes
  - Phasing out certain deductions under PIT
- Rate increases:
  - Bank asset tax
  - Property taxes
  - Petroleum excises
- Introduction of new taxes:
  - National Social Responsibility Levy (NSRL) — effectively an excise tax on imports and first sale of locally manufactured goods
  - Foreign Exchange Fee
- Measures that reduced revenue or provided concessions:
  - Increased tax concessions for the tourism sector to include imported consumption goods, including alcohol (2014)
  - Reduced the VAT rate on tourism services to 7.5 percent
  - Decreased PIT rates
  - Repealed the municipal solid waste tax (2015)
  - Allowed the consolidation tax (a surtax on personal income) to expire (2016)
  - Tax amnesties in 2016 and 2017 (intended to raise revenue but may lower long-run compliance)

### Efficiency and equity assessment
- Recent tax regime changes increased revenue productivity but reduced overall efficiency and progressivity.
- In the last four years:
  - The share of indirect taxes increased by 4 percentage points
  - The share of direct taxes decreased by 2 percentage points
- Specific distributional effect:
  - Increase in the NSRL’s rate from 2 to 10 percent, combined with exemptions for the tourism, manufacturing, and offshore sectors, increased the tax burden on households and small businesses relative to productive sectors.

### Policy implications and recommendations
- Given the high level of taxation, focus should be on increasing the efficiency of the VAT, income, and property taxes by reducing exemptions and seeking other ways to make the tax system more progressive.
- Such reforms would allow for at least a partial reversal of the NSRL.
- The authorities should reconsider the recommendations of the 2014 IMF FAD tax policy report.
- A thorough review of existing tax structures is warranted.

*Source: Annex IV. Barbados Revenue Mobilization.*

### 6.      Progress in reforming revenue administration will be central to boosting revenue.

### 6.      Progress in reforming revenue administration will be central to boosting revenue.

### Main finding
- Strengthening revenue administration functions has the potential to not only safeguard but also improve collections.

### Actions undertaken by the authorities (per the 2016 TADAT response)
- Improve IT systems and data quality to facilitate an increase in reliance on electronic payment facilities for taxpayers.
- Establish a large taxpayer unit, which will be able to use modern risk-based approaches in managing taxpayer and trader compliance.
- Note: “Most of the base-broadening measures followed the 2014 IMF FAD technical assistance’ recommendations.”3
- Contextual measures referenced: concessions for tourism aimed to revive the tourism sector that only started recovering from the financial crisis in 2015.4 The consolidation tax was introduced as a temporary measure to address the loss of other revenues as a result of the global financial crisis.5

### Remaining gaps / priorities
- Eliminate tax arrears and improve the management of arrears as a priority function.
- Finalize the merger of tax and customs to improve key customs functions.
- Conduct a review of tax policies, together with strengthening tax administration and improving tax compliance, as part of Barbados’ strategy.

### Policy recommendation / strategic role
- A review of tax policies, combined with strengthening tax administration and improving tax compliance, per the authorities’ Barbados Sustainable Recovery Plan (BSRP), should be an important part of Barbados’ strategy to improve fiscal balance and stimulate economic growth.

*Source: 6. Progress in reforming revenue administration will be central to boosting revenue — STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX*

### 2017. Nonetheless, ongoing fiscal adjustment measures are expected to dampen expenditure

### cr18133-barbadosbundle - 2017. Nonetheless, ongoing fiscal adjustment measures are expected to dampen expenditure further as well as contribute to expected above-average inflation rates in the short term.

### Restoring reserves to desired levels
- Improved tourism performance for the first nine months of 2017 enabled the stabilization of the external current account.
- International reserves declined to 8.6 weeks of import cover by the end of September 2017 and further contracted to about 7 weeks by the end of 2017.
- Authorities expect project-related inflows, divestment proceeds from the sale of the national oil terminal and the Hilton Hotel, and net positive effects of macroeconomic reforms and fiscal adjustment to support gradual accumulation of foreign exchange over the coming year.
- Current forecast: moderate recovery in reserves by the end of the current fiscal year to March 2018, contingent on higher capital inflows, including those associated with public sector divestment.
- Plans to strengthen reserve accumulation:
  - Accelerate approval process for foreign private and public investment projects.
  - Continue access to project funding from multilateral development banks (drawdowns have been slower than anticipated due to internal capacity constraints).
  - Decrease reliance on fuel imports through advancement of the alternative energy sector.
- Barbados National Energy Policy target: 75 percent production of electricity from renewable sources by 2037.
- Ongoing wind and solar projects are expected to yield foreign exchange savings over the medium term.

