## 1brbea2019001 ## Source details **Canonical URL:** [1brbea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1brbea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1brbea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1brbea2019001.pdf.json) --- ### Executive summary — recent developments, macro background, and outlook - BERT: Comprehensive Economic Recovery and Transformation plan to restore fiscal and debt sustainability, address falling reserves, and increase growth. - Public debt trajectory: - Public debt doubled since 2008–09 to almost 160 percent of GDP prior to restructuring. - Domestic debt restructuring produced an immediate nominal reduction in the debt-to-GDP ratio of about 30 percentage points. - Authorities’ anchors: intermediate anchor of 80 percent debt-to-GDP by FY2027/28; long-term anchor of 60 percent debt-to-GDP by FY2033/34. - International reserves: - Reserves dropped to about US$220 million (5–6 weeks of import coverage) by end-May 2018. - Reserves increased to US$531 million as of end-March 2019 (about 3 months of import coverage and 100 percent of the ARA metric). - About three quarters of the reserve increase between May 2018 and March 2019 due to IFI inflows. - IMF support: - IMF Executive Board approved a four-year extended arrangement under the Extended Fund Facility (EFF) on October 1, 2018. - Near-term macro outcomes: - Output contracted by 0.6 percent in 2018. - Long-stay tourism arrivals increased by 3 percent in 2018; average length of stay declined. - Average inflation slowed to 3.7 percent in 2018. - Fiscal stance and targets: - A primary surplus of around 3½ percent of GDP maintained in FY2018/19. - Overall balance estimated at a deficit of about 0.3 percent of GDP in FY2018/19. - Primary balance projected to increase to 6 percent of GDP in FY2019/20 and to remain at that level over the medium term; the 6 percent primary surplus is a key element of the domestic creditors’ agreement. - Outlook: - Small decline in output projected for 2019; medium-term growth projected to return to about 2 percent (medium-term average). - Current account deficit projected to stabilize around 3 percent of GDP. - Reserves projected to reach 5 months of import coverage or about 150 percent of the ARA metric by end of the program period, contingent on successful external commercial debt restructuring and sustained policy implementation. ### Fiscal outturns, FY2019/20 budget, and tax reforms - FY2019/20 budget: - Targets primary surplus of 6 percent of GDP. - Targeted fiscal adjustment amounts to 2½ percentage points of GDP. - Budget premised on conservative revenue assumptions and ambitious SOE reforms to lower transfers to SOEs. - FY2018/19 fiscal outcomes: - Primary surplus around 3½ percent of GDP. - Debt service reduction: Government interest bill reduced from 7½ percent of GDP in FY2017/18 to 3.8 percent of GDP in FY2018/19. - Key fiscal table (percent of GDP; Program Est. 2018/19; Program Projections 2019/20): - Total revenue: 29.6 29.3 31.1 31.2 - Tax revenue: 27.6 27.5 29.1 29.3 - Income and profits: 8.2 8.2 8.7 7.8 - VAT: 8.6 9.2 8.7 9.4 - Excise: 3.1 2.7 3.1 2.7 - Total expenditure: 30.9 29.6 28.5 28.2 - Interest: 4.7 3.8 3.4 3.0 - Transfers: 12.3 12.5 10.9 11.4 - CG Fiscal balance: -1.3 -0.3 2.6 3.0 - CG Primary balance: 3.3 3.5 6.0 6.0 - Tax reform (CIT and PIT): - December 2018 CIT reform: single incorporation regime and single tax rate structure for all corporates. - For domestic companies, CIT rates sharply reduced; international business sector rates increased slightly (top bracket from 0.25 percent to 1 percent). - Revenue projection assumes reduction in tax base from formerly non-resident companies by about one quarter. - OECD indicated compliance with BEPS; EU removed Barbados from its list of non-cooperative tax jurisdictions in May 2019. - PIT top rate reductions: from 40 percent to 33.5 percent as of July 1, 2019; to 28.5 percent as of January 1, 2020. - Tax administration and customs reforms (FAD TA recommendations and measures): - Consider repealing discretionary tax concessions and introducing standardized, rules-based incentives overseen by the Minister of Finance. - If revenue measures underperform, consider increasing VAT rate from 17.5 percent. - VAT measures already implemented: moving items from zero-rated to exempt, VAT rate on accommodation increased from 7.5 to 10 percent. ### Debt restructuring — domestic and external; DSA - Domestic restructuring: - Announced June 1, 2018; agreement with vast majority of domestic creditors announced October 14, 2018; transaction closed November 2018. - Domestic restructuring covers about 90 percent of the debt to be restructured (within perimeter defined). - Key terms (selected exact features): - Commercial banks: 85 percent of claims exchanged into 15-year bonds with interest of 1 percent for first three years, 2.5 percent for year 4, and 3.75 percent thereafter; remaining 15 percent into 90-day T-bills rolled over for 10 years at 0.5 percent. - Insurers: converted into a 50-year amortizing bond with 15-year grace period; interest 4 percent first 15 years, stepping to 8 percent years 25–50. - CBB: restructured with upfront haircuts; received tradable notes and T-bills priced from June 1 yield curve at 3.5 percent; CBB overdraft written off; reprofiling entailed about a 10 percentage points of GDP haircut on its short-term claims. - NIS: longer-term debt converted into a 25-year bond with a 37½ percent nominal haircut (about 13 percent of GDP), paying 4 percent for first 3 years and 8 percent thereafter; NIS provided upfront BRB$1.3 billion haircut (equivalent to about 26 percent of its reserves). - Staff estimates average NPV losses for domestic creditors at about 42 percent: - Private sector creditors: average losses about 30 percent. - Public sector creditors: average losses about 55 percent. - Rapid domestic exchange reduced economic uncertainty, put debt on downward trajectory; debt remains above the 70 percent of GDP risk assessment threshold. - Standard and Poor’s upgraded long- and short-term local currency ratings to B-/B following domestic exchange. - External restructuring: - External commercial debt (about 15½ percent of GDP, excluding interest and penalty arrears) yet to be restructured as of end-March 2019. - Moratorium on external commercial debt service since June 2018 gave rise to arrears; Fund’s lending into arrears policy applies; staff views financing assurances remain in place given ongoing good faith negotiations. - Authorities decided not to seek official bilateral restructuring; arrears to Canada repaid. Official bilateral debt small at 2 percent of GDP; repaying Canada’s loan increases financing needs by 0.1 percent of GDP per year over 2018–22, offset by higher IFI inflows. - Public Debt Sustainability Analysis (DSA): - Public sector debt about 127 percent of GDP at end FY2018/19, down from about 158 percent of GDP in FY2017/18. - Public domestic debt decreased from about 129 to 93 percent of GDP. - Public external debt increased from about 28 to 34 percent of GDP due to IFI loans and commercial arrears. - Projections and assumptions: - Growth: recover from -0.5 to -0.1 percent in 2019; return to around 1 percent in 2020; beyond FY2022/23 growth assumed 1.8 percent. - Inflation: average slows to 1.3 percent then returns to long-run average ~3.3 percent; beyond FY2022/23 inflation assumed 2.3 percent. - Primary balance: increases to 6 percent of GDP in FY2019/20 and remains until FY2021/22, then gradually decreases to 3.5 percent. - Public debt-to-GDP projected to fall to 90 percent by end-FY2024/25; projected below 80 percent by end-FY2027/28 and below 60 percent by end-FY2033/34. - Stress tests: - GFN remain below the 15 percent of GDP risk assessment threshold under all stress scenarios. - Debt remains above the 70 percent threshold under baseline and stress scenarios but on a steep downward trajectory. - Combined and contingent liability shocks could raise debt-to-GDP by about 20 percentage points relative to baseline by end of projection period. ### International reserves, external financing, and external projections - Reserves and IFI financing: - Reserves: US$531 million as of end-March 2019 (~3 months imports; 100 percent of ARA). - IFI inflows: CDB policy-based loan US$75 million; IDB policy-based loan US$100 million following IMF Board approval. - Attaining sustained reserve adequacy requires fully-restored confidence and successful external commercial debt restructuring. - External sector projections (selected exact figures from Table 4a and Table 4b): - Current account balance (US$ million): 2016 -206; 2017 -189; 2018 -242; 2019 -283; 2020 -189. - Net International Reserves (GIR, US$ million): 2016 320; 2017 206; 2018 500; 2019 688; 2020 845. - GIR in months of imports of G&S: 2016 1.9; 2017 1.2; 2018 3.0; 2019 3.9; 2020 4.7. - External debt (baseline, percent of GDP): 2018 32.7 → 2019 27.2 → 2020 26.9 → 2021 25.3 → 2022 23.4 → 2023 21.5 → 2024 19.7. - Gross external financing need (percent of GDP): 2018 5.4; 2019 4.7; 2020 4.2; 2021 4.6; 2022 5.0; 2023 4.9; 2024 4.7. ### Financial sector and macro-financial implications of restructuring - Banking sector: - Capital adequacy: capital adequacy ratio declined from 17 percent (Dec 2017) to 13 percent (Mar 2019); CAR series: 2018 13.9; 2019Q1 12.7. - Liquidity: excess cash reserves at CBB increased from about 14 to 15½ percent of deposits between Q1 2018 and end-2018. - Loan-to-deposit ratio: 2019Q1 60.6. - Non-performing loans ratio: 2019Q1 7.2. - Profitability: Return on Assets (ROA) 2018 -0.2; 2019Q1 -1.7. - Central Bank of Barbados (CBB): - CBB capital negative after restructuring: CBB capital stands at BRB$-1.6 billion (negative 16 percent of GDP). - CBB requested technical assistance; plan for recapitalization to be developed by mid-2020 with Fund TA. - New securities provided to CBB ensure an adequate income stream to meet operational expenses. - National Insurance Scheme (NIS): - NIS provided BRB$1.3 billion haircut (about 26 percent of its reserves). - Staff estimates NIS operative balance becomes negative around 2028 and reserves exhausted around 2041—five and ten years earlier than pre-restructuring, respectively. - Systemic or parametric reform required in medium term; plan to address by mid-2020. - Non-bank financial sector: - Credit unions on average maintain capital above 10 percent of assets recommended by FSC guideline. - Insurers meet minimum capital; P&C insurers affected by lack of short-term securities; life insurers benefited from longer-term securities. - Private pension funds’ solvency deteriorated; recapitalization plans agreed with supervisor. - FSC implemented a five-year forbearance policy for non-bank sector potential breaches. - Program implications: - Domestic debt restructuring reduced Government debt without jeopardizing financial stability; banks remain liquid but with reduced capital and profitability. - Plans to recapitalize CBB and address NIS challenges by mid-2020. ### SOE reforms, arrears, and public sector adjustments - SOE transfers and fiscal burden: - Transfers to SOEs close to 8 percent of GDP in FY2017/18. - Under program grants to SOEs expected to decline to about 6 percent of GDP by FY2021/22. - SOE reform measures to reduce transfers: - Stronger oversight and reporting; cost reduction including wage bill cuts; revenue enhancement including user fees; mergers and divestment. - SOE coverage and measures (scope and numbers): - Savings from debt restructuring: 8 - Leasing or selling of assets: 3 - Commercialization and user fees: 11 - Mergers and transfers of ownership 1/: 14 (note: 1/ For a total of 4 mergers and 2 transfers of ownership in FY2019/20 and FY2020/21.) - Staff retrenchments: 11 - Full closure: 4 - Privatization: 1 - Operational efficiency measures: 5 - Other measures: 9 - SOE arrears and monitoring: - SOE arrears amount to 2½ percent of GDP as of end-March 2019 (BRB$294 million), 97 percent to private sector suppliers. - Top SOE arrears contributors: Barbados Water Authority 36 percent; National Housing Corporation 32 percent; Transport Board 11 percent. - Authorities plan to extinguish all SOE arrears over the BERT program; new quantitative indicative target added to reduce SOE arrears for the monitored 33 SOEs (representing 96 percent of total SOE arrears). - Staffing and savings: - Layoffs to date around 320 staff; authorities estimate savings from layoffs at about 2 percent of GDP from FY2019/20 onwards (with limited fiscal savings in FY2018/19 due to severance payments). - Ongoing/planned mergers include GIS with CBC, and UDC with RDC; tourism-promoting entities also being merged. ### Program implementation, monitoring, institutional reforms, and technical assistance - Program performance: - All quantitative performance criteria (QPCs) and indicative targets (ITs) for March 2019 were met. - Six structural benchmarks met; remaining four implemented with minor delays. - Parliament adopted FY2019/20 budget in March 2019 targeting a primary surplus of 6 