## cr18290 — IMF staff report on Barbados ## Source details **Canonical URL:** [cr18290 — IMF staff report on Barbados](https://www.imf.org/-/media/files/publications/cr/2018/cr18290.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18290.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18290.pdf.json) --- ### Background and recent developments - Political and governance context - Opposition Barbados Labor Party (BLP) won the May 24 general elections, winning all 30 seats in Parliament. Prime Minister Mia Mottley serves as Prime Minister and Finance Minister. - Macroeconomic and balance sheet pressures - Central government debt reached 157 percent of GDP (end-May, assessed unsustainable in 2017 Article IV). - International reserves: previously around US$700 million (about 4 months of imports); by end-May reserves dwindled to about US$220 million, or 5-6 weeks of import coverage. - Fiscal deficit: about 4 percent of GDP in FY2017/18. - Economic activity: CBB reported a contraction of 0.6 percent in the first half of 2018 (over the same period last year). - Credit status: rating declined from Standard and Poor’s BBB+ to Selective Default on June 6, 2018. - Debt restructuring and fiscal measures - Government announced comprehensive debt restructuring (commercial external debt and treasury bills) on June 1, 2018, aiming to extend maturities up to 35 years and achieve a major reduction in the government’s interest bill (around 7½ percent of GDP in FY2017/18). - A revised budget for FY2018/19 approved June 13, 2018: NSRL (effectively a 10 percent excise tax on imports and first sale of locally manufactured goods, projected to bring in an estimated 2 percent of GDP per year) was repealed as of July 1, 2018. - New revenue measures to more than compensate NSRL repeal include higher departure taxes, room rate levies, a new 40 percent top PIT rate, an increase in the CIT rate from 25 to 30 percent, and a new health service contribution (paid partly by employers and partly by employees). - Wage developments: three-year (2016-19) wage agreement increased wages by 5 percent effective April 2018, ending a wage freeze since 2009. - Arrears and public sector liabilities (2017/2018) - Net stock of arrears: 11.8 (Percent of GDP, 2017/2018). - Components (Percent of GDP, 2017/2018): Accounts payable 12.4; CG arrears to the NIS 3.2 (o/w pension contributions 1.8; o/w non-contributory pensions 0.8; o/w rents and projects 0.6); CG arrears to private sector (goods and services) 0.6; BRA tax refunds 3.6; SOE arrears to private sector and NIS 5.0; Accounts receivable 0.7; NIS arrears to CG (training levy) 0.7. ### Program objectives and macro framework - Overarching objective - Restore macroeconomic stability and debt sustainability, and secure strong, sustainable and inclusive growth. - Long-term debt anchor: reduce public debt from about 157 percent of GDP to 60 percent of FY2033/34 GDP. - Expected external and growth outcomes - Restore investor confidence to stabilize exchange rate expectations and return FDI flows to the 2000-17 average of around 4 percent of GDP per year. - Rebuild international reserves: projected to stabilize and increase GIR to 100 percent of the Assessment of Reserve Adequacy (ARA) metric in the second year of the program. - Growth: restored credibility expected to increase investment and net FDI; actual and potential growth could reach close to 2 percent by the end of the program. ### Fiscal adjustment, transfers, and SOE reforms - Fiscal targets and adjustment - Program targets fiscal adjustment of about 2½ percent of GDP to bring the primary surplus to 6 percent of GDP in FY2019/20. The primary balance is expected to be kept at that level for several years. - Tax and revenue reforms - Comprehensive review of the tax system in the first year of the program (with IMF technical assistance). - Revenue-enhancing measures already adopted include: abolition of NSRL; introduction/increase of PIT top rate to 40 percent; CIT increase from 25 to 30 percent; higher departure taxes; room levies; health service contribution. - Expenditure measures - Reduce recurrent expenditures including wage and pension bills and transfers to SOEs to create room for capital spending and gradual reduction of domestic expenditure arrears. - Central government wage bill has come down to about 8 percent of GDP; public wage bill remains high at double digits when SOE wages included. - Transfers to SOEs - Transfers from the central government to SOEs are 7½ percent of GDP and a major fiscal risk. - Program aims to reduce transfers by about 2 percent of GDP through: - Stronger oversight and improved reporting of SOEs. - Cost reduction, including reductions in SOE wage bills. - Revenue enhancement via increased user fees (example: increase bus fares which had been BB$2 per trip). - Mergers, divestments, privatizations, and establishment of hard budget constraints. - Projected contributions to primary surplus from SOE measures: - In 2018/19: restructuring guaranteed debt held by seven SOEs expected to yield BB$24 million in savings; downsizing, sales, and mergers expected to yield BB$25 million. - In 2019/20: additional measures (e.g., increase in bus fare and divestment of some Transport Board services) expected to save BB$30 million; measures expected to decrease transfers to the Barbados Water Authority by BB$60 million. - Consolidated SOE reforms encompassing a broader set expected to yield an additional 1.4 percentage point increase in the primary surplus in 2019/20. - Monitoring: debt, arrears, and financial position of the 33 SOEs to be closely monitored (captured in structural benchmarks). - Social protection - Vulnerable groups to be protected by strengthening social safety nets; focus social spending on cash transfers and active labor market programs protecting the unemployed, poor households, vulnerable children and youth, and the elderly. Authorities working with the IDB. ### Monetary and exchange rate policy - Exchange rate peg - Authorities strongly committed to the exchange rate peg (in place since 1975). Adjustment burden falls on fiscal policy and structural reform. - Monetary policy normalization - Statutory minimum government security holding requirements for banking sector to be reduced to 10 percent of deposits (from 20 percent). - Program preserves adequate level of securities to ensure adequate income to the CBB and enhance operational autonomy. - Technical assistance to the CBB for conducting monetary policy using orthodox tools like open market operations and cash reserve requirements. - The recently introduced 2 percent FX fee on all FX sales will be phased out as the reserve position strengthens. ### Key numeric facts and program metrics - Public debt: 157 percent of GDP (current); target 60 percent of FY2033/34 GDP. - International reserves: previously around US$700 million (about 4 months); end-May about US$220 million (5-6 weeks). - Fiscal deficit: about 4 percent of GDP in FY2017/18. - Economic contraction: 0.6 percent (first half of 2018, over same period last year). - Government interest bill: around 7½ percent of GDP in FY2017/18. - NSRL: effectively a 10 percent excise tax; projected to bring in an estimated 2 percent of GDP per year. - New top PIT rate: 40 percent. - CIT rate increase: from 25 to 30 percent. - Wage increase under 2016-19 agreement: 5 percent effective April 2018. - Primary surplus target: 6 percent of GDP in FY2019/20. - Fiscal adjustment targeted: about 2½ percent of GDP. - Transfers to SOEs: 7½ percent of GDP; reduction target about 2 percent of GDP. - Expected FDI restoration: around 4 percent of GDP per year (2000-17 average). - Reserve adequacy goal: GIR to 100 percent of ARA in the second year of the program. - Growth target: close to 2 percent by end of program. - Banking sector government security holding requirement: reduced to 10 percent of deposits (from 20 percent). - FX fee: 2 percent on all FX sales to be phased out. ### Amendments to the Central Bank Law and governance measures - Amendments to the CBB Act will be introduced in the first year of the program, after a review of the current law (MEFP paragraph 25 and structural benchmark). - Objectives of the amendments: - Strengthen the autonomy of the CBB and the limitation on CBB financing of the government. - Clarify the mandate of the CBB. - Enhance the decision-making structures of the Central Bank. - Introduce safeguards to protect the institutional and functional autonomy of the CBB, as well as the personal autonomy of key officials. - Rationale: - Strengthening limitations on monetary financing is critical, even though there would be no new net domestic financing requirement under the program. - A safeguards assessment of the CBB has been initiated and should be completed before the first review; preliminary observations indicate fiscal dominance of the CBB has resulted in a weak financial position and legislative reforms are needed to strengthen governance arrangements and financial and institutional autonomy. - The CBB will need to reinforce financial accountability and transparency, including through modern audit and financial reporting practices in compliance with international standards. ### Transfers and State-Owned Enterprises — composition, evolution and reform focus - Transfers are the single largest expenditure category—39 percent of current expenditures in 2017/18. - Composition of transfers: - Transfers to SOEs account for over 58 percent of total transfers. - Public sector retirement benefits represent another 20 percent of transfers. - Role of SOE transfers: - Support utilities (water, transportation, electricity, waste disposal), social programs (public health and education), and economic development (mainly tourism sector, small and medium enterprises, investment promotion). - Evolution of transfers: - Total transfers to public institutions and individuals grew from 9.5 percent of GDP in FY2006/07 to a peak of 13.5 percent in FY2013/14, and were 12 percent in FY2017/18. - Efforts to contain transfers to SOEs began in 2010; despite considerable technical assistance, progress has been limited. - Reform focus (fifteen entities receiving bulk of transfers): - Improvements to financial reporting, oversight, accountability, and management. - IMF technical assistance inputs: - PFM mission proposed revisions to the Financial Management and Audit Act to: 1) establish clear definition for classification of public entities, including SOEs, and their related roles and responsibilities; and 2) enhance monitoring and supervision via internal audit, tighter reporting requirements, and sanctions for noncompliance. - SOEs reform mission recommended a new ownership policy for SOEs to clarify government policy and financial objectives, specify eligibility for government support, increase engagement between SOEs and line ministries, strengthen budgeting engagement, and actions to streamline costs and enhance revenues. - Efficiency-enhancing reforms recommended to reduce SOE transfers: - (i) review of labor laws and staffing levels for SOEs to allow for adjustment; - (ii) mergers of SOEs carrying out similar functions; - (iii) review of outdated SOE tariffs, fees, and charges; - (iv) divestment of SOEs and outsourcing of selected public services to public sector; - (v) renegotiation of ineffective legacy contracts with the private sectors; - (vi) reduction of Minimum Revenue Guarantees for airlines. ### Debt restructuring and management - Restructuring anchors: - Intermediate anchor: 80 percent of GDP by FY2027/28. - Long-term anchor: 60 percent of GDP in FY2033/34. - Central government domestic arrears: - Estimated at about 12 percent of GDP; to be cleared over the medium term through securitization, negotiation or outright repayment. - Impact and contingencies: - Menu of debt restructuring options put forward to preserve banking sector stability; impact on credit unions, the CBB, the NIS, insurers and pension funds appears manageable. - By mid-2020, the government will develop plans to recapitalize the CBB and address medium and long-term challenges for the NIS stemming from the debt restructuring. - Contingency plans prepared for liquidity assistance to financial sector entities; for idiosyncratic shocks authorities have discussed with banks plans to keep the interbank market open and considered extending liquidity assistance to non-bank entities. - Progress with creditors: - Exchange offer for domestic (Barbados dollar-denominated) debt launched on September 7, 2018. - Since June 1 announcement, authorities have suspended debt service of external commercial debt, while continuing to pay interest on domestic debt (holders of domestic debt expected to roll over maturing principal). - Domestic and external creditors have formed creditor committees; authorities and advisors engaged in intensive discussions. - IMF’s lending into arrears policy applies as a moratorium on external commercial debt is in place while authorities continue good faith negotiations with external creditors. - Key elements of the debt restructuring: - Perimeter: covers all central government debt and CG guaranteed debt, excluding debt held by multilaterals, and CG guaranteed debt serviced directly by SOEs. - Restructuring of treasury bills: - Stock of treasury bills at 39 percent of GDP. - Around 15 percent of GDP is held by the CBB; remainder by commercial banks and other financial entities. - 85 percent of claims held by commercial banks would be exchanged into 15-year bonds. - Hurricane clause: - Instruments including CCRIF coverage and a ‘hurricane clause’ under bulk of new debt instruments to allow capitalization of interest and deferral of scheduled amortization over a two-year period following a major natural disaster. - Discussions with the IDB on an additional facility to address natural disaster risks. - External debt to commercial creditors: - Creditors expected to be provided with a par option and a discount option. - Government defaulted on a loan guaranteed by the government of Canada without guarantee being called; agreement on revised terms expected shortly. - Authorities remained current on a loan guaranteed by the government of China. - Debt relief: - Discounted securities in the debt exchange for the CBB, external commercial creditors, and the NIS will provide about 33 percentage points of GDP in debt relief during the first three years of the program. - Contingency planning: - Domestic debt restructuring crafted to preserve financial sector stability; authorities prepared to provide temporary liquidity support by the CBB if needed. - Barbados Deposit Insurance Corporation insures deposits up to BB$25,000 (US$12,500) for depositors at commercial banks, deposit-taking trust and finance companies regulated by the CBB. ### Financial system assessment and stability - Financial stability findings: - Barbados’ 2017 Financial Stability Report assessed the system as stable, reconfirmed by recent stress tests. - Liquidity in the system is high; capital levels