## _cr04154 ## Source details **Canonical URL:** [_cr04154](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04154.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04154.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04154.pdf.json) --- ### Executive Summary — Recent developments - Real GDP grew by an estimated 2 percent in 2003, led by a recovery in the tourism sector. - Central government deficit remained high, at 6½ percent of GDP in FY 2003/04. - Government debt stands at 75 percent of GDP (marginal decline from 76 percent in March 2003). - External current account deficit widened in 2003 to just below 8 percent of GDP. - Merchandise exports declined for the third consecutive year; imports recovered from their low recession level. - Banking system: ratio of nonperforming loans to total loans increased to about 9 percent; profitability indicators weakened somewhat. - Broad money (M2) growth slowed to 6.5 percent in 2003 (from 10.4 percent in 2002). - Treasury bill rate declined from 1.5 percent in 2002 to 0.6 percent by end-2003; average bank lending rates declined only slightly, to about 10 percent. - Net international reserves: US$751 million (six months of imports of goods and services) at end-2003. - Barbadian dollar depreciated by nearly 14 percent in real effective terms from April 2002 to December 2003. - More than half of the FY 2003/04 government deficit financed through privatization proceeds; remainder financed mainly by drawdown of central bank deposits and borrowing from the National Insurance Scheme (NIS). ### Growth prospects - Near-term: real GDP projected to grow by about 3 percent in 2004. - Medium-term potential: growth could be in the range of 3–4 percent reflecting infrastructure completion, expansion of tourism facilities, and growth in international business and financial services. - Mission’s projection: medium-term growth assumptions of 2–2½ percent beyond 2004 (conservative, external-demand-driven). ### Fiscal policy, consolidation scenarios, and public debt - Historical fiscal stance: - Countercyclical expansion raised central government deficit from 2.3 percent of GDP in FY 2000/01 to 9.5 percent of GDP in FY 2002/03; extra-budgetary spending rose to about 4 percent of GDP. - Central government debt-to-GDP rose from 63 percent in March 2001 to 76 percent in March 2003; total public sector debt (including government-guaranteed public enterprise debt) rose from 73 percent to 84 percent of GDP over same period. - Authorities’ intent: plan to lower central government deficit to around 2.5 percent of GDP as soon as possible; prefer gradual adjustment and rely mainly on expenditure containment. - Staff baseline projections: - Narrowing of government deficit to 4½ percent of GDP in FY 2004/05, with further reductions subsequently. - Extra-budgetary spending projected to decline by about 50 percent (to around 2 percent of GDP) in FY 2004/05, and cease by FY 2006/07. - Government debt would decline by 7 percentage points to about 69 percent of GDP by end-2008. - Overall public sector debt projected to decline only marginally from 83½ percent of GDP in FY 2003/04 to 81½ percent of GDP in FY 2008/09, reflecting public enterprise deficits assumed at about 1½ percent of GDP in FY 2004/05 and thereafter. - Mission’s strengthened adjustment (staff-favored) scenario: - Eliminate central government deficit by FY 2006/07. - Reduce government debt ratio to below 60 percent of GDP by 2008/09, and to about 50 percent of GDP two years later if balance maintained. - Policy mix: (i) revenue measures amounting to 0.8 percent of GDP in FY 2004/05; (ii) limit growth of non-wage primary current expenditure to the rate of inflation; (iii) reduce government transfers by a cumulative 1 percentage point of GDP over next five years (with increase in tariffs of public utilities); (iv) allocate one-half of remaining and projected privatization funds to debt retirement. - Suggested revenue measures: broaden VAT base (reduce exemptions), increase VAT rate if necessary, and possibly increase excises (per FAD recommendations). - Authorities’ counterarguments: favor more gradual adjustment; view a deficit in range of 1–2 percent of GDP as sustainable; emphasize debt largely domestic and local-currency denominated. ### Monetary policy, exchange rate, and liquidity management - Fixed exchange rate regime: staff and authorities concur it remains appropriate provided supported by sound policies and structural reforms. - Mission concerns: - Rapid increase in monetary base and buildup of bank liquidity due to injections of high-powered money from foreign loans and privatization proceeds. - Excess reserves held unremunerated are creating potential for excessive credit expansion. - Central bank floor on interest rate on savings/time deposits could impede market adjustment. - Staff recommendations to central bank: - Reduce NDA