percent of GDP. - Institutional and legal reforms: - Financial Management and Audit (FMA) Act adopted January 2019; government must approve all SOE borrowing and receives standardized quarterly SOE financial reports; consolidated SOE report submitted to Parliament in early April 2019. - Town and Country Planning Law adopted January 2019 to streamline construction permits. - Central Bank law amendments planned to enhance autonomy (structural benchmark end-December 2019, reset in some instances). - Exchange control liberalization (sequencing and measures): - Gradual and cautious under the program; initial steps announced March 2019. - Planned measures: allow residents to open FX deposit accounts starting July 1, 2019; allow banks to lend in FX; relax FX surrender requirement for exporters. - FX fee of 2 percent introduced July 2017 remains in place as a capital flow management measure; authorities aim to phase out as reserves and fiscal position strengthen. - CBB to develop liquidity management capacity and instruments with IMF technical assistance. - Statistical and TA support: - BSS revised annual and quarterly GDP series; rebasing to 2016 delayed due to limited resources. - IMF two-year project commenced to upgrade GDP series; peripatetic visits since May 2019. - CBB addressing weaknesses in monetary and external statistics; safeguards assessment completed December 2018 with recommendations being implemented. ### Risks, challenges, and staff recommendation - Principal risks: - Domestic: untested ability to sustain a 6 percent primary surplus; implementation capacity constraints; fiscal adjustment shortfalls due to delays or political pressures; revenue uncertainty from CIT reform and new taxes. - External: disorderly Brexit or US slowdown reducing tourist arrivals and investment; tightening US monetary policy appreciating the real exchange rate and reducing competitiveness. - Program-specific: risks related to external debt restructuring process; impact of restructuring on CBB and NIS; contingent liabilities and combined shocks per DSA. - Staff view and recommendation: - Staff supports authorities’ request to modify performance criteria for end-September 2019 and end-March 2020. - Staff recommends completion of the first review of the EFF arrangement in light of strong program implementation and meeting of all March 2019 performance criteria. - Capacity to repay the Fund: - Debt service to the IMF projected to remain below 2 percent of exports and below 1 percent of GDP throughout the projection period to 2032. - Gross reserves projected to remain well above 100 percent of ARA over the full projection period. - EFF-supported program fully financed over the next 12 months with good prospects for the remainder of the program period. *Source: EXECUTIVE SUMMARY and selected sections, 1brbea2019001* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Recent Developments: BERT and macro background - Barbados has embarked on a comprehensive Economic Recovery and Transformation (BERT) plan aimed at restoring fiscal and debt sustainability, addressing falling reserves, and increasing growth. - Since the 2008-09 global financial crisis public debt doubled to almost 160 percent of GDP. - By end-May 2018, international reserves had dropped to about US$220 million, or 5–6 weeks of import coverage. - The IMF Executive Board approved a four-year extended arrangement under the Extended Fund Facility (EFF) to support Barbados’ stabilization program on October 1, 2018. ### Recent output, inflation, and tourism developments - Output contracted by 0.6 percent in 2018, in line with program projections. - Long-stay tourism arrivals increased by 3 percent in 2018, but average length of stay declined due to a larger share of short-stay arrivals from the United States. - Average inflation slowed to 3.7 percent in 2018, as higher oil prices early in the year were offset by the removal of a temporary emergency tax on consumption (the National Social Responsibility Levy, NSRL, a 10 percent surcharge, was abolished in July 2018). ### Fiscal outturns and composition - A primary surplus of around 3½ percent of GDP was maintained in FY2018/19. - The ongoing debt restructuring reduced the Government’s interest bill from 7½ percent of GDP in FY2017/18 to 3.8 percent of GDP in FY2018/19; debt service on external commercial debt was suspended since June 2018. - The overall balance is estimated at a deficit of about 0.3 percent of GDP in FY2018/19. - Overperformance of VAT and CIT was offset by larger than anticipated tax refunds, lower excises due to lower imports, and lower than expected performance of newly introduced taxes (airline travel fee, room levies, a new fuel tax, and a new health service contribution). ### Tax reform - In December 2018, Parliament adopted a comprehensive CIT reform to comply with EU and OECD requirements that is expected to be revenue neutral. - The new regime establishes a single incorporation regime and a single tax rate structure for all corporates registered in Barbados. - For domestic companies, CIT rates have been sharply reduced, while rates payable by companies operating in the international business sector were increased slightly (but four-fold in the top bracket—from 0.25 percent to 1 percent). - Revenue projections assume a reduction in the tax base generated by formerly non-resident companies of about one quarter. - The CIT reform could make CIT revenue less predictable and could lead to a loss of revenue that would need to be compensated by offsetting measures to meet fiscal targets under the program. - The OECD indicated that, with this reform, Barbados is now compliant with its guidelines on Base Erosion and Profit Shifting (BEPS); the EU removed Barbados from the list of non-cooperative tax jurisdictions in May 2019. - The CIT reform is expected to have minimal impact in FY2019/20, with the main effects on the composition of CIT revenue expected in FY2020/21. ### Debt restructuring: domestic and external - The Government announced a comprehensive debt restructuring, including external commercial debt and domestic treasury bills, on June 1, 2018. - Agreement with the vast majority of domestic creditors (including all banks and insurers) was announced on October 14, 2018, and the transaction with domestic creditors was closed in November 2018. - Legislation adopted in September 2018 retrofitted a collective action mechanism into domestic debt to secure 100 percent participation in the domestic debt exchange. - The domestic debt restructuring represents about 90 percent of the debt to be restructured; external commercial debt (about 15½ percent of GDP) is yet to be restructured (excluding interest and penalty arrears). - The domestic debt restructuring resulted in: - An immediate reduction in the debt-to-GDP ratio of about 30 percentage points in nominal terms. - A reduction in gross financing needs (GFN) of about 35 percentage points of GDP. - Staff estimates average NPV losses for domestic creditors at about 42 percent: - Private sector creditors: average losses about 30 percent. - Public sector creditors: average losses about 55 percent. - The rapid completion of the domestic part of the debt restructuring has reduced economic uncertainty and put debt on a clear downward trajectory; risks remain elevated since debt remains above the 70 percent of GDP risk assessment threshold. - Following the domestic exchange, Standard and Poor’s upgraded Barbados’ long- and short-term local currency ratings to B-/B. - The authorities target: - An intermediate anchor of 80 percent debt-to-GDP by FY2027/28. - A long-term anchor of 60 percent debt-to-GDP by FY2033/34. - The authorities will develop plans to recapitalize the CBB and address medium and long-term challenges for the NIS (structural benchmark for end-June 2020). ### International reserves and external financing - Reserves increased to US$531 million as of end-March 2019, about 3 months of import coverage and 100 percent of the Assessment of Reserve Adequacy (ARA) metric. - About three quarters of the increase in gross international reserves between May 2018 and March 2019 was due to IFI inflows. - Following IMF Board approval of the Extended Arrangement on October 1, 2018: - Caribbean Development Bank (CDB) approved a policy-based loan of US$75 million. - Inter-American Development Bank (IDB) approved a policy-based loan of US$100 million. - Debt service on external commercial debt was suspended immediately following the Government’s June 1, 2018 restructuring announcement. - Attaining reserve adequacy on a sustained basis will require fully-restored confidence in Barbados’ macroeconomic prospects. ### Program implementation and institutional reforms - All quantitative performance criteria (QPCs) and indicative targets (ITs) for March 2019 were met. - Six structural benchmarks were met and the remaining four were implemented with minor delays. - In March 2019, Parliament adopted a budget for FY2019/20 that targets a primary surplus of 6 percent of GDP; this budget provides a solid basis for the envisaged fiscal consolidation. - Authorities have started reforming state-owned enterprises (SOEs) by tightening reporting requirements and shedding excess staff; several entities are being merged. - Work is underway on a review of all tariffs and fees charged by SOEs, reforming the customs department, public pension reform, and amending the central bank law—key benchmarks for upcoming reviews. - Staff supports the authorities’ request to modify the performance criteria for end-September 2019 and end-March 2020. ### Outlook: growth, fiscal targets, and reserves - A small decline in output is projected for 2019, with fiscal consolidation impacts expected to be offset by continued tourism growth and increasing private sector confidence. - Over the medium term, growth is projected to return to close to its medium-term average of about 2 percent. - The primary balance is projected to increase to 6 percent of GDP in FY2019/20 and to remain at that level over the medium term; the 6 percent primary surplus target is a key element of the agreement reached with domestic creditors in the debt restructuring. - International reserves are projected to increase further over the medium term, supported by additional IFI inflows. - The current account deficit is projected to stabilize around 3 percent of GDP. - Reserves are projected to reach 5 months of import coverage or about 150 percent of the ARA metric by the end of the program period, contingent on a successful external commercial debt restructuring and sustained implementation of policies supported by the program. ### Risks to the outlook - Domestic risks: - The Government’s untested ability to reach and sustain a 6 percent primary surplus. - Fiscal adjustment could be less than estimated due to implementation delays, increased spending owing to political pressures, or a weaker-than-expected full-year impact of the new taxes introduced in 2018. - Starting with FY2020/21, CIT and PIT revenues could be impacted by the CIT reform adopted in late 2018. - Growth could be much higher than projected if large FDI projects materialize. - External risks: - A disorderly Brexit or a US slowdown could reduce tourist arrivals and private investment. Key source markets for tourism: UK (about 33 percent market share), US (30 percent), Canada (13 percent). - Tightening of monetary policy in the US could appreciate Barbados’ real exchange rate and reduce competitiveness. ### Program risks and operational concerns - Risks to program implementation include limited implementation capacity, untested ability to maintain high primary surpluses over an extended period, and risks related to the external debt restructuring process. - Plans will be developed to address the impact of the debt restructuring on public agencies. *Source: EXECUTIVE SUMMARY, 1brbea2019001* ### 12. The FY2019/20 budget adopted ### 12. The FY2019/20 budget adopted ### Fiscal targets and budget projections - The FY2019/20 budget adopted by Parliament in March targets a primary surplus of 6 percent of GDP. - The targeted fiscal adjustment amounts to 2½ percentage points of GDP. - The budget is premised on conservative revenue assumptions and ambitious SOE reforms to facilitate lower transfers to SOEs (grants to public institutions). - Revenue is projected to increase as full-year effects of new taxes introduced in 2018 materialize and new measures following the recent FAD TA on tax policy are implemented. - If necessary, the authorities stand ready to take additional measures recommended during the recent FAD TA on tax policy while maintaining the quality of fiscal consolidation by prioritizing capital expenditure. - Over the medium term, capital spending is projected to gradually increase to 3 percent of GDP over the program period, as transfers to SOEs are gradually reduced further. - Fiscal table (Program Est. 2018/19; Program Projections 2019/20; values in percent of GDP unless otherwise indicated): - Total revenue: 29.6 29.3 31.1 31.2 - Tax revenue: 27.6 