adequate. - System can withstand a range of adverse shocks (credit, liquidity, interest rate, sovereign risk). - Banking sector composition and metrics: - Commercial banks represent 53 percent of total financial assets in 2017 (BB$25.5 billion in 2017). - Banking system highly solvent with strong capital buffers well over prescribed levels. - Banks’ NPLs fell by 100 basis points to 7.9 percent in 2017. - All five banks in Barbados are foreign owned: - Three Canadian banks (Nova Scotia, RBC and CIBC First Caribbean, all three rated AAA) hold 75 percent of total bank assets. - Two Trinidadian banks (Republic Bank Barbados and First Citizens, both rated BBB+) account for remaining 25 percent. - Parent entities of these banks are well capitalized. - Extensive stress testing by CBB and FSC to ensure proposed debt restructuring would not jeopardize financial stability. - Debt management capacity strengthening (post-restructuring, with IMF TA): - Debt management unit in MOF will: (i) establish and execute a medium-term debt management strategy (MTDS); and (ii) establish a market-determined auction mechanism for long term debt. - MTDS objective: ensure financing needs and payment obligations met at lowest possible cost over medium to long run, consistent with prudent degree of risk. ### Structural reforms to support growth - Reforms planned to promote long-term potential growth (MEFP Section V and structural benchmarks): - Liberalize labor, product and service markets. - SOE structural reform to improve quality and efficiency of public services, restore confidence, attract FDIs and increase potential growth. - Increase speed and flexibility of business processes to reduce clearance times at immigration, customs, and expedite issuance of construction permits in planning entities. - Reform legal processes and improve services at CAIPO. - Modernize labor laws to increase labor market flexibility, ease labor market regulation, improve incentives to work and increase productivity. ### Program modalities, financing and monitoring - Program length and financing request: - Authorities requested a 4-year EFF arrangement. - Requested support in the amount of SDR 208 million (around US$290 million), or 220 percent of Barbados’ IMF quota. - Financing design: - IMF resources to be used for BOP support only; IDB and CDB expected to provide budget support. - IMF and other IFIs support expected to bring GIR above 100 percent of the ARA metric in the second year of the program and close the financing gap to reach targeted GIR levels. - Over medium term, reserves projected to stabilize at above 4 months of goods and service import cover. - External financing requirements and sources (selected figures) - Gross Financing Requirements (US$ million): 2017: 387; 2018: 365; 2019: 350; 2020: 298; 2021: 430; 2022: 496; 2023: 350. - Current Account Balance (US$ million): 2017: 189; 2018: 213; 2019: 239; 2020: 218; 2021: 221; 2022: 197; 2023: 190. - Debt Amortization (US$ million): 2017: 198; 2018: 152; 2019: 111; 2020: 80; 2021: 209; 2022: 299; 2023: 161. - Sources of Financing (US$ million): 2017: 387; 2018: 254; 2019: 225; 2020: 216; 2021: 234; 2022: 231; 2023: 251. - Foreign Direct Investment (net) (US$ million): 2017: 156; 2018: 174; 2019: 188; 2020: 205; 2021: 225; 2022: 247; 2023: 270. - Public Long Term Borrowing (US$ million): 2017: 50; 2018: 19; 2019: 42; 2020: 131; 2021: 66; 2022: 44; 2023: 73. - Change in Reserve (- increase) (US$ million): 2017: 131; 2018: -114; 2019: -175; 2020: -154; 2021: -77; 2022: -60; 2023: -92. - Financing Gap (US$ million): 2017: 0; 2018: 11; 2019: 21; 2020: 25; 2021: 82; 2022: 196; 2023: 265; 2024: 99. - Prospective Financing (US$ million) (selected): IMF: 0 in 2017; 49 in 2018; 98 in 2019; 73 in 2020; 48 in 2021; 24 in 2022; 0 in 2023. - Exceptional Financing (Restructuring) (US$ million): 2017: 0; 2018: -50; 2019: -67; 2020: -66; 2021: 129; 2022: 241; 2023: 99. - Memo items: - GIR/ARA (percent): 2017: 44; 2018: 66; 2019: 95; 2020: 117; 2021: 125; 2022: 131; 2023: 143. - GIR coverage (months of imports of G&S): 2017: 1.3; 2018: 1.9; 2019: 2.8; 2020: 3.6; 2021: 3.9; 2022: 4.1; 2023: 4.4. - Program conditions: - Quantitative performance criteria: - Floor on the central government primary balance (excluding repayment of central government arrears). - Ceiling on the stock of Net Domestic Assets of the CBB. - Floor on the Net International Reserves of the CBB. - Non-accumulation of central government external arrears (excluding arrears resulting from nonpayment of debt service for which the government is pursuing a debt restructuring). - Ceiling on grants and transfers to public institutions. - Ceiling on the stock of public debt. - Indicative targets: - Ceiling on the stock of central government domestic arrears. - Floor on CG social spending. - Structural benchmarks: - Focus on SOE reforms, growth and business climate, CBB autonomy, tax policy and revenue administration, public sector reform, and public financial management. - Monitoring and reviews: - Semiannual reviews with quarterly missions. - Performance monitored based on data supplied to the IMF by the MOF, CBB and the BSS as described in the TMU (Annex II). - Indicators of capacity to repay the Fund (selected projection figures): - Fund disbursements (US$ million): 2018/19: 48.9; 2019/20: 97.7; 2020/21: 72.6; 2021/22: 47.5. - Fund disbursements as percent of exports G&S: 2.3; 4.4; 3.2; 2.0. - Fund credit outstanding (US$ million): 48.9; 146.6; 219.2; 266.7. - Fund credit outstanding as percent of quota: 37.0; 111.0; 166.0; 202.0. - Memo items: - IMF loan service: 0.5; 2.6; 4.3; 5.4. - Exports of G&S (US$ million): 2,160.7; 2,222.0; 2,282.7; 2,351.0. - Ext. debt service (US$ million): 50.3; 61.4; 64.9; 72.2. - GIR (US$ million): 342.0; 516.7; 671.0; 748.0. ### Data issues - Data inadequacies hamper understanding of key macroeconomic aggregates. - IMF TA supporting the Barbados Statistical Service (BSS) to: - Revise annual GDP estimates at current and constant prices. - Develop quarterly GDP estimates to address inconsistencies between BSS and the CBB. - BSS has disseminated revised series. - TA planned to rebase the CPI index. - Sustainable capacity improvement depends on adequate resources for BSS to increase staff for national account compilation. ### Program risks and safeguards - Major risks: - Extensive structural reforms required and limited implementation capacity. - Government’s ability to sustain high primary surpluses over several years is untested. - Growth could be weaker than projected if fiscal multipliers are higher than expected. - SOE reforms will require considerable political commitment. - Inclusion of treasury bills in the restructuring may hamper liquidity management going forward for the CBB and commercial banks; reviving a market for short-term government paper soon after restructuring will be important. - Weaker growth in key source tourism markets (in particular, the UK) could slow arrivals and reduce private investment in tourism facilities. - Faster tightening of US monetary policy could appreciate Barbados’ real exchange rate and reduce competitiveness. - Mitigating factors: - Government’s strong sense of urgency to address vulnerabilities and extensive outreach to build support for reforms. - Contingency plans for liquidity assistance and temporary CBB support if required. - Deposit insurance up to BB$25,000 (US$12,500). *Source: IMF staff report (cr18290).* ### 1. Transfers and State-Owned Enterprises _______________________________________________________ 12 ### 1. Transfers and State-Owned Enterprises ### Background and recent developments - Political and governance context - Opposition Barbados Labor Party (BLP) won the May 24 general elections, winning all 30 seats in Parliament. Prime Minister Mia Mottley serves as Prime Minister and Finance Minister. - Macroeconomic and balance sheet pressures - Central government debt reached 157 percent of GDP (end-May, assessed unsustainable in 2017 Article IV). - International reserves: previously around US$700 million (about 4 months of imports); by end-May reserves dwindled to about US$220 million, or 5-6 weeks of import coverage. - Fiscal deficit: about 4 percent of GDP in FY2017/18. - Economic activity: CBB reported a contraction of 0.6 percent in the first half of 2018 (over the same period last year). - Credit status: rating declined from Standard and Poor’s BBB+ to Selective Default on June 6, 2018. - Debt restructuring and fiscal measures - Government announced comprehensive debt restructuring (commercial external debt and treasury bills) on June 1, 2018, aiming to extend maturities up to 35 years and achieve a major reduction in the government’s interest bill (around 7½ percent of GDP in FY2017/18). - A revised budget for FY2018/19 approved June 13, 2018: NSRL (effectively a 10 percent excise tax on imports and first sale of locally manufactured goods, projected to bring in an estimated 2 percent of GDP per year) was repealed as of July 1, 2018. - New revenue measures to more than compensate NSRL repeal include higher departure taxes, room rate levies, a new 40 percent top PIT rate, an increase in the CIT rate from 25 to 30 percent, and a new health service contribution (paid partly by employers and partly by employees). - Wage developments: three-year (2016-19) wage agreement increased wages by 5 percent effective April 2018, ending a wage freeze since 2009. - Arrears and public sector liabilities (2017/2018) - Net stock of arrears: 11.8 (Percent of GDP, 2017/2018). - Components (Percent of GDP, 2017/2018): Accounts payable 12.4; CG arrears to the NIS 3.2 (o/w pension contributions 1.8; o/w non-contributory pensions 0.8; o/w rents and projects 0.6); CG arrears to private sector (goods and services) 0.6; BRA tax refunds 3.6; SOE arrears to private sector and NIS 5.0; Accounts receivable 0.7; NIS arrears to CG (training levy) 0.7. ### Program objectives and macro framework - Overarching objective - Restore macroeconomic stability and debt sustainability, and secure strong, sustainable and inclusive growth. - Long-term debt anchor: reduce public debt from about 157 percent of GDP to 60 percent of FY2033/34 GDP. - Expected external and growth outcomes - Restore investor confidence to stabilize exchange rate expectations and return FDI flows to the 2000-17 average of around 4 percent of GDP per year. - Rebuild international reserves: projected to stabilize and increase GIR to 100 percent of the Assessment of Reserve Adequacy (ARA) metric in the second year of the program. - Growth: restored credibility expected to increase investment and net FDI; actual and potential growth could reach close to 2 percent by the end of the program. ### Fiscal adjustment, transfers, and SOE reforms - Fiscal targets and adjustment - Program targets fiscal adjustment of about 2½ percent of GDP to bring the primary surplus to 6 percent of GDP in FY2019/20. The primary balance is expected to be kept at that level for several years. - Tax and revenue reforms - Comprehensive review of the tax system in the first year of the program (with IMF technical assistance). - Revenue-enhancing measures already adopted include: abolition of NSRL; introduction/increase of PIT top rate to 40 percent; CIT increase from 25 to 30 percent; higher departure taxes; room levies; health service contribution. - Expenditure measures - Reduce recurrent expenditures including wage and pension bills and transfers to SOEs to create room for capital spending and gradual reduction of domestic expenditure arrears. - Central government wage bill has come down to about 8 percent of GDP; public wage bill remains high at double digits when SOE wages included. - Transfers to SOEs - Transfers from the central government to SOEs are 7½ percent of GDP and a major fiscal risk. - Program aims to reduce transfers by about 2 percent of GDP through: - Stronger oversight and improved reporting of SOEs. - Cost reduction, including reductions in SOE wage bills. - Revenue enhancement via increased user fees (example: increase bus fares which had been BB$2 per trip). - Mergers, divestments, privatizations, and establishment of hard budget constraints. - Projected contributions to primary surplus from SOE measures: - In 2018/19: restructuring guaranteed debt held by seven SOEs expected to yield BB$24 million in savings; downsizing, sales, and mergers expected to yield BB$25 million. - In 2019/20: additional measures (e.g., increase in bus fare and divestment of some Transport Board services) expected to save BB$30 million; measures expected to decrease transfers to the Barbados Water Authority by BB$60 million. - Consolidated SOE reforms encompassing a broader set expected to yield an additional 1.4 percentage point increase in the primary surplus in 2019/20. - Monitoring: debt, arrears, and financial position of the 33 SOEs to be closely monitored (captured in structural benchmarks). - Social protection - Vulnerable groups to be protected by strengthening social safety nets; focus social spending on cash transfers and active labor market programs protecting the unemployed, poor households, vulnerable children and youth, and the elderly. Authorities working with the IDB. ### Monetary and exchange rate policy - Exchange rate peg - Authorities strongly committed to the exchange rate peg (in place since 1975). Adjustment burden falls on fiscal policy and structural reform. - Monetary policy normalization - Statutory minimum government security holding requirements for banking sector to be reduced to 10 percent of deposits (from 20 percent). - Program preserves adequate level of securities to ensure adequate income to the CBB and enhance operational autonomy. - Technical assistance to the CBB for conducting monetary policy using orthodox tools like open market operations and cash reserve requirements. - The recently introduced 2 percent FX fee on all FX sales will be phased out as the reserve position strengthens. ### Key numeric facts and program metrics (preserved exactly as in source) - Public debt: 157 percent of GDP (current); target 60 percent of FY2033/34 GDP. - International reserves: previously around US$700 million (about 4 months); end-May about US$220 million (5-6 weeks). - Fiscal deficit: about 4 percent of GDP in FY2017/18. - Economic contraction: 0.6 percent (first half of 2018, over same period last year). - Government interest bill: around 7½ percent of GDP in FY2017/18. - NSRL: effectively a 10 percent excise tax; projected to bring in an estimated 2 percent of GDP per year. - New top PIT rate: 40 percent. - CIT rate increase: from 25 to 30 percent. - Wage increase under 2016-19 agreement: 5 percent effective April 2018. - Primary surplus target: 6 percent of GDP in FY2019/20. - Fiscal adjustment targeted: about 2½ percent of GDP. - Transfers to SOEs: 7½ percent of GDP; reduction target about 2 percent of GDP. - Expected FDI restoration: around 4 percent of GDP per year (2000-17 average). - Reserve adequacy goal: GIR to 100 percent of ARA in the second year of the program. - Growth target: close to 2 percent by end of program. - Banking sector government security holding requirement: reduced to 10 percent of deposits (from 20 percent). - FX fee: 2 percent on all FX sales to be phased out. *Source: IMF staff report chapter "1. Transfers and State-Owned Enterprises" (cr18290).