growth. - Move towards indirect, market-based monetary policy instruments. - Liberalize deposit rates; phase out administered minimum interest rate on savings and time deposits. - Authorities’ response: - Intend gradual move toward indirect instruments; preparing technical infrastructure for open market operations. - Minimum deposit rate reduced from 3 percent to 2.5 percent in December 2002 and to 2.25 percent effective March 15, 2004. - Discontinued setting maximum indicative lending rate in December 2002. - Attribute excess reserves mainly to conservative lending policies and oligopolistic banking structure. - Second-tier reserves arrangement: allows private sector investment abroad with undertaking to provide equivalent foreign exchange on demand to central bank; as of end-2003, second-tier reserves amounted to about US$50 million (about 7 percent of central bank’s international reserves). ### Structural reforms and competitiveness - Progress and measures: - Budget process improvements: accrual accounting and multi-year budgeting with CARTAC assistance. - NIS pension reforms (January 2003): change in accrual rate (cap 60 percent of final average earnings); phased retirement age increase from 65 to 67 over 2006–18; phased contribution rate increase over four years by 4 percentage points. - Transparency: expanded Public Accounts Committee authority. - Financial sector: implementation of December 2002 FSAP recommendations underway; further liberalization planned. - Supply-side: revocation of telecom monopoly; corporatization law for Barbados Port Authority; privatization of Barbados National Bank (BNB); steps to restructure and diversify sugar sector. - Tax and incentive measures: multi-year phased lowering of personal and corporate income taxes (example: corporation tax rate being reduced from 45 percent to 25 percent over a five year period as stated by authorities). - Future focus: budget and tax policy, government pensions, financial sector reform, measures to enhance supply response, and trade liberalization under CARICOM, WTO, and envisaged FTAA. ### Debt sustainability analysis and stress tests - Baseline and stress-test summary: - Public debt ratio could rise markedly under policy slippages or adverse shocks; some stress tests push debt ratio above 90 percent of GDP. - Staff sees no imminent debt crisis due to strong external position, limited regional financial linkages, and gross financing requirements projected to be almost fully met domestically amid abundant banking liquidity. - External debt-to-GDP ratio declines or remains roughly stable for all shocks except those to exchange rate and current account. - Enhanced adjustment scenario effects: - Smaller external current account deficit (slower import growth). - Somewhat stronger private capital inflows (mainly FDI-related). - Projected net international reserves: rise from US$750 million in 2003 to about US$1.2 billion in 2008. - Government debt: lower government debt ratio (less than 60 percent of GDP); higher international reserves reduce external vulnerability. - Stress-test scenario series (public debt ratio examples): - Scenario 1 (historical averages 2004/05–2007/08): 84.1, 83.7, 83.3, 83.0, 82.6, 82.2 - Scenario 2 (real interest rate = historical average + two standard deviations 2004/05–2005/06): 84.1, 86.4, 88.6, 88.2, 87.7, 87.0 - Scenario 3 (real GDP growth = historical average − two standard deviations 2004/05–2005/06): 84.1, 88.9, 93.8, 93.2, 92.5, 91.7 - Scenario 6 (one-time 30 percent real depreciation in 2004/05): 84.1, 96.1, 96.0, 95.7, 95.3, 94.7 - Scenario 8 (revenue-to-GDP at historical average − two standard deviations 2004/05–2005/06): debt-to-GDP series: 84.1, 88.9, 93.6, 93.3, 92.8, 92.2; debt-to-revenue series (8a): 249.7, 308.3, 324.9, 278.9, 280.9, 282.5 ### Social security, pensions, and fiscal numerical outcomes - NIS reforms (January 2003) postponed exhaustion of NIS reserves from 2030 to 2060 via: - increase in contribution rate by 1 percent per year for four years, bringing rate to 17½ percent (shared equally between employers and employees); - cap on accrual of pension rights at 60 percent of final average earnings; - calculation of pension benefits based on best five years rather than best three; - increase in retirement age from 65 to 67 years, with six-month increases every four years during 2006–18. - NIS Reserve Ratio (total value of retirement funds to annual expenditures): - Before reforms (2000, 2010, 2020, 2030): 5.0 5.9 3.9 0.4 - After reforms (2000, 2010, 2020, 2030): 5.0 7.1 7.7 6.0 - Civil service pensions: - Current government expenditure: around 2 percent of GDP. - Projected peak: almost 3.5 percent of GDP in 2015, then decline to around 2.5 percent of GDP by 2050. - Proposed measures: increase retirement age, change calculation from best 3 years to best 5 years, transition from defined-benefit to defined-contribution