27.5 29.1 29.3 - Income and profits: 8.2 8.2 8.7 7.8 - Taxes on property: 1.3 1.6 1.3 1.9 - VAT: 8.6 9.2 8.7 9.4 - Social levy (NSRL): 0.4 0.5 0.0 0.0 - Excise: 3.1 2.7 3.1 2.7 - Import taxes: 2.2 2.1 2.2 2.1 - Other taxes: 3.8 3.3 5.2 5.4 - Nontax revenue: 1.7 1.8 1.7 1.8 - Capital revenue and grants: 0.3 0.0 0.3 0.1 - Total expenditure: 30.9 29.6 28.5 28.2 - Interest: 4.7 3.8 3.4 3.0 - Transfers: 12.3 12.5 10.9 11.4 - o/w Grants to public institutions: 7.8 8.0 6.4 6.9 - Capital expenditure and net lending: 2.4 1.9 2.7 2.0 - CG Fiscal balance: -1.3 -0.3 2.6 3.0 - CG Primary balance: 3.3 3.5 6.0 6.0 - Layoffs at the central Government and SOEs in FY2018/19 should help reduce the wage bill and transfers to SOEs in FY2019/20, with severance payments reflected in the FY2018/19 fiscal outturn. ### Tax policy and customs administration reforms (FAD TA recommendations) - The authorities are reviewing and implementing recommendations from recent FAD TA missions on tax policy and customs administration. - FY2019/20 budget measures include broadening the VAT and Land Tax bases, and limiting potential base erosion stemming from large discrepancy between CIT and PIT rates. - FAD TA report also suggests: - repeal the discretionary provisions for providing tax concessions; - introduce a standardized, rules-based incentives package, overseen by the Minister of Finance; - should revenue measures underperform, consider increasing the VAT rate, from 17.5 percent at present. - The February 2019 FAD TA on customs administration identified severe management problems requiring urgent attention; modernization of customs could enhance revenue and facilitate integration in the global economy. - Box 1 — Measures already implemented: - VAT base broadened by moving items from zero-rated to exempt to reduce VAT refunds; VAT rate on the accommodation sector increased from 7.5 to 10 percent. - Authorities intend to gradually reduce PIT rates and extended the reverse tax credit to BRB$25,000 to make PIT more progressive. - Land tax reforms: discounts for hotels and tourist accommodation reduced; cap on residential land tax increased from BRB$60,000 to BRB$100,000; land tax rates increased. - Box 1 — Future measures: - With unified low CIT rates, broaden CIT base by removing concessions and introducing interest deductibility restrictions; consolidate remaining CIT incentives into the Income Tax Act and place oversight with the Minister of Finance. - Reform BCED to strengthen governance and accountability: prepare strategic plan; develop key performance indicators; reorganize HR; strengthen IT and migrate to ASYCUDA World. - Strengthen BCED core functions: review rules to strengthen compliance; adopt holistic risk management framework; strengthen controls of foreign trade operations, cargo targeting, and post-clearance audits. ### SOE reforms - SOE reforms are a key element of the economic reform program. - At close to 8 percent of GDP in FY2017/18, transfers to SOEs had become a significant burden and major contributor to fiscal risks. - SOE transfers support utilities (water, transportation, electricity, waste disposal), social programs (public health and education), and economic development (mainly tourism and investment promotion). - Under the program, grants to SOEs are expected to decline to about 6 percent of GDP by FY2021/22 through: - much stronger oversight of SOEs, supported by improved reporting; - cost reduction, including reduction of the wage bill; - revenue enhancement, including an increase in user fees; - mergers and divestment. - Scope and coverage of SOE reforms (measures and number of entities): - Savings from debt restructuring: 8 - Leasing or selling of assets: 3 - Commercialization of operations and introduction of user fees: 11 - Mergers and transfers of ownership 1/: 14 - Staff retrenchments: 11 - Full closure: 4 - Privatization: 1 - Operational efficiency measures: 5 - Other measures: 9 - 1/ For a total of 4 mergers and 2 transfers of ownership in FY2019/20 and FY2020/21. - With adoption of the new FMA law in January 2019: - Government must approve all SOE borrowing and can sanction SOEs for noncompliance with reporting requirements. - Government now receives standardized quarterly financial reports on SOE performance; a consolidated report on SOE performance was submitted to Parliament in early April 2019. - A comprehensive review of all tariffs and fees charged by SOEs is underway; a steep increase in bus fares was implemented in April 2019. - Staff reductions and mergers: - To date, layoffs amount to around 320 staff; some entities plan further retrenchment in upcoming months. - Authorities launched a training and outplacement program; authorities estimate savings from layoffs at about 2 percent of GDP from FY2019/20 onwards (with limited or no fiscal savings in FY2018/19 due to severance payments). - Ongoing and planned mergers include GIS with CBC, and UDC with RDC; entities promoting tourism are also being merged. - SOE arrears and monitoring: - SOE arrears amount to 2½ percent of GDP and authorities plan to reduce them by about 1 percent of GDP by March 2020. - At end-March 2019, SOE arrears amounted to BRB$294 million, of which 97 percent accrued towards private sector suppliers and the rest to the Barbados Revenue Authority (BRA) and the National Insurance Corporation (NIS). - SOEs owing the largest shares of arrears: Barbados Water Authority (36 percent), National Housing Corporation (32 percent), Transport Board (11 percent). - Government has taken charge of negotiating settlement of outstanding SOE arrears with private suppliers, planning to extinguish all SOE arrears over the course of the BERT program. - A new quantitative indicative target to reduce SOE arrears for the monitored 33 SOEs (representing 96 percent of total SOE arrears) was added to the program. ### External debt restructuring - Discussions with external commercial creditors are ongoing; authorities and the external creditor committee continued regular meetings, with a recent meeting in Washington, DC in mid-April 2019. - Despite narrowing positions since late 2018, differences remain. - A moratorium on external commercial debt service has given rise to arrears, and the Fund’s lending into arrears policy applies; in view of ongoing good faith negotiations, staff views that financing assurances remain in place. - The authorities have decided not to seek official bilateral debt restructuring, and arrears to Canada have been repaid. - Official bilateral debt is small, at 2 percent of GDP; authorities are now current on official bilateral obligations. - Repaying Canada’s loan on current terms increases financing needs by 0.1 percent of GDP per year over the program period (2018-22); this has been offset by higher-than-anticipated inflows from IFIs. ### Impact of debt restructuring on domestic financial institutions - Domestic debt restructuring reduced Government debt without jeopardizing financial stability; the financial system remains stable and liquid, with reduced capital but no signs of stress. - Plans will be developed to recapitalize the CBB and address medium and long-term challenges for the NIS by mid-2020, as envisaged under the program. - Banking sector: - Banks have capital above the regulatory minimum, remain liquid, but with higher asset concentration ratios and reduced profitability. - Between December 2017 and March 2019, the capital adequacy ratio in the banking system declined from 17 to 13 percent. - Liquidity: between Q1 2018 and end-2018, excess cash reserves held at the CBB increased from about 14 to 15½ percent of deposits. - Central Bank of Barbados (CBB): - The CBB now has negative capital and has requested technical assistance to consider how to address this over the medium term. - After the debt restructuring, the CBB’s capital stands at BRB$-1.6 billion (or negative 16 percent of GDP). - A plan for recapitalization will be developed by mid-2020, with Fund TA. - New securities provided to the CBB during the debt restructuring ensure an adequate income stream to meet operational expenses. - National Insurance Scheme (NIS): - The NIS’s financial position deteriorated and systemic or parametric reform will be required in the medium term. - NIS provided large debt relief to the central Government through an upfront BRB$1.3 billion haircut (equivalent to about 26 percent of its reserves), amortization grace periods and lower interest payments. - Staff estimates: NIS operative balance will become negative around 2028 and reserves will be exhausted around 2041—five and ten years earlier than pre-restructuring, respectively. - Reforming the pension system will be required before operating balance becomes negative to restore sustainability and actuarial fairness. - Other financial institutions: - Credit unions: no minimum regulatory requirement; on average continue to have capital above the 10 percent of assets recommended by FSC guideline. - Insurers: continue to meet minimum capital requirements; P&C insurers affected negatively by lack of short-term securities post restructuring; life insurers positively affected by introduction of longer-term securities. - Private pension funds: solvency position deteriorated considerably, especially plans heavily invested in Government paper; recapitalization plans agreed with relevant supervisor. - FSC has put in place a five-year forbearance policy to cover the non-bank sector’s potential breaches of capital, reserves and other statutory benchmarks. ### Growth-oriented reforms and exchange control liberalization - Regulatory streamlining and renewed confidence expected to increase growth over the medium term. - Town and Country Planning Law adopted in January 2019 streamlined the process for construction permits. - Government established a Sandbox regime to support fintech start-ups. - Authorities intend to review components of the World Bank’s Doing Business survey and are preparing a growth diagnostic with staff support. - Exchange control liberalization (gradual and cautious under the program): - Initial steps announced in March 2019 budget speech. - Planned measures include allowing residents to open FX deposit accounts starting July 1, 2019; allow banks to lend in FX; relax FX surrender requirement for exporters. - Liberalization will be cautious and gradual to protect international reserves; Fund staff supports sequencing and gradual liberalization. - CBB will need to develop liquidity management capacity and instruments with IMF technical assistance support. - The FX fee introduced in July 2017 was assessed by the Fund as a capital flow management measure and remains in place; authorities aim to phase this out as reserve and fiscal positions strengthen. ### Program implementation, performance criteria, and structural benchmarks - All performance criteria for end-March were met. - Modified performance criteria and indicative targets are proposed to be set through March 2020. - A new indicative target for monitoring SOE arrears is proposed covering the same SOEs under the indicative ceiling on transfers. - Six structural benchmarks were met and the remaining four were implemented with minor delays. - The Financial Management Act and the Town and Country Planning legislation were adopted by Parliament in early 2019. - The consolidated report on performance of SOEs was submitted to Parliament in early April 2019. - Proposed changes to structural benchmarks: - June 2019 structural benchmark on civil servants’ pension reform proposed to be reset for end-June 2020 to allow more time for consultation and to prepare an actuarial review (new structural benchmark for end-December 2019). - New structural benchmark for end-July 2019 proposed to require proclamation of the new FMA Act by the Governor General. - End-June 2019 benchmark on amending the Central Bank Law proposed to be reset for end-December 2019 to accommodate further consultations and legal drafting capacity constraints. - End-June 2019 benchmark on reviewing SOE tariffs proposed to be reset to end-September 2019 to accommodate further consultations with social partners. *Source: IMF staff report text on Barbados FY2019/20 budget and program measures.