* ### 15. The CBB Act will be amended, with the help of IMF TA, to strengthen the ### cr18290 - 15. The CBB Act will be amended, with the help of IMF TA, to strengthen the ### Amendments to the CBB Act - Amendments to the CBB Act will be introduced in the first year of the program, after a review of the current law (MEFP paragraph 25 and structural benchmark). - Objectives of the amendments: - Strengthen the autonomy of the CBB and the limitation on CBB financing of the government. - Clarify the mandate of the CBB. - Enhance the decision-making structures of the Central Bank. - Introduce safeguards to protect the institutional and functional autonomy of the CBB, as well as the personal autonomy of key officials. - Rationale: - Strengthening limitations on monetary financing is critical, even though there would be no new net domestic financing requirement under the program. - A safeguards assessment of the CBB has been initiated and should be completed before the first review; preliminary observations indicate fiscal dominance of the CBB has resulted in a weak financial position and legislative reforms are needed to strengthen governance arrangements and financial and institutional autonomy. - The CBB will need to reinforce financial accountability and transparency, including through modern audit and financial reporting practices in compliance with international standards. ### Transfers and State-Owned Enterprises (Box 1) - Transfers are the single largest expenditure category—39 percent of current expenditures in 2017/18. - Composition of transfers: - Transfers to SOEs account for over 58 percent of total transfers. - Public sector retirement benefits represent another 20 percent of transfers. - Role of SOE transfers: - Support utilities (water, transportation, electricity, waste disposal), social programs (public health and education), and economic development (mainly tourism sector, small and medium enterprises, investment promotion). - Evolution of transfers: - Total transfers to public institutions and individuals grew from 9.5 percent of GDP in FY2006/07 to a peak of 13.5 percent in FY2013/14, and were 12 percent in FY2017/18. - Efforts to contain transfers to SOEs began in 2010; despite considerable technical assistance, progress has been limited. - Reform focus (fifteen entities receiving bulk of transfers): - Improvements to financial reporting, oversight, accountability, and management. - IMF technical assistance inputs: - PFM mission proposed revisions to the Financial Management and Audit Act to: 1) establish clear definition for classification of public entities, including SOEs, and their related roles and responsibilities; and 2) enhance monitoring and supervision via internal audit, tighter reporting requirements, and sanctions for noncompliance. - SOEs reform mission recommended a new ownership policy for SOEs to clarify government policy and financial objectives, specify eligibility for government support, increase engagement between SOEs and line ministries, strengthen budgeting engagement, and actions to streamline costs and enhance revenues. - Efficiency-enhancing reforms recommended to reduce SOE transfers: - (i) review of labor laws and staffing levels for SOEs to allow for adjustment; - (ii) mergers of SOEs carrying out similar functions; - (iii) review of outdated SOE tariffs, fees, and charges; - (iv) divestment of SOEs and outsourcing of selected public services to public sector; - (v) renegotiation of ineffective legacy contracts with the private sectors; - (vi) reduction of Minimum Revenue Guarantees for airlines. ### Debt Restructuring and Management - Restructuring anchors: - Intermediate anchor: 80 percent of GDP by FY2027/28. - Long-term anchor: 60 percent of GDP in FY2033/34. - Central government domestic arrears: - Estimated at about 12 percent of GDP; to be cleared over the medium term through securitization, negotiation or outright repayment. - Impact and contingencies: - Menu of debt restructuring options put forward to preserve banking sector stability; impact on credit unions, the CBB, the NIS, insurers and pension funds appears manageable. - By mid-2020, the government will develop plans to recapitalize the CBB and address medium and long-term challenges for the NIS stemming from the debt restructuring. - Contingency plans prepared for liquidity assistance to financial sector entities; for idiosyncratic shocks authorities have discussed with banks plans to keep the interbank market open and considered extending liquidity assistance to non-bank entities. - Progress with creditors: - Exchange offer for domestic (Barbados dollar-denominated) debt launched on September 7, 2018. - Since June 1 announcement, authorities have suspended debt service of external commercial debt, while continuing to pay interest on domestic debt (holders of domestic debt expected to roll over maturing principal). - Domestic and external creditors have formed creditor committees; authorities and advisors engaged in intensive discussions. - IMF’s lending into arrears policy applies as a moratorium on external commercial debt is in place while authorities continue good faith negotiations with external creditors. - Key elements of the debt restructuring (Box 2): - Perimeter: covers all central government debt and CG guaranteed debt, excluding debt held by multilaterals, and CG guaranteed debt serviced directly by SOEs. - Restructuring of treasury bills: - Stock of treasury bills at 39 percent of GDP. - Around 15 percent of GDP is held by the CBB; remainder by commercial banks and other financial entities. - 85 percent of claims held by commercial banks would be exchanged into 15-year bonds. - Hurricane clause: - Instruments including CCRIF coverage and a ‘hurricane clause’ under bulk of new debt instruments to allow capitalization of interest and deferral of scheduled amortization over a two-year period following a major natural disaster. - Discussions with the IDB on an additional facility to address natural disaster risks. - External debt to commercial creditors: - Creditors expected to be provided with a par option and a discount option. - Government defaulted on a loan guaranteed by the government of Canada without guarantee being called; agreement on revised terms expected shortly. - Authorities remained current on a loan guaranteed by the government of China. - Debt relief: - Discounted securities in the debt exchange for the CBB, external commercial creditors, and the NIS will provide about 33 percentage points of GDP in debt relief during the first three years of the program. - Contingency planning: - Domestic debt restructuring crafted to preserve financial sector stability; authorities prepared to provide temporary liquidity support by the CBB if needed. - Barbados Deposit Insurance Corporation insures deposits up to BB$25,000 (US$12,500) for depositors at commercial banks, deposit-taking trust and finance companies regulated by the CBB. ### Financial System Assessment and Stability - Financial stability findings: - Barbados’ 2017 Financial Stability Report assessed the system as stable, reconfirmed by recent stress tests. - Liquidity in the system is high; capital levels adequate. - System can withstand a range of adverse shocks (credit, liquidity, interest rate, sovereign risk). - Banking sector composition and metrics: - Commercial banks represent 53 percent of total financial assets in 2017 (BB$25.5 billion in 2017). - Banking system highly solvent with strong capital buffers well over prescribed levels. - Banks’ NPLs fell by 100 basis points to 7.9 percent in 2017. - All five banks in Barbados are foreign owned: - Three Canadian banks (Nova Scotia, RBC and CIBC First Caribbean, all three rated AAA) hold 75 percent of total bank assets. - Two Trinidadian banks (Republic Bank Barbados and First Citizens, both rated BBB+) account for remaining 25 percent. - Parent entities of these banks are well capitalized. - Extensive stress testing by CBB and FSC to ensure proposed debt restructuring would not jeopardize financial stability. - Debt management capacity strengthening (post-restructuring, with IMF TA): - Debt management unit in MOF will: (i) establish and execute a medium-term debt management strategy (MTDS); and (ii) establish a market-determined auction mechanism for long term debt. - MTDS objective: ensure financing needs and payment obligations met at lowest possible cost over medium to long run, consistent with prudent degree of risk. ### Structural Reforms to Support Growth - Reforms planned to promote long-term potential growth (MEFP Section V and structural benchmarks): - Liberalize labor, product and service markets. - SOE structural reform to improve quality and efficiency of public services, restore confidence, attract FDIs and increase potential growth. - Increase speed and flexibility of business processes to reduce clearance times at immigration, customs, and expedite issuance of construction permits in planning entities. - Reform legal processes and improve services at CAIPO. - Modernize labor laws to increase labor market flexibility, ease labor market regulation, improve incentives to work and increase productivity. ### Program Modalities, Financing and Monitoring - Program length and financing request: - Authorities requested a 4-year EFF arrangement. - Requested support in the amount of SDR 208 million (around US$290 million), or 220 percent of Barbados’ IMF quota. - Financing design: - IMF resources to be used for BOP support only; IDB and CDB expected to provide budget support. - IMF and other IFIs support expected to bring GIR above 100 percent of the ARA metric in the second year of the program and close the financing gap to reach targeted GIR levels. - Over medium term, reserves projected to stabilize at above 4 months of goods and service import cover. - External financing requirements and sources (selected figures from projections table): - Gross Financing Requirements (US$ million): 2017: 387; 2018: 365; 2019: 350; 2020: 298; 2021: 430; 2022: 496; 2023: 350. - Current Account Balance (US$ million): 2017: 189; 2018: 213; 2019: 239; 2020: 218; 2021: 221; 2022: 197; 2023: 190. - Debt Amortization (US$ million): 2017: 198; 2018: 152; 2019: 111; 2020: 80; 2021: 209; 2022: 299; 2023: 161. - Sources of Financing (US$ million): 2017: 387; 2018: 254; 2019: 225; 2020: 216; 2021: 234; 2022: 231; 2023: 251. - Foreign Direct Investment (net) (US$ million): 2017: 156; 2018: 174; 2019: 188; 2020: 205; 2021: 225; 2022: 247; 2023: 270. - Public Long Term Borrowing (US$ million): 2017: 50; 2018: 19; 2019: 42; 2020: 131; 2021: 66; 2022: 44; 2023: 73. - Change in Reserve (- increase) (US$ million): 2017: 131; 2018: -114; 2019: -175; 2020: -154; 2021: -77; 2022: -60; 2023: -92. - Financing Gap (US$ million): 2017: 0; 2018: 11; 2019: 21; 2020: 25; 2021: 82; 2022: 196; 2023: 265; 2024: 99 (table includes additional prospective financing rows). - Prospective Financing (US$ million) (selected): - IMF: 0 in 2017; 49 in 2018; 98 in 2019; 73 in 2020; 48 in 2021; 24 in 2022; 0 in 2023 (table shows prospective financing broken down further). - Exceptional Financing (Restructuring) (US$ million): 2017: 0; 2018: -50; 2019: -67; 2020: -66; 2021: 129; 2022: 241; 2023: 99. - Memo items: - GIR/ARA (percent): 2017: 44; 2018: 66; 2019: 95; 2020: 117; 2021: 125; 2022: 131; 2023: 143. - GIR coverage (months of imports of G&S): 2017: 1.3; 2018: 1.9; 2019: 2.8; 2020: 3.6; 2021: 3.9; 2022: 4.1; 2023: 4.4. - Program conditions: - Quantitative performance criteria: - Floor on the central government primary balance (excluding repayment of central government arrears). - Ceiling on the stock of Net Domestic Assets of the CBB. - Floor on the Net International Reserves of the CBB. - Non-accumulation of central government external arrears (excluding arrears resulting from nonpayment of debt service for which the government is pursuing a debt restructuring). - Ceiling on grants and transfers to public institutions. - Ceiling on the stock of public debt. - Indicative targets: - Ceiling on the stock of central government domestic arrears. - Floor on CG social spending. - Structural benchmarks: - Focus on SOE reforms, growth and business climate, CBB autonomy, tax policy and revenue administration, public sector reform, and public financial management (Table 2 MEFP). - Monitoring and reviews: - Semiannual reviews with quarterly missions. - Performance monitored based on data supplied to the IMF by the MOF, CBB and the BSS as described in the TMU (Annex II). - Indicators of capacity to repay the Fund (selected projection figures): - Fund disbursements (US$ million): 2018/19: 48.9; 2019/20: 97.7; 2020/21: 72.6; 2021/22: 47.5. - Fund disbursements as percent of exports G&S: 2.3; 4.4; 3.2; 2.0 (for respective years shown). - Fund credit outstanding (US$ million): 48.9; 146.6; 219.2; 266.7. - Fund credit outstanding as percent of quota: 37.0; 111.0; 166.0; 202.0. - Memo items: - IMF loan service: 0.5; 2.6; 4.3; 5.4 (percent or absolute context as in source). - Exports of G&S (US$ million): 2,160.7; 2,222.0; 2,282.7; 2,351.0. - Ext. debt service (US$ million): 50.3; 61.4; 64.9; 72.2. - GIR (US$ million): 342.0; 516.7; 671.0; 748.0. ### Data Issues - Data inadequacies hamper understanding of key macroeconomic aggregates. - IMF TA supporting the Barbados Statistical Service (BSS) to: - Revise annual GDP estimates at current and constant prices. - Develop quarterly GDP estimates to address inconsistencies between BSS and the CBB. - BSS has disseminated revised series. - TA planned to rebase the CPI index. - Sustainable capacity improvement depends on adequate resources for BSS to increase staff for national account compilation. ### Program Risks and Safeguards - Major risks: - Extensive structural reforms required and limited implementation capacity. - Government’s ability to sustain high primary surpluses over several years is untested. - Growth could be weaker than projected if fiscal multipliers are higher than expected. - SOE reforms will require considerable political commitment. - Inclusion of treasury bills in the restructuring may hamper liquidity management going forward for the CBB and commercial banks; reviving a market for short-term government paper soon after restructuring will be important. - Weaker growth in key source tourism markets (in particular, the UK) could slow arrivals and reduce private investment in tourism facilities. - Faster tightening of US monetary policy could appreciate Barbados’ real exchange rate and reduce competitiveness. - Mitigating factors: - Government’s strong sense of urgency to address vulnerabilities and extensive outreach to build support for reforms. - Contingency plans for liquidity assistance and temporary CBB support if required. - Deposit insurance up to BB$25,000 (US$12,500). *Source: IMF staff report (cr18290).