plan. ### Data, statistical issues, and recommended improvements - Strengths: money and banking, budgetary operations, and current account data are comprehensive and timely. - Weaknesses and gaps: - Data on public enterprises operations and capital account weak or incomplete. - Timeliness of national income accounts needs improvement; latest Balance of Payments yearbook data correspond to 2001. - FDI coverage incomplete; FDI surveys deficient in distinguishing transactions and positions. - Some inconsistency in residency concept in monetary statistics; certain non-resident loans and deposits classified as domestic aggregates. - No quarterly GDP estimates; CPI rebased to July 2001 = 100. - Publication gaps: no data reported for GFS Yearbook or IFS. - Improvements noted: lag in submitting monetary data to STA decreased markedly; authorities participate in the General Data Dissemination System. ### Key selected indicators and macro outlook (preserved values) - Real GDP: 1999: 0.5; 2000: 2.4; 2001: -3.4; 2002: -0.4; 2003: 2.1. - Inflation (CPI 12-month): 1999: 1.6; 2000: 2.4; 2001: 2.8; 2002: 0.2; 2003: 1.5. - Tourist arrivals (annual %): 1999: 0.4; 2000: 5.8; 2001: -6.9; 2002: -1.8; 2003: 6.7. - Unemployment (percent): 1999: 10.4; 2000: 9.4; 2001: 9.9; 2002: 10.3; 2003: 10.7. - Central government deficit (percent of GDP, fiscal years April–March): FY 2000/01: 2.3; FY 2002/03: 9.5 (including extra-budgetary spending ≈ 4 percent of GDP); FY 2003/04: 6.5 (including extra-budgetary spending close to 4 percent of GDP). - External current account balance (percent of GDP): 1999: -6.0; 2000: -5.6; 2001: -3.6; 2002: -6.6; 2003: -7.8. - Net international reserves (US$ millions): 1999: 306; 2000: 484; 2001: 707; 2002: 683; 2003: 751. - Public external debt (percent of GDP): 1999: 18.5; 2000: 22.5; 2001: 28.8; 2002: 27.0; 2003: 26.1. - Broad money growth: 1999: 11.6; 2000: 7.9; 2001: 5.6; 2002: 10.4; 2003: 6.5. ### Policy recommendations (summarized) - Fiscal: - Front-load reduction in the central government deficit to place government debt on a firmly declining path. - Intensify revenue effort (broaden VAT base by reducing exemptions; increase VAT rate and excises if necessary). - Allocate privatization proceeds primarily to debt retirement rather than financing extra-budgetary spending. - Cap transfers to public entities and reduce capital expenditure or shift to PPPs where appropriate. - Monetary and financial: - Move toward market-based monetary control and indirect instruments; phase out administered minimum deposit rates. - Liberalize deposit rates; prepare for open market operations. - Implement remaining FSAP recommendations and sequence capital account liberalization with financial sector strengthening. - Structural: - Deepen reforms in budget process, tax policy, pension systems, and measures to enhance supply responsiveness. - Continue measures to increase competition (telecommunications, port corporatization) and privatization. - Support labor market flexibility via protocols and productivity-based wage policies. - Data and statistics: - Improve timeliness and coverage of national accounts, public enterprise operations, capital account, and FDI data. *Source: Executive Summary and selected sections of IMF staff report contained in _cr04154* ### Executive Summary ...................................................................................................... ### Executive Summary ### Recent developments - Real GDP grew by an estimated 2 percent in 2003, led by a recovery in the tourism sector. - The central government deficit remained high, at 6½ percent of GDP in FY 2003/04. - Government debt stands at 75 percent of GDP (marginal decline from 76 percent in March 2003). - The external current account deficit widened in 2003 to just below 8 percent of GDP. - Merchandise exports declined for the third consecutive year; imports recovered from their low recession level. - The banking system remains generally sound, although the ratio of nonperforming loans to total loans increased to about 9 percent and profitability indicators weakened somewhat. - Broad money (M2) growth slowed to 6.5 percent in 2003 (from 10.4 percent in 2002). - Treasury bill rate declined from 1.5 percent in 2002 to 0.6 percent by end-2003; average bank lending rates declined only slightly, to about 10 percent. - Net international reserves stood at US$751 million (six months of imports of goods and services) at end-2003. - The Barbadian dollar depreciated by nearly 14 percent in real effective terms from April 2002 to December 2003. - More than half of the FY 2003/04 government deficit was financed through privatization proceeds (sale of government shares in a large commercial bank); the remainder was financed mainly by drawdown of deposits at the central bank and borrowing from the National Insurance Scheme (NIS). ### Background and recent macro developments - Barbados experienced strong performance in the 1990s: during 1993–2000, per capita real GDP growth averaged 2.5 percent per year and annual inflation was 2 percent or less. - The economy entered a recession in 2001: real GDP dropped by a cumulative 4 percent in 2001–02, reflecting declines in tourism, manufacturing, and agriculture. - The government adopted a countercyclical fiscal stance in late 2001, raising the central government deficit from 2.3 percent of GDP in FY 2000/01 to 9.5 percent of GDP in FY 2002/03; extra-budgetary spending rose sharply to about 4 percent of GDP. - Central government debt-to-GDP rose from 63 percent in March 2001 to 76 percent in March 2003; total public sector debt (including government-guaranteed debt of public enterprises) increased from 73 percent of GDP to 84 percent of GDP over the same period. - Standard and Poor’s revised Barbados’ foreign and domestic currency outlook from stable to negative and adjusted sovereign credit ratings in August 2003. ### Structural reforms (progress and measures) - Budget process: with CARTAC assistance, the government is setting up accrual accounting and multi-year budgeting to strengthen fiscal policy formulation and monitoring. - Pensions: January 2003 measures to improve NIS sustainability include: - change in rate of accrual of pension rights to a maximum 60 percent of final average earnings; - phased increase in retirement age over 2006–18, from 65 to 67 years; - phased increase in the contribution rate over four years, by 4 percentage points. - Transparency and accountability: Public Accounts Committee membership expanded and given authority to review financial statements of all companies with majority state ownership. - Financial sector reform: progress in implementing recommendations of the December 2002 FSAP report. - Supply-side enhancements: - Revocation of existing monopoly license in telecommunications to foster competition and lower mobile phone rates. - Corporatization law passed for the Barbados Port Authority to increase port operational efficiency. - Central bank actions to ease liquidity pressures: - Government securities ratio reduced to 16 percent in November 2002, lowered again to 12 percent in February 2004. - Minimum administered interest rate on time and savings deposits reduced from 3 percent to 2.5 percent in December 2002, and to 2.25 percent effective March 15, 2004. - Discontinued setting a maximum indicative lending rate on selected loans in December 2002. ### Policy discussions and staff recommendations - Growth outlook: - Real GDP projected to grow by about 3 percent in 2004. - Over the medium term, achieving higher growth than the currently projected 2–2½ percent is necessary, contingent on prudent macroeconomic policies and supply-enhancing reforms. - Fiscal consolidation and debt sustainability: - Current medium-term fiscal outlook implies continued high government debt ratios and large, albeit declining, external current account deficits—posing risks to the fixed exchange rate anchor, especially if private capital inflows decline. - Staff recommended a front-loaded reduction in the central government deficit to place government debt on a firmly declining path. - Authorities agreed on the need for fiscal adjustment but preferred a more gradual adjustment path. - Exchange rate and monetary policy: - Staff concurred with authorities that the fixed exchange rate regime remains appropriate for Barbados, provided it is supported by appropriate macroeconomic, financial, and structural policies. - Staff urged strengthened measures to assure debt sustainability and deepened structural reforms. - Given buildup of liquidity and risks to excessive credit expansion, the mission suggested moving toward more market-based monetary policy tools, liberalizing deposit rates, and the central bank liberalizing deposit rates and moving towards indirect monetary policy instruments. - Structural policy agenda: - Authorities intend to press ahead with reforms focusing on the budget, tax policy, government pensions, and measures to enhance supply response. - Mission encouraged additional reforms to strengthen medium-term growth prospects. *Source: Executive Summary of IMF staff report _cr04154* ### 13. The authorities agreed with the staff on the importance of enhancing ### _cr04154 - 13. The authorities agreed with the staff on the importance of enhancing ### Growth Prospects - Near-term outlook: real GDP in 2004 is projected to grow by about 3 percent, assuming continued recovery of the global economy and tourism. - Medium-term potential: growth could be in the range of 3–4 percent reflecting completion of infrastructure projects, expansion of tourism facilities, and growth in international business and financial services. - Mission’s projection: medium-term growth assumptions of 2–2½ percent for the period beyond 2004, reflecting conservative