* ### 26. The authorities have established a program oversight committee (the BERT ### The authorities have established a program oversight committee (the BERT Monitoring Committee or BERT MC) ### Program oversight and public support - BERT MC includes members from the private sector, unions, and civil society to monitor and communicate program implementation to the broader public through regular media briefings. - BERT MC issued its first quarterly report and held its first quarterly press conference in February 2019. - A two-percent fee applies to all transactions that require the remittance of, or settlement in, foreign currency. ### Statistical capacity and technical assistance - The Barbados Statistical Service (BSS) has revised annual and quarterly GDP series. - Further improvements and rebasing the GDP estimates to 2016 have been delayed due to limited resources. - A two-year project from the IMF aiming to accelerate progress in upgrading GDP series has commenced. - Since May 2019, the IMF is supporting the BSS with peripatetic visits to improve coordination and communication on data sources of the national accounts compilation system. - Production of PPI statistics has improved, but staff shortages limit the ability of the BSS to meet the monthly publication schedule agreed under the program. - The Central Bank of Barbados (CBB) is addressing weaknesses in monetary and external statistics. ### Capacity to repay the Fund and financing assurances - With strong implementation of the program, Barbados’ capacity to repay the Fund remains adequate and financing assurances remain in place. - Debt service to the IMF is projected to remain below 2 percent of exports and below 1 percent of GDP throughout the projection period to 2032. - Gross reserves are projected to remain well above 100 percent of ARA over the full projection period. - The EFF-supported program is fully financed over the next 12 months, with good prospects for the remainder of the program period. - Adequate safeguards remain in place for further use of Fund resources. - The limited accumulation of external arrears, which are expected to be temporary, does not undermine the medium-term viability of the BOP and the capacity of Barbados to repay the Fund. ### Safeguards assessment of the Central Bank of Barbados (CBB) - A first-time safeguards assessment of the CBB was completed in December 2018. - The assessment found relatively strong internal and external audit mechanisms subject to close oversight by the Audit Committee. - The assessment identified needs to: - strengthen the legal framework; - strengthen foreign reserves management; - improve compilation of monetary data; and - enhance transparency in financial reporting. - The CBB is making progress implementing the recommendations; legal amendments are being drafted with IMF technical assistance (structural benchmark). - While the 2018 audit was completed within the statutory three-month deadline, timeliness of publication of the audited financial statements should be improved. ### Staff appraisal and fiscal outlook - The authorities have shown strong ownership of the reform effort and program implementation has also been strong. - All performance criteria for March 2019 were met. - All structural benchmarks have been implemented, four with minor delays. - Prospects for continued strong program performance are good. - The fiscal adjustment continues as programmed with the primary surplus targeted at 6 percent of GDP for FY2019/20. - Staff supports the authorities’ view that a 6 percent of GDP primary surplus for this fiscal year entails risks and continued commitment from the authorities. - The target is supported by concrete policy measures including: - the recent tax policy reform and the introduction of several new taxes; - ongoing reforms in public financial management; - a reduction of transfers to SOEs; and - adequate provisions for social safety nets and capital expenditure. - The planned adoption of a fiscal rule in 2020 will help sustain the fiscal reform effort over the medium and long term. ### SOE reforms - SOE reforms are essential for achieving and maintaining the primary surplus target over the medium term. - Grants to SOEs are envisaged to decline from 8 percent of GDP in FY2017/18 to 6 percent of GDP by FY2021/22 through: - much stronger oversight of SOEs, supported by improved reporting; - cost reduction, including reduction of the wage bill; - revenue enhancement, including an increase in user fees; and - mergers and divestment. ### Domestic debt restructuring and financial sector implications - The domestic debt restructuring has significantly reduced Barbados’s public debt burden without jeopardizing financial stability. - Domestic public debt declined by 30 percent of GDP. - Gross financing needs declined by 35 percent of GDP. - Banks’ capital adequacy declined from 17 percent in December 2017 to 14 percent in December 2018. - The insurance and credit union sectors remain sound. - The CBB now has negative capital and the NIS’ financial position has worsened. - The authorities will develop plans to recapitalize the CBB and address medium and long-term challenges for the NIS stemming from the debt restructuring. ### External debt negotiations and outlook - The authorities are continuing good faith negotiations with external commercial creditors. - The authorities and external creditors’ committee have continued to meet regularly, and the authorities have continued to share data with the external commercial creditors. - Together with the already concluded domestic debt restructuring, ongoing fiscal adjustment, and measures to boost growth, the external debt restructuring will help restore debt sustainability. ### Risks and implementation challenges - Program implementation going forward will be challenging. - Key risks include: - limited implementation capacity; - untested ability to maintain high primary surpluses over a sustained period; - risks related to the external debt restructuring process; - reforming the civil service pension system; and - strengthening the effectiveness of customs. - Amendments to the Central Bank Law should limit central bank financing of the Government to short-term advances and strengthen the CBB’s mandate, autonomy, and decision-making structures. - The tasks are arduous, but there is no alternative route to restoring fiscal and external sustainability to spur a sustained economic recovery. *Source: Excerpt from IMF staff report.* ### 37. In light of strong program implementation, staff recommends completion of the first ### 1brbea2019001 - 37. In light of strong program implementation, staff recommends completion of the first ### Program recommendation - Staff recommends completion of the first review of the extended arrangement under the Extended Fund Facility, and supports the authorities’ request to modify performance criteria. ### Real sector developments - Real GDP growth by sectors: chart-based decomposition shows negative contributions from construction and services; tourism-related sector shown separately. - Tourist Arrivals (Y/Y percent change, 12-month moving average): series for Barbados, ECCU, Dominican Republic, Jamaica (chart). - Potential GDP growth and capital accumulation: "Potential GDP growth is recovering from low levels." Capital accumulation shown (Percent change, left; Percent of GDP, right). - Labor market: "Unemployment slightly increased due to layoffs started in 4Q2018, while labor participation continued its upward trend." - Total employment (ten thousands) and unemployment rate (percent) charted. - Sectoral trends: - "Non-tourism industries are stagnating." - "Growth in tourism arrivals was weak." - Inflation: - "Inflation declined due to lower consumption taxes and energy prices." - CPI inflation and world oil/food price changes charted. ### Fiscal sector developments - Expenditure composition (Percent of GDP, FY series): wages, salaries, and NIS contributions; goods and services; interest; transfers; capital expenditure and net lending (chart). - Central Government balance (Percent of GDP): revenues and expenditures series; central government balance charted. - Tax revenue composition (Percent of GDP): Income Taxes, VAT, Other Indirect Taxes series. - Government financing: - Short term debt and long term debt (Percent of GDP, left) and Barbados T-bill rate, USA T-Bill rate (Percent, right) charted. - "Large financing requirements had increasingly been met by short-term debt instruments." - Public debt: - "Public sector debt has decreased sharply after the domestic debt restructuring." - Public Debt (Percent of FY GDP) series shown; indicators include SOE guaranteed debt, Central Government arrears, Central Government debt, EFF long term program anchor, MAC DSA risk assessment threshold. - Debt service and gross financing needs: - Primary Balance ( - = Surplus), Debt Service, Gross Financing Needs (Percent of FY GDP) series shown; MAC DSA risk assessment threshold noted. Key fiscal figures (from Table 1 and Tables 2a/2b): - Population (2017 est., thousand) 285.7 - Adult literacy rate 99.7 - Per capita GDP (2017 est., US$ thousand) 17.4 - Poverty rate (individual, 2010) 19.3 - Life expectancy at birth in years (2013) 75.3 - Gini coefficient (2010) 47.0 - Rank in UNDP Development Index (2014) 57 - Unemployment rate (2018 est.) 10.1 Selected macro projections (Table 1, Projections): - Real GDP: 2016 2.5; 2017 0.5; 2018 -0.6; 2019 est. -0.1; 2020 0.6 - CPI inflation (average): 2016 1.5; 2017 4.4; 2018 3.7; 2019 est. 1.9; 2020 1.8 - CPI inflation (end of period): 2016 3.8; 2017 6.6; 2018 0.6; 2019 est. 1.4; 2020 2.3 - Exports of goods and services: 2016 6.6; 2017 0.8; 2018 0.0; 2019 est. 4.2; 2020 3.2 - Imports of goods and services: 2016 0.2; 2017 -0.4; 2018 -0.4; 2019 est. 5.4; 2020 2.1 - Broad money: 2016 3.9; 2017 -0.6; 2018 7.9; 2019 est. 5.1; 2020 3.9 - Fiscal year (FY) public debt (Central gov't gross debt incl. guaranteed and arrears): 2016/17 149.5; 2017/18 158.3; 2018/19 125.7; 2019/20 117.1; 2020/21 110.7 From Table 2a (Central Government Operations, in millions of Barbados dollars): - Total revenue (Program / Est. / Program series): 2016/17 2,754; 2017/18 2,864; 2018/19 3,062; 2018/19 (Est.) 2,994; 2019/20 Program 3,255; 2019/20 Est. 3,259; 2020/21 3,329; 2021/22 3,461; 2022/23 3,607; 2023/24 3,760; 2024/25 3,918 - Total expenditure: 2016/17 3,275; 2017/18 3,293; 2018/19 3,201; 2018/19 (Est.) 3,024; 2019/20 2,982; 2019/20 (Est.) 2,976; 2020/21 2,996; 2021/22 3,176; 2022/23 3,366; 2023/24 3,576; 2024/25 3,807 - CG Fiscal balance (millions BBD): 2016/17 -521; 2017/18 -429; 2018/19 -139; 2018/19 (Est.) -312; 2019/20 732; 2019/20 (Est.) 833; 2020/21 332; 2021/22 862; 2022/23 411; 2023/24 184; 2024/25 112 - Interest expenditure (millions BBD): 2016/17 7, 2017/18 7, 2018/19 6 ? (Note: Table entries show interest as percentages and levels; see Table 2a for full detail) (Note: full line-item detail for tax categories, transfers, capital expenditure, financing, and memorandum items provided in Tables 2a and 2b.) ### External sector developments - "The current account deficit has narrowed, driven by lower imports and higher exports of goods and services." - Capital and financial account: "A declining trend in capital inflows was reversed owing to inflows from IFI loans and FDI." - International reserves: "Contributing to a turnaround in international reserves." - Footnote: "For 2018, figures for long-term inflows and capital and financial account i.e. reflects the accumulation of external commercial arrears equivalent to US$34 million. The current account deficit in 2018 is higher by one percent of GDP including interest payment of arrears to commercial creditors." Selected external figures (Table 4a, in millions of US$): - Current account balance (Est./Projections): 2016 -206; 2017 -189; 2018 -242; 2019 -283; 2020 -189; 2021 -190; 2022 -170; 2023 -165; 2024 -163 - Exports of goods and services (US$ million): 2016 2,083; 2017 2,100; 2018 2,100; 2019 2,188; 2020 2,258; 2021 2,340; 2022 2,432; 2023 2,525; 2024 2,621 - Imports of goods and services (US$ million): 2016 2,035; 2017 2,027; 2018 2,020; 2019 2,129; 2020 2,173; 2021 2,245; 2022 2,329; 2023 2,417; 2024 2,502 - Net International Reserves (GIR, US$ million): 2016 320; 2017 206; 2018 500; 2019 688; 2020 845; 2021 933; 2022 972; 2023 979; 2024 981 - GIR in months of imports of G&S: 2016 1.9; 2017 1.2; 2018 3.0; 2019 3.9; 2020 4.7; 2021 5.0; 2022 5.0; 2023 4.9; 2024 4.7 From Table 4b (in percent of GDP): - Current account balance (percent of GDP): 2016 -4.3; 2017 -3.8; 2018 -4.8; 2019 -5.4; 2020 -3.5; 2021 -3.4; 2022 -3.0; 2023 -2.7; 2024 -2.6 - Exports of goods and services (percent of GDP): 2016 43.1; 2017 42.2; 2018 41.3; 2019 42.2; 2020 42.4; 2021 42.3; 2022 42.2; 2023 42.0; 2024 41.9 ### Monetary sector developments - Central Bank claims on Government declined after the debt restructuring; CBB international reserves increased sharply; commercial banks’ reserves at the CBB remained high. - Country risk premium peaked after plans announced to restructure external and domestic debt. - Interest rates: - T-bill rate declined after the debt restructuring; deposit rate remained very low. - "Elimination of minimum deposit rate" annotated on interest rates chart. - Private sector credit growth remained weak with excess liquidity parked at the CBB. - Private sector credit growth note: "Private sector credit growth reflects the financial consolidation of a financial and trust company with its parent bank. Otherwise, credit growth would be flat." - Monetary survey highlights (Table 5, in millions of Barbados dollars and percent changes): - Net International Reserves (Central Bank of Barbados, Net International Reserves): 2016 575; 2017 335; 2018 832; 2019 1,014; 2020 1,182; 2021 1,263; 2022 1,295; 2023 1,308; 2024 1,313 - Monetary base: 2016 2,410; 2017 2,298; 2018 2,659; 2019 2,925; 2020 3,092; 2021 3,174; 