### Strengthening public finances
- Fiscal balances improved over past several years largely owing to increased revenues and stabilization of expenditures as part of fiscal rationalization.
- Cash-basis deficit reduced from about 9 percent of GDP in 2015/16 to about 5.5 percent in 2016/17, despite a sizable increase in debt service costs.
- Further reductions in the deficit and the annual gross borrowing requirement remain on track for fiscal year 2017/18, with the deficit reaching 3.8 percent by end-2017.
- Financing composition shifts since fiscal year 2015/16:
  - Central Bank of Barbados significantly reduced its contribution to government financing during the current fiscal year.
  - Commercial bank funding has increased following changes to required holdings of government securities.
- Measures to address outstanding tax refunds and trade payables:
  - Increased efforts to pay tax refunds in line with cash flows.
  - Establishment of a facility to advance settlement of outstanding refunds.
- Foreign funding remains limited to official sector loans for public projects.
- Outstanding external debt remains low at about 30 percent of the total debt portfolio.
- Authorities and staff agree on importance of increasing the primary balance through fiscal and social reform, recognizing changes will be required over a medium-term timeframe.
- Actions under the BSRP expected to bring the deficit in line with the underlying rate of growth by 2021/22.
- Interim measures introduced in May 2017 to reduce the budget deficit quickly and efficiently; main pillar was increase in the National Social Responsibility Levy (NSRL) from 2 percent to 10 percent.
- Implementation of NSRL rate changes was subsequently adjusted to protect key sources of economic activity and Barbados’ most vulnerable citizens.
- Tighter controls on transfers to public enterprises (initiated in 2016/17) and other current spending restraints have helped reduce total government non-interest expenditures.
- Planned future reforms:
  - Simplify tax policy and upgrade tax administration to support stronger revenues and reduce burden on the poorest.
- BSRP core element: comprehensive restructuring of SOE operations, finances, and governance alongside reform of social programs; may include changes to cost and delivery of public services, and mergers, consolidation, and divestment of entities.
- Backstopping measures:
  - Enhanced reporting and oversight of SOEs.
  - Centralization of financing and debt management across all government departments, agencies and enterprises following anticipated passage of the new Financial Management and Audit Act.
- Recommendations from recent Fund technical assistance on public service pension reform are under review by authorities.

### Maintaining a supportive financial sector
- Banking sector trends: high levels of capitalization, improved asset quality, and profitability.
- Non-performing loan ratios declined over 2016 and 2017; provisioning as a share of non-performing loans has risen.
- Private sector credit has increased modestly over the past several years amid falling interest rates after liberalization of the domestic interest rate regime; loan growth has remained subdued due to weak demand.
- Excess cash reserves are well above historical norms even after the increase in required securities reserve requirements.
- Temporary changes in securities requirements have not impacted available funding for private sector activity given a highly liquid banking sector and moderate demand for private sector credit.
- Bank profitability and securities reserve requirements do not present any undue risks to the banking system.
- Financial system is well-developed; authorities have continued to improve regulation and supervision in line with international standards and practices.
- Authorities intend to follow through on outstanding recommendations from the Financial Sector Stability Assessment and the Financial Action Task Force.
- Authorities will continue working with regional peers and other stakeholders to prevent the withdrawal of correspondent banking relationships.

### Reinforcing growth and competitiveness
- Unlocking growth potential requires restoring investor confidence, enhancing productivity, and reducing the cost of doing business.
- Authorities recognize accelerating government policy implementation, programs, projects, and initiatives is central to increasing public and private sector effectiveness.
- Implementation of a multi-factor productivity indicator initiative planned by end-2018 to measure productivity returns on production variables such as energy, raw materials, labor, capital, and technology.
- Initial focus: spurring identified tourism projects and several large infrastructure projects for which funding has already been secured.
- Authorities announced plans to establish a Competitiveness Commission and Operational Unit to drive increased efficiencies across key agencies and address business facilitation concerns.

### Concluding remarks
- Authorities are focused on engineering a turnaround in public finances and international reserves towards sustainable levels while maintaining the exchange rate peg and preserving social cohesion.
- Authorities agree on the need to increase the primary surplus but emphasize that policy design and the speed of adjustment are key to positive results.
- Given that economic drivers are highly demand sensitive and government is a major player in the economy, authorities intend to proceed carefully to avoid a negative downward spiral and social instability.

*IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18133-barbadosbundle.pdf_