external-demand-driven outlook and in line with the authorities’ approach. ### Fiscal Policy - Concern: central government deficit remains high despite some adjustment in FY 2003/04; countercyclical fiscal expansion in 2001/02 only partially reversed; substantial extra-budgetary spending continuing (utilizing privatization proceeds). - Mission recommendation: substantial further reduction in the central government deficit to reduce government debt ratio to below 60 percent of GDP over the next five years; use some privatization proceeds to retire government debt. - Authorities’ intent: plan to lower the central government deficit to around 2.5 percent of GDP as soon as possible; noted budget deficit already close to this level and extra-budgetary spending expected to fall sharply as large infrastructure projects reach completion. - Baseline scenario (staff projections): - Narrowing of government deficit to 4½ percent of GDP in FY 2004/05, with further reductions in subsequent years. - Extra-budgetary spending projected to decline by about 50 percent (to around 2 percent of GDP) in FY 2004/05, and would cease by FY 2006/07. - Government debt would decline by 7 percentage points to about 69 percent of GDP by end-2008. - Staff’s baseline assumes overall public sector debt would decline only marginally, from 83½ percent of GDP in FY 2003/04 to 81½ percent of GDP in FY 2008/09, because the overall deficit of public enterprises is assumed to rise to about 1½ percent of GDP in FY 2004/05 and stay at that level. - Authorities’ fiscal stance: medium-term deficit reduction plans predicated solely on expenditure containment; no revenue-raising measures contemplated; revenue-to-GDP ratio expected to remain broadly stable next two years and probably decline thereafter due to import tariff reductions in the context of the FTAA. - Currently, import duties amount to almost 3 percent of GDP; staff projections assume a decline of import duties by about ½ percent of GDP a year from 2006. - Expenditure measures: cap about one-third of transfers to public entities at FY 2003/04 level; reduce capital expenditure and transfer some infrastructure investment responsibility to public enterprises and private joint ventures. - Mission’s strengthened adjustment scenario (favored by staff): - Eliminate central government deficit by FY 2006/07. - Reduce government debt ratio to below 60 percent of GDP by 2008/09, and to about 50 percent of GDP two years later if balance maintained. - Policy mix to achieve this: (i) revenue measures amounting to 0.8 percent of GDP in FY 2004/05; (ii) limit growth of non-wage primary current expenditure to the rate of inflation; (iii) reduce government transfers by a cumulative 1 percentage point of GDP over next five years, in tandem with an increase in tariffs of public utilities; (iv) allocate one-half of remaining and projected privatization funds to debt retirement. - Suggested revenue measures: broaden VAT base by reducing number of exempted items, increase VAT rate if necessary, and possibly increase excises in line with FAD recommendations. - Authorities’ counterargument: a more gradual fiscal adjustment path appropriate; view deficit in range of 1–2 percent of GDP as sustainable based on experience since early 1990s; concern that forcing fiscal balance would undermine social pact, jeopardize recovery, and raise unemployment; emphasized that government debt is mainly held by residents and in local currency, mitigating vulnerability. ### Monetary and Exchange Rate Policy - Agreement: continued appropriateness of the fixed exchange rate regime (long-standing peg to the U.S. dollar) to anchor price stability and investor confidence. - Competitiveness assessment: weak competitiveness caused decline in traditional sectors (agriculture, manufacturing); decline seen as structural and requiring structural policies rather than exchange rate action. - Mission concerns: - High demands on policy framework under the peg; adverse fiscal expansion effect on external position partly mitigated by capital inflows, which may not persist. - Rapid increase in monetary base over last two years and associated buildup of bank liquidity due to injections of high-powered money from foreign loans and privatization proceeds being sterilized as unremunerated excess reserves. - Potential for excessive credit expansion and adverse implications for banks’ profitability given central bank’s floor on interest rate on savings/time deposits. - Mission recommendations for central bank: - Reduce NDA growth. - Move towards indirect monetary policy instruments to better manage liquidity. - Liberalize deposit rates. - Authorities’ response: - Intend gradual move toward more indirect instruments; do not think deposit rate floor contributed to high lending rates or adversely affected bank profitability. - Noted bank soundness and profitability indicators remained