2022 3,265; 2023 3,358; 2024 3,443 - Broad money (M2, liabilities to the private sector): 2016 8,751; 2017 8,695; 2018 9,384; 2019 9,860; 2020 10,241; 2021 10,568; 2022 10,914; 2023 11,272; 2024 11,633 - Net credit to the public sector (millions BBD): 2016 3,241; 2017 3,498; 2018 1,725; 2019 1,875; 2020 1,875; 2021 1,875; 2022 1,935; 2023 2,015; 2024 2,095 - Credit to the private sector (millions BBD): 2016 5,452; 2017 5,575; 2018 5,774; 2019 5,918; 2020 6,131; 2021 6,377; 2022 6,632; 2023 6,897; 2024 7,173 ### Financial sector developments - Capital relative to risk-weighted assets declined after the debt restructuring but remains adequate. - Profitability turned negative. - Banks' NPLs remained flat; mortgages increased slightly in 2018. - Banks maintained exposure to the Government after maturity lengthening due to the debt restructuring. - With some loan growth, banks’ liquid assets to total assets have decreased in the last two years. Selected financial indicators (Table 7, Percent): - Capital Adequacy Ratio (CAR): 2014 16.4; 2015 15.8; 2016 17.0; 2017 17.0; 2018 13.9; 2019Q1 12.7 - Loan to deposit ratio (Commercial banks): 2014 70.3; 2015 65.5; 2016 62.3; 2017 63.3; 2018 63.0; 2019Q1 60.6 - Liquid assets, percent of total assets (Commercial banks): 2014 20.3; 2015 25.3; 2016 27.4; 2017 26.7; 2018 26.5; 2019Q1 27.1 - Non-performing loans ratio (Commercial banks): 2014 11.5; 2015 10.6; 2016 8.9; 2017 7.9; 2018 7.4; 2019Q1 7.2 - Return on Assets (ROA) (Commercial banks): 2014 0.7; 2015 0.9; 2016 1.0; 2017 1.3; 2018 -0.2; 2019Q1 -1.7 - Provisions to non-performing loans: 2014 47.7; 2015 55.5; 2016 63.2; 2017 69.6; 2018 67.3; 2019Q1 69.1 ### Social development indicators - "Social spending has remained constant as a share of GDP... and in line with peers, given the income level." - Barbados shows higher life expectancy and higher development outcomes relative to regional peers. - Public social spending (Percent of GDP): Health, Education, Overall series charted. - Life Expectancy, 2016 (Years) charted: Barbados among the highest in peer set. - Human Development Index, 2017 ranking displayed (Rank of 188, 1 is best). ### Competitiveness indicators - Real effective exchange rate has slightly appreciated recently (Effective Exchange Rates, Index: January 2000=100). - Doing Business: Distance to Frontier, DB19: Barbados scores below regional average; values shown (Distance to Frontier numbers: 52.7, 56.4, 56.8, 58.9, 61.1, 60.8, 63.0, 67.5 in a chart sequence). - Tourism Competitiveness Index Ranking (Rank out of 148, 1 is the top): Barbados ranking deteriorated between 2014-15 and 2016-17. - Global Competitiveness Index Ranking (Rank out of 148, 1 is the top): Barbados ranking deteriorated between 2014-15 and 2016-17. ### Regional context and comparisons - Economic performance relative to regional peers: - "Barbados’ growth is relatively lower but less volatile." - "External imbalances are relatively better." - "The fiscal stance is relatively looser, but tightening. Reserves are still lower than those of its peers... while its debt is still the highest in the region." - Reserves in months of imports, 2018 (Months): Barbados 3.0; Bahamas 4.5; ECCU 5.2; Jamaica 5.9; Trinidad and Tobago 10.4 (chart). - General Government Gross Debt-GDP Ratio, 2018 (Percent): Barbados 97; Jamaica 75; ECCU 54; Bahamas 43; Trinidad and Tobago 91; others shown in chart; breakdown includes Guaranteed, NIS, Excl. NIS, Total. ### Program monitoring and support - Table 8: Schedule of Purchases Under the EFF Supported Program (in millions of SDR) - October 1, 2018: 35 SDR million (Approval of Arrangement) - May 15, 2019: 35 SDR million (1st Review and continuous and end March 2019 performance criteria) - November 15, 2019: 35 SDR million (2nd Review and continuous and end September 2019 performance criteria) - May 15, 2020: 35 SDR million (3rd Review and continuous and end March 2020 performance criteria) - November 15, 2020: 17 SDR million (4th Review and continuous and end September 2020 performance criteria) - May 15, 2021: 17 SDR million (5th Review and continuous and end March 2021 performance criteria) - November 15, 2021: 17 SDR million (6th Review and continuous and end September 2021 performance criteria) - May 15, 2022: 17 SDR million (7th Review and continuous and end March 2022 performance criteria) - Total: 208 SDR million (listed as 220 percent of quota in table header context) - Table 9: External Financing Requirements and Sources (in millions of US$) - Gross Financing Requirements (Est./Projections): 2017 322; 2018 375; 2019 447; 2020 242; 2021 406; 2022 474; 2023 259 - Sources of financing include Foreign Direct Investment (net) series: 2017 156; 2018 222; 2019 208; 2020 211; 2021 220; 2022 232; 2023 244 - Financing Gap and Prospective Financing lines presented; Exceptional Financing (Restructuring) series noted. - Table 10: Indicators of Fund Credit Under the EFF Supported Program (in millions of SDR) - Prospective Drawings (a) by year: 2019 70.0; 2020 52.0; 2021 34.0; 2022 17.0; 2023 0.0; subsequent years 0.0 - Percent of quota corresponding: 2019 74.1; 2020 55.0; 2021 36.0; 2022 18.0; subsequent years 0.0 - Repurchases (b) series and Total Interest/Charges (c) series provided in table. - Outstanding Credit (e) projections: 2019 105.0; 2020 157.0; 2021 191.0; 2022 208.0; 2023 199.2; 2024 178.8; 2025 151.2; 2026 118.0; 2027 83.3; 2028 48.6; 2029 22.7; 2030 8.5; 2031 1.4; 2032 0.0 *Source: IMF staff report content as provided in the supplied document.* ### Appendix I. Public Debt Sustainability Analysis ### Appendix I. Public Debt Sustainability Analysis ### A. Public Sector Domestic Debt Restructuring - On October 14, 2018 the Barbadian authorities reached agreement with domestic creditors on a comprehensive domestic debt restructuring that achieved an upfront debt reduction of 30 percentage points of GDP through a combination of nominal haircuts and lifting of guarantees on SOE guaranteed debt. - The restructuring improved the debt profile by longer maturities, longer grace periods on amortization, and lower interest rates. - The restructuring covered 89 percent of the full restructuring perimeter. The debt perimeter considered includes: central Government domestic debt including treasury bills and other short-term claims like expenditure arrears and overdrafts, central Government external commercial debt, SOE external and domestic debt guaranteed by the central Government, and external arrears accumulated after the external default. Liabilities outside the perimeter include central Government external official bilateral and multilateral debt. - As of end-March 2019, negotiations with external commercial creditors over exchange terms for their outstanding claims were ongoing. Key terms of the domestic debt restructuring (Box 1): - Commercial banks: 85 percent of claims exchanged into 15-year bonds with interest rate of 1 percent for the first three years, 2.5 percent for year 4, and 3.75 percent for remaining years; remaining 15 percent converted into new 90-day treasury bills, to be rolled over for 10 years, with interest rate of 0.5 percent. - Insurers (general and life): claims converted into a 50-year amortizing bond, including a 15-year grace period, with interest rate of 4 percent during the first 15 years, stepping up to 8 percent over years 25-50. - CBB (Central Bank of Barbados): restructured with upfront haircuts; in exchange the CBB received a portfolio of equally-weighted tradable benchmark treasury notes and debentures with maturities ranging from 5–25 years and a portfolio of 3-month T-bills, priced from the CBB’s June 1 yield curve at 3.5 percent interest. The reprofiling entailed about a 10 percentage points of GDP haircut on its short-term claims. The Government’s overdraft at the CBB was written off. - NIS (National Insurance Scheme): short-term and long-term claims treated differently. Treasury bills converted into the same 15-year instrument as banks’ extended treasury bills. Holdings of longer-term Government debt converted into a 25-year bond with a 37½ percent nominal haircut (about 13 percent of GDP), paying 4 percent for the first 3 years, and 8 percent thereafter. - Individuals: claims below BRB$50 thousand repaid in cash; claims between BRB$50 and BRB$200 thousand converted into a 4-year bond amortizing in 42 equal monthly payments beginning 30 April 2019 with no interest; claims above BRB$200 thousand converted into a 15-year bond with quarterly amortization beginning 31 December 2022 and step-up over time from 1 to 3.75 percent. - Natural disaster clause: most newly exchanged domestic securities (except principally treasury bills) include a clause allowing capitalization of interest and deferral of scheduled amortization for two years following a major natural disaster. Trigger defined as a payout above US$5 million by the CCRIF. - Collective Action Mechanism (CAM): Parliament passed a law to retrofit CAM into domestic debt allowing creditors holding at least 75 percent of aggregate outstanding principal to make the restructuring legally binding for all holders. ### B. Public Sector Debt Structure and Profile After the Restructuring - At end FY2018/19, public sector debt was about 127 percent of GDP, down from about 158 percent of GDP in FY2017/18. - Public domestic debt decreased from about 129 to 93 percent of GDP due to the domestic debt restructuring. - Short term CG debt decreased from 42 to 6 percent of GDP due primarily to swaps into long-term CG debt of private commercial banks’ holdings and nominal haircuts on CBB-held stock. - Long term CG debt increased as a net effect of swaps of short-term debt, swaps of CG domestic arrears, lengthening of maturities, and haircuts on NIS-held stock. - CG domestic arrears decreased from 12 to 6 percent of GDP via swaps into long term CG debt, repayments and acquisition of arrears from SOEs. - SOE debt guaranteed by the CG decreased from 10 to 1 percent of GDP due to swaps into CG long term debt and lifting of CG guarantees on liabilities of profitable SOEs. - Public external debt increased from about 28 to 34 percent of GDP due to: - an increase in CG debt of about 3 percentage points of GDP from IDB and CDB budget support loans under the EFF-supported program; - an increase in arrears to commercial creditors by about 3 percentage points of GDP (including principal arrears); - a 1 percent of GDP disbursement from the IMF under the EFF-supported program (Table 3 referenced). - The domestic restructuring engineered a large reduction in debt service through swaps into long-term debt, long amortization grace periods, and low interest rates; together with large fiscal adjustment this keeps gross financing needs well below the 15 percent risk assessment threshold. ### C. Public Debt Sustainability Assessment Assumptions - Growth and Inflation: - Growth projected to recover from minus 0.5 to minus 0.1 percent in 2019 due to reduced policy uncertainty more than offsetting negative impact of fiscal consolidation. - Growth expected to recover slowly, returning to around 1 percent in 2020. - Average inflation projected to slow to 1.3 percent due to pass-through from higher taxes, then return to a long-run average of around 3.3 percent. - Fiscal multiplier used is 0.3 reflecting FAD methodology guidance. - Beyond FY2022/23, growth and inflation assumed to remain at 1.8 and 2.3 percent, respectively. - Staff used conservative growth and inflation projections to reduce downside risk. - Primary Balance: - Primary balance increases from 3.3 percent of GDP in FY2017/18 to 6 percent in FY2019/20 where it remains until FY2021/22. - Primary balance assumed to gradually decrease to 3.5 percent and stabilize at this level until the debt target is met. - Staff assesses probability of “adjustment fatigue” as negligible given strong electoral support enjoyed by the administration. - Arrears: - Domestic expenditure arrears are gradually repaid and fully extinguished by end-FY2022/23. - External arrears accumulated in FY2018/19 are capitalized in the restructured claims in FY2019/20. - External debt restructuring: - External commercial debt assumed to be restructured in FY2019/20 in a way that ensures the financing gap is covered and debt targets are met given the program parameters. ### D. Projections - Public debt-to-GDP ratio projected to fall to 90 percent by end-FY2024/25. - Over the projection period, contributors to debt dynamics: - Cumulative impact of the primary surplus of about -35 percentage points of GDP. - Automatic debt dynamics contribute about -0.5 percentage points of GDP. - Public debt projected to be below the intermediate anchor of 80 percent of GDP by end-FY2027/28 and below the long-term anchor of 60 percent of GDP by end-FY2033/34. - Drivers of sustainability: - Low gross financing needs reduced below the 15 percent of GDP threshold after the first projection year. - A primary balance projected to be much larger than the debt stabilizing primary balance over the full projection period. - Favorable automatic debt dynamics driven by