* ### 30. Over the last decade, Barbados economy has experienced very low growth, and ### 30. Over the last decade, Barbados economy has experienced very low growth, and fiscal and external imbalances have gradually led to an unsustainable situation ### Macroeconomic diagnosis and program objective - Over the last decade, Barbados experienced very low growth, and fiscal and external imbalances gradually led to an unsustainable situation, with very high debt, and very low reserves. - These challenges must be addressed by a combination of fiscal consolidation, measures to boost growth, and debt restructuring. - The authorities’ Economic Reform and Transformation program seeks to address long-standing structural imbalances and implement an aggressive front-loaded and comprehensive reform agenda. ### Fiscal consolidation: targets and instruments - Staff supports the authorities’ judgment that a 6 percent of GDP primary surplus target will be challenging, but feasible. - Transfers from the central government to SOEs are at 7½ percent of GDP and are a major contributor to fiscal risks. - Key measures to reduce SOE transfers: - Much stronger oversight of SOEs, supported by improved reporting. - Cost reduction, likely involving reduction of the wage bill. - Revenue enhancement, starting with a review of user fees. - Mergers and divestment. - Adoption of a fiscal rule will help sustain the fiscal reform effort over the medium and long term. - Reforms in public financial management (PFM) are critically important for fiscal consolidation (structural benchmark). - IMF technical assistance (TA) will support the fiscal reforms. ### Structural reforms to boost potential growth and competitiveness - Bold structural reforms are needed to improve Barbados’ potential growth and competitiveness. - Specific areas for improvement identified: - Speeding up the process for construction permits. - Quicker licensing. - Online payment for government services. - Clearing goods through customs. ### Social policy and safety nets - Adequate social spending and an improved social safety net are key priorities for the program. - Targeted reforms aim to improve the efficiency and effectiveness of social spending while protecting the most vulnerable, in close collaboration with development partners. - Reducing SOE transfers will help create space for expanding social safety nets. ### Debt restructuring negotiations and features - Debt restructuring negotiations are progressing satisfactorily; good faith negotiations with domestic and external creditors are ongoing. - Progress has been made in identifying parameters that would provide debt relief without jeopardizing financial stability. - The proposed debt restructuring includes features to help the authorities stay current on future debt obligations, including a natural disaster clause. - The proposed restructuring, combined with fiscal consolidation and measures to boost growth, is expected to restore debt sustainability. - Adjustment mix considered appropriate: - Upfront fiscal consolidation. - Meaningful debt reduction. - Structural reforms to boost growth. - Maintenance of exchange rate stability. - Financing assurances and capacity to repay the Fund are adequate: - IDB and CDB lending for budget support is in place. - Authorities continue good faith negotiations with external creditors. ### Ownership, recent measures, and implementation risks - Authorities have shown strong ownership of the reform effort, demonstrated by important policy measures undertaken since taking office after the May 24 elections. - Recent policy actions: - Revenue measures in the mid-June 2018 ‘mini budget’ expected to lead to a more progressive tax system and a better balance between taxation of residents and visitors. - A planned comprehensive review of tax policies is expected to lead to further improvements. - Expenditure cuts announced in late August are an important first step in curbing SOE spending and central government transfers to SOEs. - Program implementation challenges and risks: - Limited implementation capacity. - Untested ability to maintain high primary surpluses over a sustained period. - Risks related to the debt restructuring process. - Despite risks, authorities’ ambition provides an opportunity to address long-standing challenges; there is no alternative route to restoring fiscal and external sustainability to spur a sustained economic recovery. ### Fund support recommendation - In view of Barbados’ balance of payments needs and the comprehensive package of measures proposed by the authorities, staff supports the authorities’ request for a four-year extended arrangement under the Extended Fund Facility in the amount of 220 percent of quota. ### Real sector findings (high-level) - Growth has declined due to a lower contribution from the non-tradable sector and tourism. - Growth in tourism arrivals slowed down. - Potential growth fell alongside capital accumulation but has recently steadily risen. - Unemployment fell and labor participation increased in the last 2 years. - Non-tourism related industries remain relatively flat. - Inflation, having fallen, is beginning to pick up due to food prices and tax increases. ### Fiscal sector findings (high-level) - Spending on transfers and interest cost have significantly grown, but total spending has been reduced in recent years. - Revenues are recovering and the fiscal deficit is declining. - All revenue categories have improved but VAT has remained relatively flat after growing following the rate increases. - Large financing requirements have been increasingly met by short-term debt instruments. - Central government debt has risen sharply, along with the debt service cost. ### External sector findings (high-level) - The current account deficit has narrowed, driven by lower imports and higher exports of goods and services. - Capital inflows are falling, contributing to a further decline in reserves. ### Monetary sector findings (high-level) - Central Bank of Barbados’ claims on the Government have rapidly risen. - Commercial banks’ reserves at the Central Bank of Barbados also have grown quickly. - The country risk premium peaked after the authorities announced plans to restructure both external and domestic debt. *International Monetary Fund staff summary of Barbados program assessment and policy recommendations.* ### 3.2 percent in early 2018. ### cr18290 - 3.2 percent in early 2018. ### Financial sector developments - Private sector credit growth remains weak, with excess liquidity parked at the CBB. - Banks' reserves in CBB (local currency) and international reserves levels shown (Mar-18 snapshot). - Capital relative to risk-weighted assets remains high and stable: - Capital Adequacy Ratio (banks, 2017 series): 17.0 percent. - Profitability remains low: - Return on Assets (Banks, 2017): 1.3 percent (quarterly series also around 1.3). - Nonperforming loans have been slowly coming down: - Nonperforming Loan Ratio (banks, 2017): 7.8 percent (Q4 2017: 7.8 percent). - Mortgage growth was flat in 2017; commercial banks’ mortgage exposure (amount and percent of GDP) show little growth in 2017. - Banks maintained exposure to the Government given higher securities reserve requirement: - Commercial Banks' Sovereign Exposure (amount and percent of GDP) remains elevated through 2018Q1. - With some loan growth, banks’ liquid assets to total assets have decreased: - Liquid assets to total assets declined toward the 2017 level of about 26.7 percent (commercial banks). ### Social development indicators - Public social spending has remained constant as a share of GDP: - Public social spending (health, education, overall) series from 2001–2015 with overall spending reaching up to about 15 percent of GDP in series plotted. - Barbados ranks among the highest in the region on social spending and achieves relatively strong social outcomes: - Life expectancy, 2016: Barbados around the mid-70s (figure axis shows 64–80 years; Barbados identified among higher values). - Human Development Index, 2016: Barbados (BRB) ranks better relative to many regional peers (rank scale 1–188). ### Competitiveness indicators - Real effective exchange rate started depreciating in 2017: - Effective Exchange Rates index (January 2000=100) shows real and nominal series diverging from 2000–2018. - Doing Business (Distance to Frontier, 2017): Barbados scored 55.7 (plotted among regional comparators; region average shown). - Tourism Competitiveness Index ranking deteriorated between 2014-15 and 2016-17: - Rankings displayed (rank out of 148, 1 is top) indicating relative deterioration. - Global Competitiveness Index ranking also deteriorated between 2014-15 and 2016-17. ### Economic performance in a regional context - Real GDP growth, 2005–2017: Barbados’ growth is relatively lower and less volatile compared to ECCU, Bahamas, Jamaica, Trinidad and Tobago. - Current account balance (percent of GDP) 2005–2017: Barbados shows relatively better external balance than some peers. - Central government fiscal balance (percent of GDP) 2005–2017: Barbados fiscal stance relatively looser in the charted period. - Reserves in months of imports, 2017: - Barbados: 1.3 months. - Bahamas: 5.7 months. - ECCU: 5.2 months. - Jamaica: 6.6 months. - Trinidad and Tobago: 9.4 months. - General Government Gross Debt–GDP Ratio, 2017: Barbados is the highest in the region in the plotted series. ### Key economic indicators and projections (Selected figures from Table 1 and Medium-Term Framework) - Population (2016 est., thousand): 280.4 - Adult literacy rate: 99.7 - Per capita GDP (2016 est., US$ thousand): 17.8 - Unemployment rate (2016 est.): 9.9 - Real GDP (annual percentage change): - 2015: 2.2 - 2016: 2.3 - 2017: -0.2 - 2018 (est.): -0.5 - 2019 (proj.): -0.1 - CPI inflation (average): - 2015: -1.1 - 2016: 1.5 - 2017: 4.4 - 2018 (est.): 4.2 - 2019 (proj.): 0.8 - Exports of goods and services (annual percent change): - 2016: 6.6 - 2017: 0.8 - 2018 (est.): 2.9 - 2019 (proj.): 2.8 - Imports of goods and services (annual percent change): - 2016: 0.2 - 2017: -0.4 - 2018 (est.): 4.3 - 2019 (proj.): 3.1 - Net domestic assets (annual percent change): - 2015: 3.0 - 2016: 7.1 - 2017: 2.6 - 2018 (est.): 1.7 - 2019 (proj.): 3.1 - Private sector credit (annual percent change): - 2015: 0.5 - 2016: 1.1 - 2017: 3.0 - 2018 (est.): 1.0 - 2019 (proj.): 3.5 - Broad money (annual percent change): - 2015: 3.7 - 2016: 3.6 - 2017: -0.6 - 2018 (est.): 3.0 - 2019 (proj.): 4.7 ### Fiscal outlook and public debt (Tables 2a/2b/3 highlights) - Central government fiscal year (Apr–Mar) aggregates and projections: - Total revenue (BDS$ millions): - 2015/16: 2,458 - 2016/17: 2,754 - 2017/18 (est.): 2,864 - 2018/19 (proj.): 3,062 - 2019/20 (proj.): 3,255 - Total expenditure (BDS$ millions): - 2015/16: 3,322 - 2016/17: 3,275 - 2017/18 (est.): 3,293 - 2018/19 (proj.): 3,201 - 2019/20 (proj.): 2,982 - CG Fiscal balance (percent of GDP): - 2015/16: -9.1 - 2016/17: -5.3 - 2017/18 (est.): -4.3 - 2018/19 (proj.): -1.3 - 2019/20 (proj.): 2.6 - Interest Expenditure (percent of GDP): - 2015/16: 7.1 - 2016/17: 7.6 - 2017/18 (est.): 7.6 - 2018/19 (proj.): 4.7 - 2019/20 (proj.): 3.4 - Primary Balance (percent of GDP): - 2015/16: -2.0 - 2016/17: 2.2 - 2017/18 (est.): 3.3 - 2018/19 (proj.): 3.3 - 2019/20 (proj.): 6.0 - Public Debt (Table 3, in millions of Barbados dollars and percent of FY GDP): - Public Debt (BDS$ millions): - 2015/16: 13,949 - 2016/17: 14,548 - 2017/18 (est.): 15,843 - 2018/19 (proj.): 12,809 - 2019/20 (proj.): 12,230 - Public Debt (percent of FY GDP): - 2015/16: 146.7 - 2016/17: 149.1 - 2017/18 (est.): 157.3 - 2018/19 (proj.): 123.6 - 2019/20 (proj.): 116.7 - Central government gross debt (FY) series show large reductions from FY 2017/18 to FY 2019/20 reflecting restructuring and exceptional financing adjustments. ### Balance of payments and reserves (Tables 4a/4b) - Current account balance (US$ million): - 2015: -289 - 2016: -206 - 2017: -189 - 2018 (est.): -213 - 2019 (proj.): -239 - Current account (percent of GDP): - 2015: -6.1 - 2016: -4.3 - 2017: -3.8 - 2018 (est.): -4.1 - 2019 (proj.): -4.6 - Exports of goods and services (US$ million): - 2015: 1,954 - 2016: 2,083 - 2017: 2,100 - 2018 (est.): 2,161 - 2019 (proj.): 2,222 - Imports of goods and services (US$ million): - 2015: 2,032 - 2016: 2,035 - 2017: 2,027 - 2018 (est.): 2,115 - 2019 (proj.): 2,180 - Trade balance (US$ million): - 2015: -737 - 2016: -706 - 2017: -717 - 2018 (est.): -768 - 2019 (proj.): -806 - Services balance (US$ million): - 2015: 659 - 2016: 754 - 2017: 790 - 2018 (est.): 814 - 2019 (proj.): 848 - Travel (credit) (US$ million): 2017: 1,082; 2018 (est.): 1,118; 2019 (proj.): 1,154 - Gross international reserves (US$ million): - 2015: 478 - 2016: 358 - 2017: 228 - 2018 (est.): 342 - 2019 (proj.): 517 - Reserves in months of imports of G&S: - 2015: 2.8 months - 2016: 2.1 months - 2017: 1.3 months - 2018 (est.): 1.9 months - 2019 (proj.): 2.8 months ### Monetary survey and credit conditions (Table 5 highlights) - Central Bank of Barbados Net International Reserves (millions BBD): - 2015: 926 - 2016: 680 - 2017: 394 - 2018 (est.): 510 - 2019 (proj.): 664 - Monetary base (millions BBD): - 2015: 1,959 - 2016: 2,444 - 2017: 2,331 - 2018 (est.): 2,487 - 2019 (proj.): 2,702 - Monetary survey – broad money (M2, liabilities to the private sector, millions BBD): - 2015: 8,297 - 2016: 8,599 - 2017: 8,548 - 2018 (est.): 8,801 - 2019 (proj.): 9,214 - Credit to private sector (millions BBD): - 2015: 5,392 - 2016: 5,452 - 2017: 5,615 - 2018 (est.): 5,671 - 2019 (proj.): 5,870 - Monetary survey percent changes (selected): - Net domestic assets (percent change): 2015: 3.0; 2016: 7.1; 2017: 2.6; 2018 (est.): 1.7; 2019 (proj.): 3.1 - Private sector credit (percent change): 2015: 0.5; 2016: 1.1; 2017: 3.0; 2018 (est.): 1.0; 2019 (proj.): 3.5 ### Medium-term macro framework and projections (Table 6 highlights) - Real GDP growth (percent, annual): - 2015: 2.2 - 2016: 2.3 - 2017: -0.2 - 2018 (est.): -0.5 - 2019 (proj.): -0.1 - 2020–2023 (projections): 0.6, 1.5, 1.8, 1.8 (2020–2023 respectively) - CPI inflation (average): - 2015: -1.1 - 2016: 1.5 - 2017: 4.4 - 2018 (est.): 4.2 - 2019 (proj.): 0.8 - 2020–2023 (proj.): 1.9, 2.3, 2.3, 2.3 - Central government gross debt (percent of GDP, fiscal year): - 2015: 146.7 - 2016: 149.1 - 2017: 157.3 - 2018 (proj.): 123.6 - 2019 (proj.): 116.7 - Current account (percent of GDP): - 2015: -6.1 - 2016: -4.3 - 2017: -3.8 - 2018 (proj.): -3.1 - 2019 (proj.): -3.4 ### Program financing schedule (Table 8) - Schedule of Purchases under the EFF Supported Program (SDR million, Percent of Quota, Conditions): - Availability Date October 1, 2018: SDR 35 (37 percent of quota) — Approval of Arrangement. - May 15, 2019: SDR 35 (37 percent of quota) — 1st Review and continuous and end March 2019 performance criteria. - November 15, 2019: SDR 35 (37 percent of quota) — 2nd Review and continuous and end September 2019 performance criteria. - May 15, 2020: SDR 35 (37 percent of quota) — 3rd Review and continuous and end March 2020 performance criteria. - November 15, 2020: SDR 17 (18 percent of quota) — 4th Review and continuous and end September 2020 performance criteria. - May 15, 2021: SDR 17 (18 percent of quota) — 5th Review and continuous and end March 2021 performance criteria. - November 15, 2021: SDR 17 (18 percent of quota) — 6th Review and continuous and end September 2021 performance criteria. - May 15, 2022: SDR 17 (18 percent of quota) — 7th Review and continuous and end March 2022 performance criteria. - Total: SDR 208 (220 percent of quota). *Source: cr18290 - 3.2 percent in early 2018. (PDF chapter/section).