strong; minimum deposit rate substantially reduced over last three years. - Attributed increase in excess reserves mainly to conservative lending policies of commercial banks and oligopolistic banking structure. - Preparing technical infrastructure for open market operations, envisaged in context of gradual capital account opening. - Second-tier reserves arrangement: allows private sector entities to invest abroad with undertaking to provide equivalent foreign exchange on demand to central bank. ### Structural Policies - Authorities’ view: structural policies are key to enhancing external competitiveness; exchange rate not the issue for competitiveness at this point. - Recent reforms welcomed by mission: - Reform of the NIS. - New regulatory framework for private pension schemes. - Corporatization of the port authority. - Privatization of BNB. - Increasing competition in telecommunications sector. - Steps to gradually restructure and diversify the sugar sector (including closure of one factory and promotion of ethanol-based fuels, drinks, building materials, animal feed, and waxes). - Multi-year phased lowering of personal and corporate income taxes and generally moderate wage increases broadly in line with productivity growth. - Authorities’ reform focus ahead: budget, tax policy, government pensions, financial sector, and measures to enhance supply response of the economy. - Fiscal reforms: - Begin multi-year budgeting on an accrual basis during the coming year. - Aim to harmonize domestic and offshore tax regimes with technical assistance from the Fiscal Affairs Department. - Considering options to reduce cost of unfunded pension plan for government employees: currently amounts to 2 percent of GDP and projected to reach 3½ percent of GDP by 2015; options include reducing benefits and fully funding the pension plan; government requested technical assistance from the IDB. - Financial sector reform: - Commitment to further liberalization and implementation of FSAP recommendations. - Further steps to strengthen central bank oversight and enhance supervision of insurance industry. - Government expected to divest its 51 percent share in the state-owned Insurance Corporation of Barbados. - Supply side reforms: - Progress expected in telecommunications: new licenses for fixed-line operators to be issued on competitive basis in 2004. - Infrastructure: corporatization of the airport authority expected in FY 2004/05. - Regional integration and capital account liberalization: - Commitment to further regional integration and trade liberalization in CARICOM, WTO, and envisaged FTAA; intend to gradually liberalize capital account. - Capital flows liberalized for OECS except outward investment in government securities; for other CARICOM members, capital outflows restricted to private equity investment; controls remain vis-à-vis the rest of the world, with limited investments abroad allowed under second-tier reserves arrangement. - As of end-2003, second-tier reserves amounted to about US$50 million, or about 7 percent of central bank’s international reserves. - Mission supports gradual approach to capital account liberalization coordinated with financial sector strengthening and development of indirect monetary instruments. ### Labor Market and Social Pact - Authorities noted labor relations and wage setting governed by “protocols” agreed among government, labor, and employers, providing orderly and harmonious working relations. - Protocols have delivered wage settlements broadly in line with productivity growth, contributing to industrial peace, FDI attraction, and social stability. - Authorities caution about potential social and political costs of rapid fiscal adjustment given tradition of broad-based consultation. ### Medium-Term Outlook - Two scenarios discussed: baseline scenario and enhanced adjustment scenario; same growth assumptions used in both (mission view that stronger fiscal adjustment unlikely to reduce growth below conservative rates). - Baseline scenario outcomes: - Fiscal adjustment would contribute to gradual improvement in external current account. - International reserves remain broadly stable over medium term. - Current account deficit projected to narrow from close to 8 percent of GDP in 2003 to 4 percent of GDP by 2008, owing to increase in tourism receipts to GDP and some decline in import-to-GDP ratio. - Capital account surplus projected in range of US$150–200 million per year, mainly from private inflows including direct investment in tourism. - Net international reserves of central bank would remain around US$750 million (7 months of imports) over next three years, and strengthen to about US$900 million (7.5 months of imports) by 2008. - External debt service projected to decline from 7.3 percent of current account receipts in 2003 to about 6 percent in 2008. *Source: _cr04154 - 13. The authorities agreed with the