reduced interest expenditure from the domestic debt restructuring. - Public short-term debt projected not to exceed 5 percent of GDP. Public debt management strategy targets a max 5 percent of GDP in short term debt and uses long-term domestic debt to fill gross financing needs as needed. By end FY2033/34 long-term debt and short-term debt projected to be about 55 and 5 percent of GDP, respectively. - External debt projected to decline to 15 percent of GDP by end-FY2033/34. By end FY2033/34, external and domestic debt projected to be about 15 and 45 percent of GDP, respectively. ### E. Stress Tests - Overall: - Debt level remains above the 70 percent of GDP risk assessment threshold, but gross financing needs (GFN) are below the 15 percent of GDP risk assessment threshold under all stress scenarios. - Scenario findings: - Debt remains above the 70 percent threshold but on a steep downward trajectory; it is significantly affected only by the combined and contingent liability shocks. - The domestic debt restructuring and planned fiscal adjustment help put debt on a steep downward trajectory; this trajectory is not meaningfully affected by real GDP, primary balance, or interest rate shocks. - The combined and contingent liability shocks would result in a debt-to-GDP ratio that is 20 percentage points higher than under the baseline by the end of the projection period. - Gross financing needs: - GFN remain below the 15 percent threshold under all stress test scenarios. - GFN are not meaningfully affected by real GDP, primary balance, interest rate, contingent liability, or combined shocks. - Debt profile vulnerabilities: - Significantly reduced after the domestic debt restructuring. - At end-March 2019, risks from market sentiment remain above the threshold of 600 basis points, as external debt continued not to be serviced. - External debt held by non-residents is above the threshold of 15 percent as the domestic debt restructuring increased the share of external debt. - Risks from external and domestic financing requirements are below the lower risk assessment benchmarks. - The domestic debt restructuring engineered a sharp reduction in short-term debt and therefore domestic financing needs. - Sensitivity and confidence intervals: - Stress tests produce narrow confidence intervals for both debt and GFN due to the nature of the domestic restructuring (drastically reducing debt service) and the fixed exchange rate. - Sensitivity of debt and GFN is higher only for the growth and primary balance shocks. *Source: Appendix I. Public Debt Sustainability Analysis (1brbea2019001).* ### 13. External debt is projected to decrease from 32.7 to about 20 percent of GDP by ### 13. External debt is projected to decrease from 32.7 to about 20 percent of GDP by ### Projection of external debt - External debt is projected to decrease from 32.7 to about 20 percent of GDP by 2024. - The projection is associated with a low risk profile. - External debt is not projected to be higher than 26 percent of GDP by 2024 under any of the stress tests considered (Figure 6). - Risks stemming from the external debt profile are reduced after the debt restructuring with smoother and lower debt service and gross financing needs. ### Assumptions underlying the projection - The public debt management strategy is assumed to: - limit expensive financing from the external capital market, and - rely on multilaterals and/or domestic sources of financing. - See Table 1 for the External Debt Sustainability Framework projections and underlying macroeconomic assumptions. ### Stress tests and scenario outcomes - Stress tests (including interest rate, current account, real depreciation, combined shocks, and other macro-fiscal shocks) were applied; under these, external debt remains at or below 26 percent of GDP by 2024. - Boundary and scenario presentations are shown in Figure 6 (Baseline, Historical, Combined shock, Real depreciation shock, Growth shock, Non-interest current account shock). - Individual shocks are described as permanent one-half standard deviation shocks; other specified shock treatments include permanent 1/4 standard deviation shocks and a one-time real depreciation of 30 percent in 2019 (Figure 6 notes). ### Key statistics and related projections (selected exact figures) - External debt (baseline): 32.7 percent of GDP (2018) → 27.2 (2019) → 26.9 (2020) → 25.3 (2021) → 23.4 (2022) → 21.5 (2023) → 19.7 (2024) (Table 1). - Change in external debt (selected years): 4.2 (2018), -5.5 (2019), -0.3 (2020), -1.6 (2021), -1.9 (2022), -1.8 (2023), -1.8 (2024) (Table 1). - Identified external debt-creating flows (total): 2.4 (2014), 0.3 (2015), 0.0 (2016), -0.2 (2017), -1.2 (2018), -0.4 (2019), -1.0 (2020), -1.4 (2021), -1.5 (2022), -1.6 (2023), -1.8 (2024) (Table 1). - Current account deficit, excluding interest payments (percent of GDP): 7.5 (2014), 4.4 (2015), 2.5 (2016), 2.1 (2017), 3.3 (2018), 2.1 (2019), 2.0 (2020), 1.8 (2021), 1.7 (2022), 1.7 (2023), 1.6 (2024) (Table 1). - External debt-to-exports ratio (in percent): 84.6 (2014), 82.4 (2015), 73.1 (2016), 67.9 (2017), 79.5 (2018), 64.8 (2019), 63.9 (2020), 60.4 (2021), 55.9 (2022), 51.7 (2023), 47.6 (2024) (Table 1). - Gross external financing need (in billions of US dollars): 0.5 (2014), 0.4 (2015), 0.3 (2016), 0.3 (2017), 0.3 (2018), 0.2 (2019), 0.2 (2020), 0.3 (2021), 0.3 (2022), 0.3 (2023), 0.3 (2024) (Table 1). - Gross external financing need (in percent of GDP): 10.5 (2014), 9.0 (2015), 6.5 (2016), 6.6 (2017), 5.4 (2018), 4.7 (2019), 4.2 (2020), 4.6 (2021), 5.0 (2022), 4.9 (2023), 4.7 (2024) (Table 1). ### Policy implications and debt management - The public debt management strategy—by limiting expensive external market financing and relying on multilaterals and/or domestic financing—is central to achieving the projected decline in external debt. - The completed domestic debt restructuring contributes to reduced risks via smoother and lower debt service and gross financing needs. - Continued adherence to the assumed financing strategy is implied as necessary to maintain the low risk profile and achieve the projected external debt path. *Source: IMF staff (Barbados Public Sector Debt Sustainability Analysis, Table 1; Figures 1–6).* ### 1. Barbados has embarked on a comprehensive Economic Recovery and Transformation ### 1brbea2019001 - 1. Barbados has embarked on a comprehensive Economic Recovery and Transformation ### Overview of BERT and objectives - BERT aims to restore fiscal and debt sustainability, address falling reserves, and increase growth. - Target: debt-to-GDP ratio of 60 percent by 2033. - Strategy: fiscal consolidation, policies to boost growth, reform of public finances, and debt restructuring. - Vision: make Barbados a green, climate resilient, fossil free; smart, technological; culturally rich and diverse; cohesive and sustainable with equal access to social justice and economic opportunity. ### IMF support and program status - IMF Executive Board approved a four-year extended arrangement under the Extended Fund Facility (EFF) on October 1, 2018. - By December 2018, international reserves had recovered to around US$500 million. - Domestic debt restructuring completed; terms agreed with creditors to put public debt on a clear downward trajectory. - All quantitative targets for end-December 2018 and for end-March 2019 were met. - Six out of ten structural benchmarks for this review were observed; other SBs completed with minor delay. - BERT Monitoring Committee (BERT MC) established as a sub-Committee of the Social Partnership; published first quarterly report in February 2019. ### Fiscal policy stance and FY2019/20 budget - Budget for FY2019/20 passed in March 2019. - Budget aims to increase the primary surplus to 6 percent of GDP in FY2019/20 while protecting vulnerable groups and increasing room for capital spending. - Budget based on conservative revenue assumptions and ambitious SOE reform to lower transfers to SOEs. - Readiness to take additional measures if necessary to reach the primary surplus target of 6 percent of GDP. ### Tax reform measures - Corporate Income Tax (CIT) reformed to unify treatment of domestic and international companies and comply with EU and OECD guidelines. - Profits up to BRB$1 million taxed at 5.5 percent. - Taxes above BRB$30 million taxed at 1 percent (with two intermediate brackets). - Highest rate increased from 0.25 percent to 1 percent. - Personal Income Tax (PIT) top rate reductions: - From 40 percent to 33.5 percent as of July 1, 2019. - To 28.5 percent as of January 1, 2020. - Compensatory revenue measures: broadening VAT base, higher land taxes, increase in tourism room rate levies, new gaming taxes and online taxes. - Comprehensive review of tax system targeted for completion by end-June 2019 (structural benchmark). ### Tax administration modernization - Measurable targets for Barbados Revenue Authority (BRA): - Improve 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 (structural benchmark for end-December 2019). - Implementation of Tax Administration Management Information System (TAMIS) to continue through 2019; online filing of personal income tax for 2018 via TAMIS in 2019. - Large Taxpayer Unit (LTU) established. - Refunds: unpaid tax refunds being repaid; going forward refunds to be paid within six months after the filing date. - By December 2019 citizens to be able to pay taxes online; by end of the fiscal year BRA will terminate the use of cheques to become a fully digitalized organization. ### Customs modernization and controls - New BCED organizational structure approved December 2018; ASYCUDA World to be completed by June 2019. - Actions and structural benchmark (completion by end-December 2019): - Deploy staff to the exemption monitoring unit and undertake at least eight 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 that gives defined benefits to program members by the end of 2018 and have at least eight companies participating by the end of 2019. - Undertake post release verification of entries and subject at least 3,500 entries to this control by the end of 2019. ### Fiscal rule and public financial management reforms - Government intends to seek Parliamentary approval of a fiscal rule to enhance fiscal transparency (structural benchmark for end-June 2020). - Key elements of the proposed fiscal rule: - Limit annual budgeted overall fiscal deficits to achieve reduction in public debt to no more than 60 percent of GDP by 2033. - Coverage to include all fiscal activities of the public sector, including SOEs and fiscal implications of PPPs. - Automatic correction mechanism triggered by substantial cumulative deviations from annual overall balance target. - Escape clause limited to major adverse shocks and triggered only with Parliamentary approval, with pre-defined events and measurable triggering conditions. - Consider institutional arrangements and legal options for strengthening sanction regime and transparency; require Minister of Finance to explain deviations in a mid-term budget review and outline corrective steps. - Public Financial Management Act (FMA) revised and adopted by Parliament; proclamation of the FMA act targeted as a new structural benchmark for end-July 2019. - PFM reform action plan highlights: - Strengthen strategic phase of budget formulation, update BERT annually, set budget ceilings consistent with BERT, move away from incremental budgeting, and seek IMF technical assistance. - Reform Budget Documentation to provide a comprehensive narrative and medium-term fiscal strategy; prepare mid-year budget review for Parliamentary discussion on a regular basis. - Strengthen GOB procurement process, establish Colleges of Negotiators, and strengthen capacity of the Public Accounts Committee. - Review legal and regulatory framework for PPPs and request IMF technical assistance by end-December 2019. ### Debt restructuring, debt management, and arrears resolution - Comprehensive debt restructuring announced June 1, 2018; agreement with overwhelming majority of domestic creditors announced October 15, 2018. - Restructuring impacted CBB capital; plans to recapitalize the CBB and address medium and long-term challenges for the NIS (structural benchmark for end-June 2020). - Negotiations with external private creditors ongoing. - Commitment to strengthen debt management and request IMF technical assistance to develop and implement a medium-term debt management strategy (MTDS) and publish MTDS and borrowing plan annually with the budget. - Domestic expenditure arrears: - Estimated at 12 percent of GDP as of March 2018. - Program to settle arrears at 85 cents on the dollar; aim to complete by end-July, 2019. - Commitment not to run new expenditure arrears; introduced legislation so that all borrowing by SOEs be done through central Government; program target for non-accumulation of new SOE arrears added. ### Public sector reform and SOE restructuring - Commitment to modernise and improve efficiency, quality and cost effectiveness of the public sector to create room for capital spending and