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### I. PROGRAMME OBJECTIVES AND GROWTH STRATEGY - Government implementing the Barbados Economic Reform and Transformation Plan (BERT) to restore macroeconomic stability and raise economic growth. - Core premises: - Fiscal and debt sustainability are necessary conditions for macroeconomic stability and economic growth. - Sharp reduction in the debt burden will support higher private sector-led investment and growth. - Increased fiscal space will allow Government spending to be directed toward catalytic infrastructure for growth. - Growth acceleration focus areas: - Renewable energy sector, creative and artistic industries, educational and health services, agro-industries, research, the international business sector, and tourism. - Social and institutional objectives: - Strengthen social safety net to soften negative impact of fiscal adjustment on the poor and vulnerable. - Broaden and make more progressive the tax base; reform expenditures, particularly of State-Owned Enterprises (SOEs). - Modernize institutions and systems; empower displaced workers. - Establish an Economic Programme Oversight Committee (EPOC) as a subcommittee of the Social Partnership for monthly monitoring and periodic public communication. ### II. MEDIUM-TERM MACROECONOMIC FRAMEWORK - Key targets and strategy: - Target a debt-to-GDP ratio of 60 percent by 2033. - Achieve target through fiscal consolidation, growth-boosting policies, public finance reform, and debt restructuring. - Domestic and external debt restructuring negotiations underway following announcement on June 1, 2018. - Fiscal stance: - Aim to eliminate the fiscal deficit and substantially reduce the debt burden. - Target a primary surplus of 6 percent of GDP in FY2019/20. - Program aims to achieve a cumulative 2.7 pp of GDP relative to 2017/18 (when the central Government registered a primary balance of 3.3 percent of GDP). - Note: the 3.3 percent reported outturn for 2017/18 did not reflect true Government cost; at least one percent of GDP of expenditures were financed through unreported arrears. - Government will implement additional measures if identified measures yield shortfalls to meet the primary surplus target of 6 percent of GDP. - SOE reform: - Transfers from central Government to SOEs equal 8.3 percent of GDP (true cost of Government for 2018/19) and are a major fiscal risk. - Aim over a three-year period to reduce transfers by about 2 percent of GDP through: - Stronger oversight of SOEs with improved reporting. - Cost reduction. - Revenue enhancement, starting with review of user fees. - Mergers and divestment. - Establish hard budget constraints for SOEs. - Structural reform agenda to support growth: - Address business climate weaknesses: construction permits, electricity access, property registration. - Introduce new Town and Country planning legislation (structural benchmark for end-December 2018). - Adopt new business plan and structure for Corporate Affairs and Intellectual Property Office (CAIPO), the Land Registry and Vital Statistics (structural benchmark for end-March 2019). - Increase financial and labor market flexibility and streamline registration and record-keeping. - Climate change and disaster resilience measures: - Risk-based coastal planning, long-term shoreline planning, beach enhancement, and promotion of hazard-resilient coastal infrastructure. - Immediate Rapid Roof Replacement Programme for non-hurricane resistant roofs. - Develop national storage capacity of generators, water, food and medicine to last for 7 days. - Upgrade hurricane shelters and other resilience measures. ### III. FISCAL POLICIES FOR THE REMAINDER OF 2018/19 AND BEYOND - Revised budget adopted June 13, 2018; repeal of NSRL effective July 1, 2018 (NSRL effectively a 10 percent excise tax; previously brought in an estimated 2 percent of GDP per year when VAT on NSRL included). - New and adjusted revenue measures (with expected annual yields and GDP shares where provided): - Airline Travel and Tourism Development fee (effective October 1, 2018): - US$70 for passengers flying outside CARICOM; US$35 within CARICOM. - Expected to bring in BDS$95 million annually (1.0 percent of GDP). - Room levy and Direct Tourism Services product levy (interim measure pending VAT rate increase to 15 percent as of January 1, 2020): - Room levy: US$2.50 per room per night for “B” Class and Apartments; US$5.50 per night for “A” Class rooms; US$10 per room per night for luxury rooms. - 2.5% Direct Tourism Services product levy on all direct tourism services. - Expected to bring in BDS$25 million annually (0.3 percent of GDP). - Shared accommodation levy: - 10 percent on all fees charged for shared accommodation (Airbnb, Home Away, others). - Expected to raise BDS$8 million per year (0.1 percent of GDP). - Personal Income Tax changes (effective July 1, 2018): - New top PIT bracket of 40 percent. - First BDS$25,000 tax free. - BDS$25,001 to BDS$60,000 taxed at 16 percent. - BDS$60,001 to BDS$75,000 taxed at 33.5 percent. - Expected to raise BDS$41 million annually (0.4 percent of GDP). - Fuel Tax replacing Road Tax (effective July 1, 2018): - 40 cents per litre of petrol, 40 cents per litre of diesel, 5 cents per litre of kerosene. - Expected net yield BDS$20.8 million annually (0.2 percent of GDP). - Corporate Income Tax (CIT) increase: - CIT rate raised from 25 to 30 percent. - Expected to raise BDS$57 million annually (0.6 percent of GDP). - VAT on online transactions: - As of October 1, 2018 all online transactions for purchase of goods and services by residents of Barbados will be subject to VAT. - Health Service Contribution (effective October 1, 2018): - Employees and self-employed: 1.0 percent of insurable earnings. - Employers: 1.5 percent of insurable earnings. - Expected to raise BDS$50 million annually (0.5 percent of GDP). - Improved tax compliance and redomiciling of companies in the International Business Sector: - Potential additional revenue BDS$65 million per year (0.6 percent of GDP). - Tax policy review: - Comprehensive review of tax system to be completed with IMF technical assistance by end-June 2019 (structural benchmark). - Parliament to adopt legislation addressing concerns in the comprehensive review consistent with fiscal objectives. - Tax and customs administration reforms: - Decision not to merge Barbados Revenue Authority (BRA) and Customs Department; instead improve performance of separate entities. - BRA targets: improve on-time filing for Corporate Income Tax and VAT from current levels (less than 50 percent for both) to 75 percent over Calendar Year 2019 (structural benchmark for end-December 2019). - Continue implementation of Tax Administration Management Information System (TAMIS) through 2019. - Establish Large Taxpayer Unit (LTU) with mandates: - Update all LTU taxpayer accounts to reflect accurate balances. - Commence audits targeting the most current tax period (structural benchmark for end-December 2018). - Ensure refunds due to taxpayers are paid within 60 days going forward. - Customs Department reforms and structural benchmarks (completion of listed actions is a structural benchmark by end-December 2019): - Approve organizational structure by end-December 2018. - Deploy staff to the exemption monitoring unit and undertake at least 8 exemption verification assignments in 2019. - Train and deploy at least 6 officers in the post clearance audit unit and undertake at least 8 field audits in 2019. - Establish a trusted trader program by end-2018 and have at least 8 companies participating by end-2019. - Undertake post release verification of entries and subject at least 3,500 entries to this control by end-2019. - Social protection and spending measures in the mid-June ‘Mini Budget’: - Increase in non-contributory pensions from BDS$155 to BDS$225 per week: - Expected cost BDS$18 million (0.2 percent of GDP). - Abolition of tuition fees at the University of the West Indies: - Expected cost BDS$22 million (0.2 percent of GDP). - Public sector wage agreement (June): - 5 percent wage increase for public servants (ending a wage freeze since 2009). - Estimated cost to Government approximately BDS$62 million per year (0.6 percent of GDP). *Letter of Intent and attached Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding submitted by The Hon. Mia Amor Mottley Q.C., M.P., Prime Minister and Minister of Finance, Economic Affairs and Investments, Barbados, dated September 14, 2018.* ### 14. Regarding capital spending, our top priority is to address key problems in ### 14. Regarding capital spending, our top priority is to address key problems in ### Capital spending and infrastructure priorities - Immediate priorities: - South Coast sewage system and Bridgetown sewage plants: estimated cumulative cost of BDS$77 million (0.8 percent of GDP). - Immediate remedial cost for South Coast and Bridgetown sewage plants: BDS$22 million. - Repair and buy new garbage trucks and buses, and undertake essential road and bridge repair: total BDS$60 million cost estimate. ### A Fiscal Rule - Government intent: - Seek Parliamentary approval of a fiscal rule (structural benchmark for end-June 2020). - Seek technical assistance from the IMF’s Fiscal Affairs Departments to develop the rule. - Key elements of the fiscal rule: - Aim to limit the annual budgeted overall fiscal deficits of the public sector (covering all fiscal activities), to achieve a reduction in public debt to no more than 60 percent of GDP by 2033. - Coverage to take into account all fiscal activities associated with the public sector, including SOEs, and the fiscal implications of PPPs (capturing all associated actual or contingent fiscal liabilities and risks). - Establish an automatic correction mechanism triggered by substantial cumulative deviations from the annual overall balance target; when cumulative deviations exceed a pre-specified threshold, additional fiscal adjustment is required in subsequent fiscal years. - Include an escape clause limited to major adverse shocks and triggered only with Parliamentary approval; the clause will pre-define events/shocks and specify measurable triggering conditions (such as declines in projected GDP or fiscal revenues). Validation of the event or shock by the EPOC will be required before initiation by the Ministry of Finance. - Consider institutional and legal options to strengthen the sanction regime and transparency; measures could include requiring the EPOC to independently assess macroeconomic projections, disclose budget execution with respect to the fiscal rule, and support transparency via Parliamentary hearings. The Minister of Finance will be required to explain deviations inconsistent with the fiscal rule in a mid-term budget review in Parliament and outline corrective steps. ### Reforms to Public Financial Management and the Budget Process - Action plan commitments: - Adoption of an amended 2007 Financial Management and Audit (FMA) Act and new Budget Calendar: starting with FY2019/20, seek Parliament adoption of budgets prior to fiscal year start, on April 1. Amend FMA Act 2007 to establish a permanent binding budget calendar (structural benchmark for end-December 2018). - Strengthen the strategic phase of budget formulation: - Update BERT annually based in part on expenditure and revenue reviews. - Set budget ceilings in accordance with the updated BERT to guide allocation. - Cabinet to provide clear instructions for budget submissions and move away from incremental budgeting. - Reform Budget Documentation: - Annual Budget Documentation (Budget Estimates) to provide a comprehensive narrative of public finances, assessment of alignment between fiscal framework and fiscal objective, and comprehensive description of revenue and expenditure measures. - Prepare a mid-year budget review for Parliament on a regular basis. - Strengthen GOB procurement process and governance: - Establish the office of the Contractor General as an independent entity to review central Government and statutory corporation contracts; Contractor General to report to Parliament annually. - Establish a College of Negotiators to improve negotiation of government agreements and contracts. - Strengthen capacity of the Public Accounts Committee for oversight and transparency. - Review legal and regulatory framework for Public-Private Partnerships (PPPs) and request IMF technical assistance. ### Debt restructuring and reduction - Status and objectives: - Public debt declared unsustainable; comprehensive debt restructuring announced on June 1, 2018 (including external debt to commercial creditors and treasury bills). - Exchange offer for Barbados dollar-denominated debt issued on September 7; aim to table exchange offer for external (US dollar-denominated) debt to commercial creditors shortly. - Central government debt held by the CBB and NIS will also be restructured; plans to recapitalize the CBB and address medium and long term challenges for the NIS (structural benchmark for end-June 2020). - Debt management: - Request IMF technical assistance to develop and implement a medium-term debt management strategy (MTDS) to meet financing needs at the lowest possible cost consistent with prudent risk. - Publish medium-term debt strategy and borrowing plan with the budget annually. - Review debt management practices, including assessment of effectiveness of the auction mechanism for long-term debt. ### Domestic expenditure arrears - Current situation and commitments: - Domestic expenditure arrears are now estimated at 12 percent of GDP. - Commit not to run new expenditure arrears. - Negotiate and settle legitimate arrears over a period of 5 years. - Develop a system for monitoring SOE arrears on an ongoing basis. - Introduce legislation so all borrowing by SOEs is done through central Government; introduce a program target for non-accumulation of new SOE arrears at first program review (structural benchmark for end-March 2019). ### Public sector reform and SOE transformation - Modernisation objectives: - Reduce recurrent expenditures to create room for capital spending, arrears reduction, or both. - Analyse public functions to identify what is essential, highly desirable, optional, or better delivered elsewhere. - Undertake