staff on the importance of enhancing* ### 29. A debt sustainability analysis anchored on the baseline scenario indicates that ### _cr04154 - 29. A debt sustainability analysis anchored on the baseline scenario indicates that ### Debt sustainability analysis — baseline and stress tests - The public debt ratio could rise markedly in the event of policy slippages or adverse exogenous shocks. - All the stress tests result in rising public debt levels, with some shocks taking the debt ratio above 90 percent of GDP (Table 10). - Despite adverse underlying trends, staff does not see any significant risk of an imminent debt crisis in the near term because: - the external position is strong; - financial linkages with regional economies are limited; - gross financing requirements—which are projected to be almost fully met from domestic sources over the medium term (see Table 3)—appear manageable, particularly in view of the abundant liquidity in the banking system. - External sustainability analysis shows the external debt-to-GDP ratio declines or remains roughly stable for all shocks except those to the exchange rate and the current account (Table 11). ### Enhanced adjustment scenario — effects and projections - A stronger fiscal stance in the enhanced adjustment scenario would significantly reduce vulnerability to external shocks. - Key effects: - smaller external current account deficit, mainly on account of slower import growth; - somewhat stronger private capital inflows, reflecting strengthened investor confidence.21 - Projected net international reserves: - rise steadily from US$750 million in 2003 to about US$1.2 billion in 2008.22 - Government debt and reserves outcomes: - lower government debt ratio (less than 60 percent of GDP); - higher international reserves would significantly reduce the vulnerability of the economy to external shocks. - Footnotes retained verbatim: - 21 Most of the capital inflows are FDI-related, and therefore do not constitute a source of vulnerability. - 22 There is no significant difference in external debt service ratios between the two scenarios, which reflects the assumption that the lower fiscal deficit in the enhanced scenario would be fully reflected in lower domestic borrowing—i.e., external debt service obligations do not change across scenarios. ### Statistical issues - Statistical information provided by Barbados is broadly adequate for surveillance purposes, though some weaknesses remain. - Strengths: - Data on money and banking, the budgetary operations, and the current account of balance of payments is comprehensive and available on a timely basis. - Weaknesses: - data on the operations of the public enterprises; - data on the capital account of the balance of payments; - timeliness of national income accounts needs to be improved. - Barbados participates in the General Data Dissemination System and its metadata and plans for improvement of the national statistical system are posted on the Fund’s website. ### Staff appraisal — macroeconomic outlook and risks - Recent performance and concerns: - The economy has started to recover from the 2001–02 recession, led by tourism and supported by a countercyclical fiscal stance. - That fiscal stance has given rise to an increase in government debt which must now be addressed decisively. - Decline in tourism receipts during the recession and the large fiscal deficit have contributed to a widening external current account deficit, which has barely begun to unwind. - Net international reserve position has strengthened over the last three years, reflecting continued access to foreign financing and strong private capital inflows. - Central message: - Macroeconomic outlook and debt sustainability hinge critically on the government’s success in further reducing its deficit and deepening reforms to boost growth. - The current size of the deficit would still imply continued high government debt ratios in the context of large, albeit declining, external current account deficits. - These trends could pose a risk to the fixed exchange rate anchor, especially if private capital flows reverse. - Recommended priorities: - Reduce the fiscal deficit quickly to ensure adequate reserve cover and place the government debt ratio on a firmly declining path. - Complement fiscal adjustment with growth-enhancing structural reforms. ### Policy recommendations — revenue, expenditure, monetary and structural measures - Revenue and expenditure: - Intensify the revenue effort, in particular consider measures to broaden the base of the VAT by reducing exemptions, and increase the rate of the VAT and excises, as necessary to protect social spending. - Winding down extra-budgetary spending is welcomed; privatization proceeds, previously used to finance extra-budgetary spending, should in future be allocated mainly to retirement of government debt. - Review tariffs of major public