reduce domestic arrears. - Comprehensive consultations undertaken including Social Partnership and online survey with almost 5000 participants answering 93 questions. - Agenda includes adjustment and rationalisation of SOEs and some Government Departments, retooling, retraining and empowering public sector workers. - Review of public sector labour laws underway with two studies in progress. *Source: 1brbea2019001 - 1. Barbados has embarked on a comprehensive Economic Recovery and Transformation* ### 18. Reform of State-Owned Enterprises is essential to secure medium-term fiscal viability. ### Reform of State-Owned Enterprises is essential to secure medium-term fiscal viability ### SOE restructuring framework and actions - Framework principles: retooling and empowering, retraining and enfranchising of Barbadians. - Comprehensive review conducted of all state-owned entities to identify potential for efficiency gains, cost recoveries, and enfranchisement through divestment of entities and/or activities. - SOEs listed in the TMU submitted standardized quarterly financial reports (structural benchmark for end-December 2018). - Consolidated report on SOE performance prepared; first report submitted to Parliament together with the Budget Estimates in early April 2019 (structural benchmark). - Government will review all tariffs and fees charged by SOEs by September 2019 (structural benchmark). - Price and levy adjustments already implemented: - increased bus fares; - adjusted water rates; - introduced a health levy; - introduced an airline & travel development fee; - introduced a garbage and sewage contribution levy. ### Financial Management and Audit (FMA) Act and SOE oversight - New FMA Act adopted by Parliament in January 2019. - Key FMA provisions: - confers greater autonomy to the Ministry of Finance to oversee SOEs, including ensuring compliance with the law for prior approval of all borrowings and other assumptions of liabilities; - establishes clear definitions for the classification of public entities, and their related roles and responsibilities; - establishes tighter and more precise reporting requirements for SOEs, and sanctions for noncompliance. ### Mitigating social impacts of SOE restructuring and pensions reform - Programme measures to mitigate adverse effects on the vulnerable from SOE restructuring: - models of worker enfranchisement; - preferential access to public procurement and agricultural lands owned by the State for those displaced; - enhanced severance packages. - Public sector pension reform is a stated priority to ensure long-run sustainability. - Actions and timing: - publish an actuarial report by December 2019 (new structural benchmark); - table in Parliament a revised public pension law by end-June 2020 (reset structural benchmark). - Options under consideration (for new employees): - make the public service scheme contributory; - increase the earliest age of eligibility; - reduce the rate of benefit accrual for each year of service. ### Monetary and financial sector policies to support the exchange peg - Exchange rate peg to the US dollar maintained since 1975 and reaffirmed as a critical platform for stability. - Authorities commit to fiscal and structural policies to support the peg and rebuild international reserves. - Amend Central Bank Law to enhance autonomy — structural benchmark by end-December 2019. - IMF technical assistance requested to review Central Bank law; IMF completed Safeguards Assessment of the Central Bank of Barbados; recommendations to be promptly implemented including publication of the CBB 2018 financial statements. - Financial sector liberalization measures: - commercial banks’ minimum requirement to hold Government securities reduced from 20 to 17.5 percent of domestic deposits in November 2018, with gradual further reductions as monetary conditions permit. - intention to remove the FX fee of 2 percent on all FX sales as reserve positions strengthen. - Gradual relaxation of exchange controls (targeted approach): - effective July 1st, all Barbadians allowed to open foreign currency denominated accounts; - allow foreign currency proceeds from the sale of assets to be repatriated in foreign currency or kept locally in a foreign currency account; - eliminate the surrender requirement of 70 percent of foreign exchange brought into Barbados by July 1, 2019; - gradually increase select foreign exchange limits such as the limit on personal travel facilities. ### Growth-enhancing reforms and human capital - Growth strategy pillars: - invest in a high skilled, knowledge-based economy (skills training and education); - better mobilize private domestic savings for local investment; - make Government an enabler of growth (supporting, facilitating, regulating, partnering with private sector); - promote labour productivity by diversifying into renewable energy, high-tech and software development alongside traditional services. - Knowledge-based initiatives and education: - 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; - reintroduced return to free tertiary education at vocational, technical and undergraduate levels; - plan to integrate the Barbados Community College, Samuel Jackson Polytechnic and the Erdiston Teacher Training College. - focus on achieving efficiency savings in post-secondary and tertiary institutions to reinvest in enhanced offerings. - Legal and institutional measures to enable growth: - establish a self-financing Commercial Court by mid-fiscal year 2019/20 to speed commercial adjudication and judgments; - introduce new legislation compliant with UNCITRAL for arbitration and alternate dispute resolution; - establish three temporary additional criminal courts to address backlog and ensure serious cases dealt with within six to nine months. - Gender and labour participation: - facilitate opening of day care facilities in industrial parks and key Government office buildings over the next two years; - establish paternity leave by end FY2019/20. - Digital government: - facilitate a wide range of services online (drivers’ licenses, clearing goods through Customs, applying for passports, planning and development applications, et cetera); - seven departments earmarked for digitization including the Immigrating Department, the Civil Registry and the Courts, the Police Department, the International Business division, the Customs and Excise Department, the Town and County Planning Office, and the Barbados Licensing Authority. - Business climate improvements: - priority to speed up licensing processes and make services deliverable to global standards; - Customs to facilitate trade, make cargo clearance quicker and easier, and establish a trusted trader program providing defined benefits to compliant traders without compromising revenue. ### Structural benchmarks and selected quantitative targets (high-level) - Structural benchmark timing and status highlights (selected items preserved verbatim): - SOEs listed in TMU to prepare and submit standardized quarterly financial reports — end-December 2018 — Met. - Parliament to adopt a revised Financial Management and Audit (FMA) Act conferring greater autonomy — end-December 2018 — Not met / Implemented with delay. - Government to submit a consolidated report on performance of SOEs, together with budget estimates — end-March 2019 — Not met / Implemented with delay. - Government to introduce a system for monitoring SOE arrears on an ongoing basis — end-March 2019 — Met. - Government to conduct a comprehensive review of all tariffs and fees charged by SOEs — end-September 2019 (reset). - Governor General to proclaim the Financial Management and Audit (FMA) Act — end-July 2019 (new). - Parliament to enact an amended Central Bank Law aimed at enhancing autonomy — end-December 2019 (reset). - The Barbados Revenue Authority (BRA) to adopt measurable performance targets to 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. - Government to conduct an actuarial review of the civil service pension system — end-December 2019 (new). - Government to table a revised public pension law — end-June 2020 (reset). - Government to table legislation for a fiscal rule — end-June 2020. - 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. *Source: IMF — MEFP and TMU material in "1brbea2019001 - Reform of State-Owned Enterprises is essential to secure medium-term fiscal viability."* ### 4. The CG primary balance is defined as total revenues and grants minus primary expenditure ### 1brbea2019001 - 4. The CG primary balance is defined as total revenues and grants minus primary expenditure ### Primary balance: definition and measurement - Paragraph 4: The CG primary balance is defined as total revenues and grants minus primary expenditure and covers non-interest Government activities as specified in the budget. - Measurement: - The CG primary balance will be measured as cumulative over the fiscal year. - It will be monitored from above the line. - Revenues: - Revenues are recorded when the funds are transferred to a Government revenue account. - Tax revenues are recorded as net of tax refunds. - Tax refunds are recorded when the funds for repayment are transferred to the BRA from the Barbados Treasury Department. - Revenues will also include grants. - Capital revenues will not include any revenues from non-financial asset sales proceeding from divestment operations. - Primary expenditure: - Central Government primary expenditure is recorded on a cash basis and includes recurrent expenditures and capital spending. - Primary expenditure also includes transfers to State-Owned Enterprises (SOEs). - All primary expenditures directly settled with bonds or any other form of non-cash liability will be treated as one-off adjustments and recorded as spending above-the-line, financed with debt issuance, and will therefore affect the primary balance. ### Adjustors and reporting for the primary balance - Paragraph 5: Adjustors: The primary balance target will be adjusted upward (downward) by the surplus (shortfall) in disbursements of grants relative to the baseline projection. - Paragraph 6: For the purpose of monitoring, data will be provided to the Fund on a monthly basis with a lag of no more than four weeks from the end-of-period (Section C, Table 2). ### Ceiling on Net Domestic Assets (NDA) of the Central Bank of Barbados - Paragraph 7: NDA definition: - Net Domestic Assets (NDA) of the CBB are defined in the CBB survey as the difference between the monetary base and the sum of the NIR (as defined below) and commercial banks’ and Part III companies’ foreign currency deposits at the CBB. - The monetary base includes currency in the hands of the non-bank public plus vault cash held in the banking system, statutory cash reserve requirements, and the current account of commercial banks and non-bank financial institutions (Part III companies) comprising of credit balances held at the Central Bank. - Paragraph 8: Monitoring frequency: - For the purpose of monitoring, the data will be reported on a monthly basis, with a lag of no more than two weeks from the end-of-period (Section B, Table 2). ### Floor on Net International Reserves (NIR) - Paragraph 9: NIR definition: - Net International Reserves (NIR) of the CBB are defined as the difference between reserve assets and reserve liabilities with a maturity of less than one year. - Paragraph 10: Reserve assets include: - The CBB’s holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the Fund. - Exclusions: sinking funds’ assets; any assets that are pledged, collateralized, or otherwise encumbered; claims on residents; claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, options et cetera); precious metals other than gold; assets in nonconvertible currencies; and illiquid assets. - Paragraph 11: Reserve liabilities: - (1) all foreign exchange liabilities to residents and nonresidents with maturity of less than one year, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, options, et cetera); - (2) all liabilities outstanding to the IMF. - Paragraph 12: Adjustors: - The NIR target will be adjusted upward (downward) by 75 percent of the amount of the surplus (shortfall) in program loan disbursements from multilateral institutions (i.e., Caribbean Development Bank (CDB), the Interamerican Development Bank (IDB), and the Development Bank of Latin America (CAF)) relative to the baseline projection. - Program loan disbursements are defined as external loan disbursements from official creditors that are usable for the financing of the CG. - The NIR target will be adjusted upward (downward) by the surplus (shortfall) in disbursements of budget support grants relative to the baseline projection. - Paragraph 13: Monitoring frequency: - For the purpose of monitoring, the data will be reported by the Central Bank on a daily basis, with a lag of no more than one week from the end-of-period (Section A, Table 2). ### Non-accumulation of CG external debt arrears (continuous) - Paragraph 14: Performance criterion: - The CG will not incur new arrears in the payments of its external debt