adjustment and rationalisation of SOEs and some Government Departments; retooling, retraining, and enfranchising public sector workers; review public sector labour laws to enhance flexibility. - SOE reform measures: - Framework to restructure and transform SOEs based on retooling, empowering, retraining and enfranchisement. - Comprehensive review of all state-owned entities to identify efficiency gains, cost recoveries, and opportunities for divestment. - SOEs listed in the TMU required to submit standardized quarterly financial reports (structural benchmark for end-December 2018). - Prepare consolidated annual report on SOE performance and submit to Parliament with Budget Estimates; first report expected by March 2019 (structural benchmark). - Include statement of fiscal risks associated with SOEs in annual budget documentation. - Review all tariffs and fees charged by SOEs by June 2019 (structural benchmark). - Submit to Parliament a revised FMA Act conferring greater autonomy to the Ministry of Finance over SOEs, ensuring prior approval for all borrowings and liabilities, establish clear definitions and tighter reporting requirements, and sanctions for noncompliance (structural benchmark by end-December 2018). - Mitigating measures for affected workers: - Models of worker enfranchisement, preferential access to public procurement and agricultural lands, enhanced severance packages. - Launch training and outplacement programme (structural benchmark by end-December 2018), identifying critical transformational activities such as medical billing and coding, medical and legal transcription, and digitisation of public sector records to transform to full E-Government. ### Public sector pension reform - Priority actions: - Review public sector pension scheme to address long-run sustainability. - Table a revised public pension law in Parliament by end-June 2019 (structural benchmark). - Consider options including making the public service scheme contributory for new employees, increasing the earliest age of eligibility for new employees, and reducing the rate of benefit accrual for each year of service for new employees. ### Monetary and financial sector policies - Exchange rate and central bank autonomy: - Reaffirm commitment to maintain the exchange rate peg to the US dollar. - Implement fiscal and structural policies to support the peg and rebuild international reserves. - Amend the Central Bank Law to enhance its autonomy (structural benchmark by end-June 2019); request IMF technical assistance and a Safeguards Assessment of the Central Bank of Barbados. - Central Bank financing and monetary measures: - Continue to reduce Central Bank financing to the Government. - Amended Central Bank Act and FMA Act; reduced the limit on the Ways and Means account to 7.5 percent (of CG revenues) from 10 percent. - Commercial banks’ minimum requirement to hold Government securities presently at 20 percent of domestic deposits will be gradually reduced, as monetary conditions permit. - Aim to remove the recently introduced FX fee of 2 percent on all FX sales as reserve positions strengthen. - Fintech and regulation: - Develop a Sandbox Regime for fintech start-ups and innovators to enable safe experimentation (structural benchmark for end-December 2018). - Monitor cryptocurrencies and design new regulation as necessary. ### Growth-enhancing reforms - Growth strategy pillars: - Invest in a high skilled, knowledge-based economy, focusing on skills training and education. - Better mobilize private domestic savings for local investment. - Make Government an enabler of growth by supporting, facilitating, regulating, and partnering with private sector. - Diversify the economy into renewable energy, high-tech and software development, complementing traditional services sectors. - Human capital and education commitments: - Large commitment to retooling and retraining Barbadians over the next 4 years across all sectors and levels. - Launch a National First Jobs Initiative and apprenticeship scheme. - Reintroduce free tertiary education at vocational, technical and undergraduate levels and integrate Barbados Community College, Samuel Jackson Polytechnic and Erdiston Teacher Training College. - Seek efficiency savings in post-secondary and tertiary institutions and reallocate savings to enhanced offerings. - Improving the business climate: - Focus on speeding up construction permits and licensing processes. - Facilitate more efficient Customs clearance and implement a trusted trader program with benefits for compliant traders while safeguarding revenue. - Move to online payment for a range of Government activities and services; expedite delivery of passports, driver’s licenses, Certificates of Character using new technologies. *Source: cr18290 - 14. Regarding capital spending, our top priority is to address key problems in* ### 32. Program Monitoring. Program implementation will be monitored through prior actions, ### 32. Program Monitoring ### Monitoring framework and timeline - Program implementation will be monitored through prior actions, quantitative performance criteria and indicative targets, and structural benchmarks. - Reviews: semi-annual reviews, with the first, second, and third reviews occurring on or after May 15, 2019, November 15, 2019, and May 15, 2020, respectively. - Test dates for periodic PCs: end-March and end-September of each year. These will be ITs at end-June and end-December. - For program monitoring purposes, PCs and ITs are set for March 31, 2019; September 30, 2019; and March 31, 2020. The same variables are ITs for June 30, 2019 and December 31, 2019. - This table assumes Board approval on October 1, 2018. ### Key quantitative targets and selected figures (BRB$ millions, unless otherwise indicated) - Fiscal targets — Performance Criteria: - Floor on the CG Primary Balance 4/: 257343246 | 222464629 - Non-accumulation of CG external debt arrears 4/ 6/0: 00 | 0 | 00 - Ceiling on CG Transfers and Grants to Public Institutions 4/: 495 | 732 | 130 | 327487 | 741 - Ceiling on Public Debt 5/: 13,62912,871 | 12,72612,582 | 12,43712,293 | 0 - Indicative targets: - Ceiling on CG Domestic Arrears 5/: 1246 | 1,2461,100 | 1,100971 | 874 - Floor on Social Spending 4/: 3850 | 132538 | 50 - Monetary targets — Performance Criteria: - Ceiling on Net Domestic Assets of the CBB 5/: 1,9771,992 | 2,0072,0222,037 | 2,047 - Floor on Net International Reserves 5/: 510707 | 679689 | 664881 - Memo items: - IDB budget support 4/: 2002000 | 0100100 - CDB budget support 4/: 100100 | 00 | 5050 - Grants 4/: 172810 | 1019 | 26 (Note: numeric values are presented exactly as shown in the source table.) ### Structural program conditionality - A. Prior Action - Debt Restructuring - (1) Government to launch exchange offer for debt restructuring of the stock of central government domestic debt held by private creditors and eligible for debt restructuring consistent with EFF supported program objectives. — 7 September 2018 (Completed) - B. Structural Benchmarks (selected items and timing) - SOE Reform - (2) Parliament to adopt a revised Financial Management and Audit (FMA) Act conferring greater autonomy to the Ministry of Finance and Economic Affairs to oversee SOEs ... — end-December 2018 - (3) Government to ensure that all SOEs listed in TMU paragraph 2 prepare and submit to the government standardized quarterly financial reports. — end-December 2018 - (4) Government to submit to Parliament a consolidated report on the performance of SOEs, together with budget estimates. — end-March 2019 - (5) Government to conduct a comprehensive review of all tariffs and fees charged by SOEs. — end-June 2019 - (6) Government to introduce a system for monitoring SOE arrears on an ongoing basis. — end-March 2019 - (7) Government to launch a training and outplacement programme to help mitigate effects on the vulnerable from the restructuring of SOEs. — end-December 2018 - Growth and Business Climate - (8) Parliament to adopt new Town and Country Planning legislation ... — end-December 2018 - (9) Government to establish a Sandbox regime for regulation for fintech start-ups — end-December 2018 - (10) Government to adopt a new business plan and staffing strategy for CAIPO ... — end-March 2019 - Central Bank Autonomy - (11) Parliament to enact an amended Central Bank Law ... — end-June 2019 - Revenue Policy and Administration / Tax reform - (12) Government to conduct a comprehensive review of the tax system, with inputs from IMF technical assistance. — end-June 2019 - (13) BRA to adopt measurable performance targets that increase on-time filing for corporate Income Tax and VAT from current levels (less than 50 percent for both respectively) to 75 percent over calendar year 2019. — end-December 2019 - (14) The Large Taxpayer Unit (LTU) to (i) update all LTU taxpayer accounts ... and (ii) commence audits targeting the most current tax period. — end-December 2018 - Customs Department - (15) Multiple actions including exemption verification, post clearance audits, trusted trader program, and 3,500 post release verifications by end-2019. — end-December 2019 - Public Sector Reform / Public pension reform - (16) Government to table a revised public pension law to enhance sustainability of the public sector pension scheme. — end-June 2019 - Public Financial Management - (17) Government to table legislation for a fiscal rule ... — end-June 2020 - (18) Government to table a revised FMA Act to establish a permanent binding budget calendar ... — end-December 2018 - (19) Government to develop plans to recapitalize the CBB and address medium and long term challenges for the NIS stemming from the debt restructuring. — end-June 2020 ### Technical Memorandum of Understanding — definitions and modalities - Program exchange rates (08/29/2018) — Average daily selling rates as reported by the CBB: - Barbadian dollar to the US dollar: 2.0000 - Barbadian dollar to the SDR: 0.345745 - Barbadian dollar to the euro: 2.3392 - Barbadian dollar to the Canadian dollar: 1.54662 - Barbadian dollar to the British pound: 2.5739 - Barbadian dollar to the East Caribbean dollar: 0.74074 - Barbadian dollar to the Belizean dollar: 1.00000 - Definitions: - Central Government (CG) consists of institutions covered under the state budget including transfers to SOEs. - CG revenues and expenditures cover all items included in the CG budget as approved by Parliament. - Fiscal year: starts on April 1 and ends on March 31. - Debt definition follows paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision 15688-(14/107), adopted on December 5, 2014). Debt includes loans, suppliers’ credits, and leases (with present value of lease payments). - External CG debt: debt contracted or guaranteed by the CG in foreign currency. Domestic CG debt: debt contracted or guaranteed by the CG in Barbados dollars. - CG debt is considered contracted when authorized by Barbadian law or approved by Parliament and signed or accepted by the relevant authority. - Public institutions covered under Section I (selected list): - Queen Elizabeth Hospital; University of the West Indies; Barbados Tourism Marketing Inc.; Sanitation Service Authority; Barbados Agricultural Management Corporation; Barbados Community College; National Conservation Commission; Transport Board; Child Care Board; NLICO; Barbados Water Authority; National Assistance Board; Barbados Cane Industry Corp.; Barbados Investment and Development Corporation; Invest Barbados; National Housing Corporation; Barbados Tourism Product Inc.; Student Revolving Loan Fund; Urban Development Commission; Barbados Agricultural Development and Marketing Corporation; Barbados Tourism Investment Inc.; Rural Development Commission; Caves of Barbados Limited; Barbados Conferences Services; Fair Trading Commission; Kensington Management Oval Inc.; National Accreditation Board; National Productivity Council; Financial Services Commission; Southern Meats; Gymnasium; Cultural Industries Development Authority; Caribbean Broadcasting Corporation. ### Quantitative performance criteria — implementation and reporting - CG Primary Balance (floor): - Definition: total revenues and grants minus primary expenditure; measured cumulative over the fiscal year and monitored above the line. - Revenues recorded when funds transferred to government revenue account; tax revenues net of tax refunds. - Primary expenditure recorded on a cash basis; includes recurrent, capital spending and transfers to SOEs. - Adjustor: target adjusted upward (downward) by surplus (shortfall) in disbursements of grants relative to baseline projection. - Reporting: data provided by EPOC monthly with a lag of no more than four weeks from end-of-period. - Ceiling on Net Domestic Assets (NDA) of the CBB: - NDA = monetary base minus NIR. Monetary base includes currency in hands of non-bank public, vault cash, statutory cash reserve requirements, and current account of commercial banks at the Central Bank. - Reporting: EPOC monthly with a lag of no more than two weeks. - Floor on Net International Reserves (NIR): - NIR = reserve assets minus reserve liabilities with maturity less than one year. - Reserve assets include monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and reserve position at the Fund; excluded: pledged/collateralized assets, claims on residents, derivatives vis-à-vis domestic currency, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. - Reserve liabilities: all FX liabilities with maturity less than one year, including commitments from derivatives, and all liabilities outstanding to the IMF. - Adjustors: NIR target adjusted upward (downward) by 75 percent of surplus (shortfall) in program loan disbursements from multilateral institutions (CDB, IDB, CAF) relative to baseline projection. Also adjusted by surplus (shortfall) in disbursements of budget support grants relative to baseline projection. - Reporting: Central Bank on behalf of EPOC on a daily basis with a lag of no more than one week. - Non-accumulation of CG external debt arrears (continuous): - CG will not incur new arrears in payments of external debt obligations at any time during the program. - External arrears = delay in payment beyond grace period in loan/debt contracts. - Arrears excluded when a clearance framework has been agreed or when debt restructuring is being pursued. - Reporting: data on external arrears by creditors reported immediately by EPOC. - Ceiling on CG Transfers and Grants to Public Institutions: - Includes cash transfers and grants to entities listed in paragraph 2 above. - Measured cumulative over the fiscal year and reported by EPOC monthly with lag no more than four weeks. - Ceiling on the Stock of Public Debt: - Public debt = domestic and external CG debt, CG guaranteed debt, and arrears. - Stock measured under disbursement basis excluding valuation effects; program FX rates used to value debt in FX. - Adjustors: ceiling adjusted upwards by full amount of surplus in disbursements from multilateral institutions (CDB, IDB, CAF) relative to baseline; adjusted downward by nominal debt forgiveness in case of debt restructuring. - Reporting: CG debt and CG guaranteed debt data by issuer, creditor, maturity, and currency reported to the Fund by EPOC quarterly with lag no more than four weeks. Data on external and domestic arrears reported as set forth elsewhere in TMU. ### Indicative targets (start) - Indicative targets include a ceiling on the stock of domestic CG arrears (details continue beyond provided excerpt). *International Monetary Fund — Attachment II. Technical Memorandum of Understanding (excerpt).* ### 21. The stock of domestic payment arrears of the CG is defined as the sum of: (a) any invoice ### 21. The stock of domestic payment arrears of the CG is defined as the sum of: (a) any invoice ### Definition of CG domestic payment arrears - The stock of domestic payment arrears of the CG is the sum of: - (a) any invoice that has been received by a spending agency from a supplier of goods, services, and capital goods delivered and verified, and for which payment has not been made within the contractually agreed period (taking into account any applicable contractual grace period), or in the absence of a grace period, within 60 days after the due date; - (b) non-contributory pension transfers (by CG only), wages and pensions contributions to the NIS for which payment has been pending for longer than 60 days; - (c) rent and loan payments to the NIS pending for longer than 60 days; and - (d) arrears on refunds of Personal Income Tax (PIT), Reverse Tax Credit (RTC), Corporate Income Tax (CIT), and Value Added Tax (VAT). Tax refund arrears are defined as obligations on tax refunds in accordance with tax legislation that remain unpaid six months after the filing date. ### Monitoring and reporting of CG domestic arrears - Measurement and frequency: - Data on CG domestic arrears and its components by creditors will be measured as cumulative over the fiscal year. - It will be reported by the EPOC on a quarterly basis, with a lag of no more than four weeks from the end-of-period. (Section D, Table 2). ### Indicative floor on CG social spending — scope - The indicative floor on social spending of the CG applies only to expenditures incurred by the CG on the following plans and programs intended to have a positive impact on education, health, social protection, housing and community services and recreational activities: - Welfare Department spending including cash transfers and assistance for house rents, utilities, food, and education to the poor and vulnerable; - Child Care Board spending on protection of vulnerable children; - Youth Entrepreneurship Scheme assisting jobless youth to start own businesses; - Strengthening Human and Social Development programme targeting the unemployed and vulnerable families and youth; - Alternative Care for the Elderly programme targeting the elderly transferred to private care; - Provision of medication to HIV patients. - For monitoring, the data will be measured as cumulative over the fiscal year and reported by the EPOC on a quarterly basis, with a lag of no more than four weeks from the end-of-period (Section D, Table 2). ### Program reporting requirements — overview - Performance under the program will be monitored from data supplied to the IMF by the EPOC as outlined in Table 2. The authorities will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement under the EFF. ### Summary of data reporting requirements (timing and items) - Reporting on a daily basis, with a lag of no more than one week of the end-of-period: - CBB NIR, as defined in section I. - CBB GIR. - Reporting on a monthly basis, with a lag of no more than two weeks of the end-of-period: - Financial Sector: - CBB NDA, as defined in section I. - CBB survey showing detailed composition of NFA, NCCG, CODC, COSE, OIN, and MB. - ODC survey showing gross items for NFA, claims on the CBB, NCCG, COSE, OIN, deposits included in BM, deposits excluded from BM, and liabilities to the CBB. - DC survey consolidating CBB and ODC surveys. - CBB purchases and sales of foreign exchange. - Amounts offered, demanded and placed in government auctions and primary issues; including minimum maximum and average bid rates. - Statement of use and outstanding balance of the CG deposit in the CBB. - Reporting on a monthly basis, with a lag of no more than four weeks of the end-of-period: - Real Sector: - RPI index, its components, and weights. - Fiscal Sector: - CG budgetary accounts. - Net Domestic Financing and its components. - Net External Financing and its components. - Grants and Transfers to Public Institutions and its components as defined in Section I. - Stock of CG external arrears (interest and principal amounts separately) by creditor and its components as defined in Section I. This will be reported immediately. - Social Expenditure and its components as defined in Section II. - Program loan disbursements from multilateral institutions, including the CDB, the IDB, and the CAF, as defined in section I. - Budget support grants as defined in section I. - Liabilities of public-private partnerships (PPPs) (if any). - External Sector: - Balance of Payments accounts. - CBB’s Cashflow Table deriving GIR and NIR. - Reporting on a quarterly basis, with a lag of no more than four weeks of the end-of-period: - Real Sector: - Tourism and other real sector high frequency indicators. - Fiscal Sector: - Financial position of Public Institutions listed in paragraph 2 including non-audited income statement, balance sheet and profit and loss accounts. - CG domestic debt stock data by creditor/holder and by maturity (ST <= 1 year, and LT > 1 year maturity). - CG external debt stock data by creditor/holder and by maturity (ST <= 1 year, and LT > 1 year maturity). - CG domestic guaranteed debt stock data by creditor/holder and by maturity (ST <= 1 year, and LT > 1 year maturity). - CG external guaranteed debt stock data by creditor/holder and by maturity (ST <= 1 year, and LT > 1 year maturity). - SOE domestic non CG guaranteed debt stock data by creditor/holder and by maturity (ST <= 1 year, and LT > 1 year maturity). - SOE external non CG guaranteed debt stock data by creditor/holder and by maturity (ST <= 1 year, and LT > 1 year maturity). - Quarterly LT and ST debt amortization and interest projections separate for CG domestic, CG external, CG guaranteed domestic and CG guaranteed external debt. - Copies of loan agreements for any new loan contracted, including financing involving the issue of government paper, and of any renegotiated agreement on existing loans. - Stock of CG domestic arrears by creditor and its components as defined in Section II. - Stock of Tax Refunds and its components as defined in Section II. - Financial Sector: - CBB Balance sheet. - The following financial stability indicators by bank and by sector: Regulatory capital; Regulatory Tier 1 capital; Risk-weighted assets; Total assets; Total liabilities; Nonperforming loans in BB$ millions; Non-performing loans net of provisions; Gross loans; Sectoral distribution of loans to total loans; Return on assets; Return on equity; Interest margin; Gross income; Noninterest expenses; Liquidity coverage ratio; Liquid assets; Short-term liabilities; Net open position in foreign exchange; Large exposures to capital; Gross asset position in financial derivatives; Gross liability position in financial derivatives; Total income; Personnel expenses; Noninterest expenses; Spread between reference lending and deposit rates (base points); Highest interbank rate; Lowest interbank rate; Customer deposits; Total (non-interbank) loans; Foreign-currency-denominated loans; Foreign-currency-denominated liabilities; Net open position in equities; Net profits of the banking sector. - Reporting on an annual basis, within 6 weeks of the end-of-period: - Nominal and real GDP and its components from the demand and supply side (provided by the MOF). - Audited financial statements of Public Institutions listed in Paragraph 2 within 12 weeks of the end-of-period. - Audited financial statements of Commercial Banks. - Summary of legislative changes pertaining to economic matters. - Notification of establishment of new Public Institutions. - Notification of change in juridical status of existing Public Institutions. ### Appendix II — Public Debt Sustainability Analysis (summary) - Under the EFF supported program, public debt is sustainable and projected to decrease: - from about 157 percent of GDP at end-March 2018 - to about 95 percent of GDP by FY2023/24 - consistent with an intermediate debt target of 80 percent by FY2027/28 - and a long-term debt target of 60 percent by end-FY2033/34. - The debt restructuring delivers around 33 percent of GDP in debt relief, helps to bring about favorable automatic debt dynamics, and pushes gross financing needs well below the 15 percent of GDP threshold. ### A. Public debt — recent trends (key figures) - Public debt is about 157 percent of GDP. - Of this, about 136 percent of GDP was issued by the CG. - 10 percent of GDP was issued by SOEs and guaranteed by the CG. - Domestic expenditure arrears amounted to 14 percent of GDP. - Around 4 percent of GDP is guaranteed debt serviced by SOEs. - The remaining 6 percent of GDP is serviced directly by the CG. - As of end FY 2017/18, no external arrears had been accumulated. - Between FY2009/10-17/18, CG debt increased from 87 to 136 percent of GDP. - The share of short term debt more than doubled from 17 to 36 percent. - The private sector holds 54 percent of GDP in domestic debt. - The CBB increased its holdings from 1 percent of GDP to 19 percent of GDP. - Banks’ share of total domestic debt decreased from 37 to 26 percent; their holdings of ST domestic debt increased from 32 to 64 percent. ### B. Public debt sustainability assessment assumptions (selected) - Growth and Inflation: - Growth is projected to dip to minus 0.5 percent in 2018. - Growth is expected to recover slowly, returning to around 1 percent in 2020. - Inflation is projected to peak to an annual average of 5.1 percent, then return to a long-run average of around 3.3 percent. - Beyond FY 2022/23, growth and inflation are assumed to remain at 1.8 and 2.3 percent, respectively. - The fiscal multiplier used is 0.3. - Primary Balance: - The primary balance increases from 3.3 percent of GDP in FY 2017/18 to 6 percent in FY 2019/20 where it remains until FY 2021/22. - The primary balance is assumed to gradually decrease to 3.5 percent and stabilize at this level until the debt target is met. - Domestic arrears: - No accumulation of domestic arrears; the stock at FY 2018/19 is gradually brought down to zero by end-FY 2022/23. - External arrears: - No accumulation of external arrears during the projection period. - External arrears incurred with external commercial creditors following the June 1 debt restructuring declaration; estimated at BB$74 million (0.7 percent of GDP) in the period June-September 2018. - Public debt restructuring perimeter: - Covers all public debt excluding multilateral debt, and guaranteed debt directly serviced by SOEs. - Public debt relief—2018/19 immediate reductions (about 33 percent of GDP achieved by): - (i) lifting the guarantee on guaranteed debt serviced directly by SOEs in the amount of about 4 percent of GDP; - (ii) writing off CBB’s holdings of government debt in the amount of about 16 percent of GDP; - (iii) cancelling out debt held as assets in the central government Sinking Fund in the amount of 3 percent of GDP; - (iv) writing off external commercial debt in the amount of about 3 percent of GDP; - (v) writing off NIS holdings of government debt in the amount of 7 percent of GDP. - In FY 2019/20 and 2020/21, an additional debt relief of about 3 percent of GDP is achieved through write-offs of external commercial debt. ### C. Key elements of the debt exchange offer - Small investors (T-bills, treasury notes, and debentures): - Converted into 15-year debentures, with a 4-year grace period, paying 1 percent interest during the first 3 years, 2.5 percent for the next four years, followed by 3.75 percent interest for the remaining years. - Commercial banks (T-bills, treasury notes and debentures): - 15 percent of commercial banks’ holdings will be exchanged for new 90-day T-bills with an annual interest rate of ½ of a percent. Banks expected to rollover this portfolio for 10 years while the minimum statutory requirement is gradually lowered. - The remaining stock will be converted into new 15-year debentures offered to individuals. - Life insurers (T-bills, treasury notes and debentures): - Holdings of T-bills and 15 percent of treasury notes and debentures swapped for new 15-year debenture offered to individuals and commercial banks. - Remaining holdings converted into new 35-year debentures, with a 15-year grace period, paying 1.5 percent interest per annum for the first 5 years; 4.5 percent for the next 5 years; 6 percent for the next 5 years; followed by 7.5 percent interest for the remaining years. - General insurers (Treasury notes and debentures): - Holdings of T-bills exchanged for new 15-year debenture offered to individuals and commercial banks; holdings of treasury notes and debentures exchanged for the new 15-year debenture offered to banks. - All other holdings (including claims on SOEs) of investors: - Converted into the new 15-year debenture offered to banks. - CBB (T-bills, treasury notes and debentures): - In exchange for its existing portfolio the CBB will receive a portfolio of equally-weighted tradable benchmark treasury notes and debentures with maturities ranging from 5–25 years and a portfolio of 6-month T-bills, priced from the CBB’s June 1 yield curve. - The new portfolio will contribute sufficiently to the income the CBB requires to meet its expenses and provide instruments to implement monetary policy and preserve a domestic government yield curve. - NIS (T-bills, treasury notes and debentures): - T-bills held by the NIS will be swapped for the new 15-year debenture; treasury notes and debentures exchanged for a 20-year discount debenture with a 2-year grace period. - Principal will be reduced by 17.5 percent at issuance; after the 2nd successful review under the proposed EFF-supported program, principal will be reduced by an additional amount. *Source: cr18290 - 21. The stock of domestic payment arrears of the CG is defined as the sum of: (a) any invoice* ### 12.5 percent of the original principal; and after the 4 ### cr18290 - 12.5 percent of the original principal; and after the 4 ### Debt restructuring terms and financing parameters - Principal reduction schedule: - Initial principal reduction of 12.5 percent of the original principal. - After the 4th successful review under the proposed EFF-supported program, principal will be reduced by a final 5 percent of the original principal. - Interest schedule: - Interest will be paid at a rate of 4 percent per annum for the first 3 years. - Interest rate of 8 percent per annum for remaining years. - Status: The government and