obligations at any time during the program. - External arrears are defined as a delay in the payment of contractual obligations beyond the grace period set in the respective loan or debt contracts. - Arrears resulting from the nonpayment of debt service for which a clearance framework has been agreed or for which the Government or the institution with Government guaranteed debt is pursuing a debt restructuring are excluded from this definition. - The performance criterion will be applied on a continuous basis under the program. - Paragraph 15: Monitoring: - For the purpose of monitoring, data on external arrears by creditors will be reported immediately. ### Ceiling on CG transfers and grants to public institutions - Paragraph 16: Coverage: - CG Transfers and Grants to Public Institutions will include cash transfers and grants to entities listed in paragraph 3 above. - Paragraph 17: Monitoring frequency: - For the purpose of monitoring, the data will be measured as cumulative over the fiscal year and it will be reported on a monthly basis, with a lag of no more than four weeks from the end-of-period (Section C, Table 2). ### Ceiling on the stock of public debt - Paragraph 18: Public debt definition: - Public debt is defined as domestic and external CG debt, CG guaranteed debt, and domestic CG expenditure arrears. - Interest and penalties arrears resulting from non-payment of debt service on external commercial debt subject to debt restructuring are excluded from the definition of public debt. - For program purposes, the stock of CG and CG guaranteed debt is measured under the disbursement basis excluding valuation effects. - Program FX rates defined in Table 1 will be used to value debt in FX. - Paragraph 19: Adjustors: - The ceiling on stock of public debt will be adjusted upwards by the full amount of the surplus in disbursements from multilateral institutions (i.e., Caribbean Development Bank (CDB), the Interamerican Development Bank (IDB), and the Development Bank of Latin America (CAF) relative to the baseline projection. - The ceiling on stock of public debt will be adjusted downward by the amount of nominal debt forgiveness in the case of debt restructuring. - Paragraph 20: Monitoring frequency: - For the purpose of monitoring, the CG debt and CG guaranteed debt data by issuer, creditor, maturity, and currency will be reported to the Fund on a quarterly basis, with a lag of no more than four weeks from the end-of-period (Section D, Table 2). - Data on external and domestic arrears will be reported to the Fund as set forth elsewhere in this TMU. ### Indicative targets: domestic CG expenditure arrears - Paragraph 21: Definition of stock of domestic expenditure arrears of the CG: - (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. - Paragraph 22: Monitoring frequency: - For the purpose of monitoring, the data on CG expenditure arrears and its components by creditors will be measured as cumulative over the fiscal year and it will be reported by the EPOC on a monthly 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 - Paragraph 23: Coverage (applies only to expenditures incurred by the CG on the following plans and programs, excluding operating expenditure): - 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. - Paragraph 24: Monitoring frequency: - For the purpose of monitoring, the data will be measured as cumulative over the fiscal year and it will be reported on a quarterly basis, with a lag of no more than four weeks from the end-of-period (Section D, Table 2). ### Ceiling on the stock of public institutions expenditure arrears - Paragraph 25: Definition of stock of public institutions expenditure arrears: - (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) wages and pensions contributions to the NIS for which payment has been pending for longer than 60 days; - (c) arrears on Tax obligations defined as obligations on taxes in accordance with tax legislation. - Paragraph 26: Coverage: - The list of public institutions covered by this indicative target is listed in paragraph 3 excluding University of West Indies (UWI). - Paragraph 27: Monitoring frequency: - For the purpose of monitoring, the data on SOE expenditure arrears and its components by creditors will be measured as cumulative over the fiscal year and it will be reported on a monthly basis, with a lag of no more than four weeks from the end-of-period. (Section D, Table 2). *Source: IMF staff text from the provided TMU extract.* ### 28. Performance under the program will be monitored from data supplied to the IMF as ### Performance under the program will be monitored from data supplied to the IMF as ### Data reporting requirements and institutional responsibilities - Financial Sector and External sector data to be provided by the CBB; Real and Fiscal sector data by the MOF, in consultation with relevant agencies unless otherwise noted. - Authorities will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement under the EFF. ### Reporting frequency, lags, and primary items (daily to monthly) - 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. - 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 and Fiscal Sector): - RPI index, its components, and weights. - CG budgetary accounts. - Net Domestic Financing and its components. - Net External Financing and its components. - Grants and transfers to public institutions listed in paragraph 3 as defined in Section I. - Stock of CG external arrears (interest, principal, and penalty amounts separately) by creditor and its components as defined in Section I. This will be reported immediately. - 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). - Stock of CG expenditure arrears by creditor and its components as defined in Section II. - Stock of expenditure arrears of public institutions listed in paragraph 3 by creditor and its components as defined in Section II. - Reporting on a monthly basis, with a lag of no more than four weeks of the end-of-period (External Sector): - BOP trade balance data. - CBB’s Cashflow Table deriving GIR and NIR. ### Additional monthly and quarterly financial reporting - Reporting on a monthly basis, with a lag of no more than six weeks of the end-of-period (Financial Sector): - ODC survey: 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: consolidation of CBB and ODC surveys showing gross items for CBB NFA, ODC NFA, ODC NCCG, COSE, OIN, and BM. - Reporting on a quarterly basis, with a lag of no more than four weeks of the end-of-period (Real Sector): - Nominal and real GDP. - Tourism and other real sector high frequency indicators. - Reporting on a quarterly basis, with a lag of no more than four weeks of the end-of-period (Fiscal Sector): - Social expenditure and its components as defined in Section II. - Financial position of public institutions listed in paragraph 3 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 Tax Refunds and its components as defined in Section II. - Reporting on a quarterly basis, with a lag of no more than four weeks of the end-of-period (Financial Sector): - CBB Balance sheet. - Reporting on a quarterly basis, with a lag of no more than four weeks of the end-of-period (External Sector): - Balance of Payments accounts. ### Quarterly financial stability indicators (quarterly, within six weeks) - The following indicators by bank and by sector: - Regulatory capital - Regulatory Tier 1 capital - Risk-weighted assets - Total assets - Total liabilities - Nonperforming loans in BRB$ 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 - 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 ### Annual reporting requirements - 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. - 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. - Reporting on an annual basis, within 5 months of the end-of-period: - Audited financial statements of Commercial Banks. ### Program performance, fiscal outcomes, and structural actions (June 24, 2019 statement highlights) - Program performance (first six months of the four-year EFF): - All quantitative performance criteria and indicative targets were met. - Six structural benchmarks were met on time; four benchmarks experienced short delays. - Authorities exceeded the social spending floor while meeting the primary balance target. - Targets on net international reserves and net domestic assets of the CBB were met by wide margins. - Fiscal outcomes and debt: - Primary surplus of 3.5 percent in 2018-19 driven by VAT and CIT overperformance and new fees/taxes. - 2019-20 Budget targets a primary balance of 6 percent. - October 2018 debt restructuring covered approximately 90 percent of the debt to be restructured and helped drive public sector debt to 127 percent of GDP in 2018-19, down from 158 percent in 2017-18. - Authorities aim to meet a long-term program anchor of 60 percent debt-to-GDP by 2033-34. - Public sector and SOE reforms: - SOEs have begun submitting quarterly financial reports; consolidated report on SOE performance provided to Parliament. - A system established to monitor SOE arrears on an ongoing basis. - New Public Financial Management Act: requires budget to be tabled prior to the beginning of the fiscal year, establishes an Internal Audit Office, and increases ministerial oversight of SOE borrowing. - Up to ten (10) years of unaudited financial statements for some SOEs are being addressed. - Authorities will introduce an explicit fiscal rule to capture actual and contingent liabilities of the central government and maintain a fiscal track to meet the program debt anchor. - Revenue measures and tax administration: - VAT rate on accommodation (tourism) to be increased from 7.5 percent to 10 percent in 2020; VAT base broadened by moving items from zero-rated to exempt (which reduces VAT refunds). - Legislation passed to improve VAT collection from e-commerce; new tax on gambling winnings introduced. - Property tax rules updated. - Barbados compliant with BEPS Action 5 as of January 2019; EU removed Barbados from its list of non-cooperative tax jurisdictions in May 2019. - Barbados Revenue Authority to adopt measurable targets to improve on-time filing for CIT and VAT; legacy systems to be replaced; Large Taxpayer Unit established. - Reforms to Barbados Customs and Excise Department underway. - Planned establishment of Major Organized Crimes and Anti-Corruption Agency. - Monetary policy and reserves: - Fixed exchange rate maintained as anchor for macroeconomic stability. - At end-March 2019, international reserves stood at three months of import coverage, up from five-to-six weeks of coverage in May 2018. - Improvement in reserves driven by loans from international financial institutions and a narrowing current account deficit supported by an improved trade balance. - Relaxation of exchange controls being pursued cautiously (e.g., allowing foreign currency accounts, repatriation or local retention of foreign currency proceeds from asset sales). - Two percent fee on foreign currency transactions remains subject to monitoring. - Actions taken to limit CBB financing of the central government by reducing government overdraft limits and limiting CBB’s right to hold unlimited primary issues. - Amended Central Bank Law planned to enhance CBB autonomy, mandate, and decision-making structures. - Financial sector stability and innovation: - Domestic debt restructuring impacted capital levels and profitability but did not jeopardize financial stability due to sound prudential oversight and stress testing. - Plans to recapitalize the CBB and address National Insurance Scheme challenges. - Regulatory Sandbox established to test fintech products and services. - Structural reforms and competitiveness: - Modernizing the Town and Country Planning Act. - Streamlining registration of new businesses and strengthening commercial records maintenance. - Developing plans to offer a wide range of government services online. - Infrastructure investments: comprehensive road repair program and improvements to the international airport. - Authorities estimate around USD $1 billion in investments planned over the next three years (nearly 20 percent of GDP) are well advanced in their planning stage. - Social protection, labor, and resilience: - Protection of investments in skills, education, and poverty reduction despite fiscal consolidation. - Largest National Training Initiative planned to tackle youth unemployment. - Household Mitigation Unit established to resettle and retrain displaced public sector workers. - Natural disaster clauses included in restructured debt instruments to allow capitalization of interest and deferral of scheduled amortization in the event of a natural disaster. - Commitment to make Barbados a 100 percent renewable and carbon neutral island by 2030 by eliminating fossil fuels for domestic consumption; National Energy Policy revised to support this goal. *Statement by Louise Levonian, Executive Director for Barbados and Jeremy Weil, Senior Advisor to the Executive Director, June 24, 2019* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1brbea2019001.pdf_