its financial advisors are still negotiating with external creditors the exchange terms for their outstanding claims. ### Natural Disaster Clause - Proposal: - Excepting T-bills, each new debt instrument issued as part of the restructuring should include a clause offering protection against future debt distress caused by a major natural disaster. - The clause would allow for capitalization of interest and deferral of scheduled amortizations falling due over a two-year period following a major natural disaster. - Trigger: - A payout above a predetermined threshold by the Caribbean Catastrophe Risk Insurance Facility (CCRIF) under the Government’s catastrophe insurance policy would trigger the natural disaster ‘event’. - Rationale and implications: - Such clauses were first used by Grenada in its 2015 restructuring and have received recognition and support from the IMF and others. - Given Barbados’s exposure to natural disasters, to achieve fiscal sustainability without such a natural disaster clause, the government would need to seek larger NPV reduction of its debt from debt restructuring. ### Public debt projections and drivers (projection horizon and anchors) - Public debt trajectory: - Public debt-to-GDP ratio is projected to fall to 95 percent by end-FY2023/24. - Public debt is projected to reach its intermediate anchor of 80 percent of GDP by end-FY 2027/28. - Public debt is projected to reach its long-term anchor of 60 percent of GDP by end-FY 2033/34. - Primary drivers of debt dynamics over the projection period: - Primary surplus: cumulative impact of about -33 pp of GDP. - Interest rate – growth differential: cumulative impact of about 1.3 pp of GDP. - Debt relief (haircut to external commercial debt, CBB holdings, NIS holdings, and lifting of guarantee on guaranteed debt directly serviced by SOEs): cumulative impact of about -31 pp of GDP. - Contributing factors to debt sustainability: - Large debt relief achieved by the debt restructuring. - External arrears that do not accumulate as debt is restructured in FY2018/19. - Gross financing needs reduced below the 15 percent of GDP threshold after the first projection year. - Domestic interest expenditure reduced drastically over the full projection period. ### Stress tests, risks, and scenario outcomes - General finding: Stress tests suggest reduced risks to the debt profile after the debt restructuring, though high initial debt remains a concern in the first 5 projection years. - Reasons for reduced risk: - Debt starts at a very high level but rapidly decreases; sensitivity to interest rate shock decreases due to restructuring of short-term debt into longer-term maturities. - Gross financing needs (GFN) are reduced after the first projection year to less than 10 percent of GDP. - Note: About 5 percentage points of GDP in GFN represent a stock of T-bills used by the CBB for monetary policy operations (about 2 percentage points of GDP) and a stock of T-bills banks need to rollover by regulation (about 3 percentage points of GDP). - Other historical debt profile risks are negligible; external financing requirements are reduced to 1 percent and foreign currency debt is very low. - Stress test magnitudes: - Individual stress tests: negligible impact on debt dynamics. - Combined macro-fiscal shock: increases debt by 15 percent of GDP by 2023. - Contingent liability shock: increases debt by 20 percent of GDP by 2023. - Caveats: - Real growth and inflation assumptions are described as conservative while targeted primary surpluses are ambitious. - Market perception worsened after the announcement of the debt restructuring—on June 6, 2018, Standard and Poor’s downgraded Barbados to SD. ### Key DSA figures (selected values from the DSA table and charts) - Nominal gross public debt (percent of GDP): - 2016: 114.0 - 2017: 149.1 - 2018: 157.3 - 2019: 123.6 - 2020: 119.4 - 2021: 113.8 - 2022: 107.9 - 2023: 101.4 - End-FY2023/24 projection: 95.1 - Public gross financing needs (percent of GDP): - 2016: 30.6 - 2017: 46.3 - 2018: 52.5 - 2019: 39.8 - 2020: 8.8 - 2021: 7.5 - 2022: 5.0 - 2023: 4.8 - Real GDP growth (in percent): - 2016: -0.5 - 2017: 1.7 - 2018: -0.3 - 2019: -0.4 - 2020: 0.1 - 2021: 0.8 - 2022: 1.6 - 2023: 1.8 - Inflation (GDP deflator, in percent): - 2016: 1.6 - 2017: 0.9 - 2018: 3.5 - 2019: 3.3 - 2020: 1.1 - 2021: 2.0 - 2022: 2.3 - 2023: 2.3 - Effective interest rate (in percent): - 2016: 6.2 - 2017: 5.9 - 2018: 5.7 - 2019: 3.2 - 2020: 2.9 - 2021: 3.0 - 2022: 3.4 - 2023: 3.5 - Change in gross public sector debt (cumulative and yearly highlights): - 2016: 7.9 - 2017: 2.4 - 2018: 8.2 - 2019: -33.7 - Cumulative identified debt-creating flows over projection period: -31.7 (percent of GDP) - Primary deficit cumulative impact: -32.8 (percent of GDP) ### DSA scenarios and alternative assumptions (selected) - Baseline, Historical, and Constant Primary Balance scenarios are presented with underlying assumptions for: - Real GDP growth, Inflation, Primary Balance, Effective interest rate for years 2018–2023. - Example baseline assumptions (2018–2023): - Real GDP growth: -0.4, 0.1, 0.8, 1.6, 1.8, 1.8 - Inflation: 3.3, 1.1, 2.0, 2.3, 2.3, 2.3 - Primary Balance: 3.3, 6.0, 6.0, 6.0, 6.0, 5.5 - Effective interest rate: 3.2, 2.9, 3.0, 3.4, 3.5, 3.8 ### Additional indicators and Fund credit projections (selected memoranda) - Prospective Drawings (SDR million) and related indicators are listed for 2018–2032 (examples): - Prospective Drawings: 35.0, 70.0, 52.0, 34.0, 17.0, 0.0, ... - Repurchases: 0.0, 0.0, 0.0, 0.0, 8.7, 20.4, 27.6, 33.2, 34.7, 34.7, 25.9, 14.3, 7.1, 1.4 - Total Interest/Charges: 0.4, 1.8, 3.1, 3.9, 4.9, 5.1, 4.6, 3.9, 3.3, 2.6, 2.0, 1.3, 0.9, 0.6, 0.5 - Memo items (selected): - Exports of G&S (US$ million): 2,161; 2,222; 2,283; 2,351; 2,421; 2,493; 2,579; 2,667; 2,759; 2,854; 2,952; 3,053; 3,158; 3,266; 3,378 - GIR (US$ million): 342; 517; 671; 748; 808; 900; 976; 1,027; 1,064; 1,095; 1,123; 1,168; 1,222; 1,291; 1,397 - Nominal CY GDP (US$ million): 5,172; 5,207; 5,339; 5,546; 5,780; 6,024; 6,278; 6,543; 6,820; 7,108; 7,409; 7,722; 8,049; 8,390; 8,745 ### External sector assessment (summary) - Overall Assessment: The external position of Barbados in 2017 was moderately weaker than the level consistent with the medium-term fundamentals and desirable policies. - The current account (CA) gap is assessed at -1.3 percent, translating into a 4.4 percent REER overvaluation. - Recommendation: The CA gap should be addressed through fiscal consolidation and structural reforms targeted to improve public savings. - Recent developments: - The current account deficit narrowed to 3.8 percent of GDP in 2017, from 4.4 percent in 2016 and 6.1 percent in 2015. - Improvement in 2017 driven by compression of goods import by -1.3 percent—despite a 24.5 percent increase in fuel imports—and a 5 percent increase in net service receipts. - Exports of goods declined by 3.8 percent in 2017, reflecting a significant decline in the re-export of artificial body parts. *Source: IMF staff.* ### 2. The Real Effective Exchange Rate (REER) has depreciated by about 1 percent in 2017 ### 2. The Real Effective Exchange Rate (REER) has depreciated by about 1 percent in 2017 ### REER and exchange rate dynamics - The Real Effective Exchange Rate (REER) has depreciated by about 1 percent in 2017 relative to 2016. - The 2017 depreciation reflects: - the fall in domestic prices within the year, and - the relative depreciation of the US dollar against major currencies. - The REER is appreciating in 2018 reflecting: - the strengthening of US dollar, and - domestic inflationary pressure. ### External sustainability assessment — summary findings - The EBA-lite current account model indicates that the external position is moderately weaker than fundamentals suggest. - The EBA-lite methodology yields mixed results; staff consider the current account model to be the most informative. - Current account results: - Current account gap: -1.3 percent of GDP - Actual current account deficit: -3.8 percent of GDP - Estimated current account norm: -2.5 percent of GDP - Policy gap: - 3.2 percent (largely reflects inadequate fiscal policy, deterioration in the reserve position, and weak private credit growth) - Components cited for the policy gap: - inadequate fiscal policy (-1.6 percent) - deterioration in the reserve position (-2.9 percent) - weak private credit growth (1.3 percent) ### Balance of Payments, 2015-17 (Percent of GDP) - 2015 / 2016 / 2017 - Current account -6.1 -4.4 -3.8 - Trade balance of goods -15.7 -14.8 -14.3 - Exports of goods and services 41.6 43.7 42.0 - Imports of goods and services 43.3 42.7 40.5 - Services 14.0 15.8 15.8 - Credits 24.6 26.2 25.9 - Travel 20.2 21.8 21.6 - Debits 10.5 10.4 10.1 - Income -4.5 -4.6 -4.5 - Current transfers (private and public) 0.0 -0.7 -0.8 - Capital and Financial Account 4.5 0.8 0.5 - Public sector -0.8 -1.8 -1.4 - Private sector 5.6 3.5 2.4 - Of which, short term -0.1 -0.8 -0.9 ### Reserves and adequacy - Reserves have fallen below what could be considered adequate because of weak capital inflows (both official and private). - Official inflows were negative since 2015 as debt service more than offset modest disbursements. - Long term private inflows declined from 3.5 percent of GDP in 2016 to 2.4 percent of GDP in 2017. - ARA methodology implies gross reserves should be in the range of 10 to 15 percent of GDP, corresponding to 3 to 4.5 months of import. - 2017 level of reserves: 4 percent of GDP, covering 1.2 months of import. - International reserves movements in 2018: - Grew from about USD 200 million at end-December 2017 to USD 240 million at end-August 2018 (mostly reflecting lower outflows on debt service since May 2018). - Reserves remain far below the central bank’s operational target of 12 weeks of import coverage. ### Current account summary table figures (Fund staff calculations) - CA-Actual -3.8% - Cyclical factors 0.1% - CA-Cyclically Adjusted -3.9% - CA-Norm -2.5% - CA-Norm Cyclically Adjusted -2.6% - CA-Gap -1.3% - of which policy gap -3.2% - Elasticity -0.30 - Real Exchange Rate Gap 4.4% ### Program context, outlook, and financing developments - Barbados requested a 48-month arrangement under the Extended Fund Facility to support macroeconomic stabilization, debt sustainability, and growth. - Recent developments: - Barbados is now in arrears to Canada on a loan; arrears amount: US$1.2 million. - Authorities announced suspension of all payments on external commercial debt on June 1, 2018. - Fiscal year developments: - Central bank financing required approx BDS $100 million in the first quarter of the 2018/19 fiscal year. - At the end of June, the debt-to-GDP ratio stood at about 157 percent. - Economic activity: - Estimated contraction of 0.6 percent during the first six months of 2018. - Authorities expect a decline in economic activity of 0.5 percent over the calendar year, and a small contraction of 0.1 percent in 2019, before growth turns positive in 2020. - Multilateral financing prospects: - Caribbean Development Bank indicated it is likely to increase its contribution over the program period. - World Bank indicated willingness to explore financing to Barbados. - Conditional understanding with Canada: - Canada consents to Fund financing despite arrears given assurances including that the US$1.2 million arrears will be cleared before the first review under the EFF arrangement, and that restructuring will be sought on comparable terms for other bilateral debt and creditor-sovereign guarantees if this loan is restructured. ### Key program objectives and policy measures - Fiscal consolidation: - Aim: induce a 6 percent primary surplus by fiscal year 2019/20, to be maintained for several years. - Revenue measures expected to contribute a cumulative 3.7 percent to the fiscal balance by 2019/20 (including fees on air travel, tourism levies, a fuel tax, a health services contribution, revised personal and corporate income tax rates, VAT on online purchases, and enhanced tax administration). - Expenditure measures: - Reduce transfers to state-owned enterprises (SOEs) by 2 percent of GDP cumulatively over a 3-year period. - Central government wages to decline over time through attrition. - Review the public-sector pension scheme and adjust legislation for sustainability. - Public financial management and fiscal rules: - Improve budget formulation, procurement, and PPP legal/regulatory framework. - Fiscal rules framework aiming to support long-term target of reducing public debt to 60 percent of GDP by 2033. - SOE reforms and social mitigation: - Review and categorize SOE functions; proceed with divestment where appropriate. - Require 33 key SOEs to submit standardized quarterly financial reports. - Implement training and outplacement programs for displaced workers; offer preferential access to public procurement and state-owned agricultural lands. - Monetary and financial sector policy: - Maintain the foreign exchange peg as anchor; build adequate reserves. - Bolster CBB operations via legislative amendments to enhance autonomy and governance and strengthen limits on monetary financing. - Reduced Ways and Means Account limit to 7.5 percent of central government revenues from 10 percent. - Gradual removal of temporary measures on financial institutions (increased government securities held as reserves; fees on sales of foreign exchange). - Establish a regulatory sandbox for fintech startups with Fund TA. - Continue improving financial regulation and supervision and address outstanding FATF and FSSA recommendations. - Debt restructuring and debt management: - Comprehensive debt restructuring underway covering BDS and USD denominated debt to private creditors, central government debt held by the CBB and the NIS, and government spending arrears. - Exchange offer for domestic debt announced on September 7. - Domestic arrears to be negotiated and settled over a 5-year period; controls to prevent new public-sector arrears. - Develop a medium-term debt management strategy (MTDS) with Fund TA and publish the MTDS with the government’s borrowing plan annually. - Structural reforms for growth and resilience: - Promote a highly-skilled, knowledge-based economy; provide free tertiary education at vocational, technical, and academic institutions. - Launch a National First Jobs initiative and apprenticeship scheme. - Improve business climate and investor confidence through reforms to construction permits, electrical service, property and business registration, and data records; streamline Town and Country Planning; reform Corporate Affairs and Intellectual Property Office, Land Registry, and Vital Statistics office. - Modernize labor laws to improve labor market flexibility and incentives to work. - Mitigate climate and disaster vulnerabilities (coastline protection, disaster response); implement a Rapid Roof Replacement Program to support homeowners in replacing non-hurricane resistant roofs. *Source: IMF staff report (cr18290).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18290.pdf_