enterprises (in particular water and bus fares) which have not been adjusted for more than 10 years; concurrently reduce government transfers to these entities. - Exchange rate and fiscal sustainability: - Staff supports continuation of the fixed exchange rate regime; long-term sustainability requires returning public debt dynamics to a sustainable position under robust economic policies and reforms to boost growth and competitiveness. - Monetary policy and financial sector: - Move toward more market-based mechanisms of monetary control; phase out the administered minimum interest rate on savings and time deposits. - Accelerate transition to market-based instruments of monetary control; initial steps by the central bank to prepare technical infrastructure for open market operations are welcome. - Continue implementing remaining FSAP recommendations; sequence capital account liberalization with strengthening of the financial sector and development of indirect instruments of monetary control. ### Structural reforms and competitiveness - Structural policies are the main mechanism for enhancing external competitiveness under the fixed exchange rate regime. - Recent achievements welcomed by staff: - reform of the NIS; - establishment of a regulatory framework for private pension schemes; - corporatization of the port authority; - privatization of the Barbados National Bank; - move toward greater competition in telecommunications. - Future reform focus: - budget and tax policy; - government pensions; - measures to enhance the supply response of the economy; - continued commitment to trade liberalization in the context of CARICOM, the WTO, and the envisaged FTAA. ### Social security, pensions, and public finances (selected numerical outcomes) - NIS reforms (implemented January 2003) postponed exhaustion of NIS reserves from 2030 to 2060 through measures including: - increase in the contribution rate by 1 percent per year, for four years, bringing the rate to 17½ percent, shared equally between employers and employees; - cap on accrual of pension rights at 60 percent of final average earnings; - calculation of pension benefits based on the best five years of insurable income rather than the best three; - increase in the retirement age from 65 to 67 years, with six-month increases in the retirement age every four years starting during 2006–18. - NIS: Reserve Ratio (ratio of total value of the retirement funds to annual expenditures) - Before reforms (2000, 2010, 2020, 2030): 5.0 5.9 3.9 0.4 - After reforms (2000, 2010, 2020, 2030): 5.0 7.1 7.7 6.0 - Civil service pensions: - Current government expenditure on civil service pensions around 2 percent of GDP; - Projected peak at almost 3.5 percent of GDP in 2015, then decline to around 2.5 percent of GDP by 2050. - Proposed measures include increase in retirement age for government pension plan; change in calculation formula from best 3 years to best 5 years; transition from defined-benefit to defined-contribution plan. ### Regional comparisons and CARICOM convergence (selected figures) - Barbados comparison with selected Caribbean countries (1995–2000 averages, in percent unless stated): - GDP growth rate: 3.2 (Barbados), -0.5 (Jamaica), 3.3 (ECCU) - Inflation: 2.5 (Barbados), 13.1 (Jamaica), 1.1 (ECCU) - Fiscal deficit/GDP: 1.6 (Barbados), 4.0 (Jamaica), 3.4 (ECCU) - Public debt/GDP (end-2000): 58.5 (Barbados), 132.7 (Jamaica), 69.6 (ECCU) - External current account balance/GDP: -1.8 (Barbados), -3.5 (Jamaica), -14.7 (ECCU) - GDP per capita (in U.S. dollars, 2002): 9,589 (Barbados), 2,912 (Jamaica), 4,843 (ECCU) - Adult literacy rate (2002): 99.0 (Barbados), 79.9 (Jamaica), ... - Human Development Index (2003 rank): 27 (Barbados), 78 (Jamaica), 51–93 (ECCU) *Source: IMF staff report contained in _cr04154 - 29. A debt sustainability analysis anchored on the baseline scenario indicates that* ### Box 5. Barbados: Income Policies ### Box 5. Barbados: Income Policies ### Background - The severe economic difficulties and near foreign exchange crisis experienced in 1991–92 were addressed, in large measure, through a negotiated restraint on wage increases to enhance competitiveness while maintaining the exchange rate peg. - This policy approach was formalized in successive “protocols”—tripartite agreements involving government, labor, and private employers—and has evolved into an important feature of the economy of Barbados, providing the framework for labor market relations in the country. ### The four protocols (highlights) - First protocol (1993–95): - Established an economy-wide wage freeze. - Required companies to abstain from price increases except those warranted by increases in prices of imported inputs or changes in taxation. - Second protocol (1995–97): - Provided for a period of wage restraint in line with productivity changes. - Third protocol (1998–2000): - Maintained productivity guidelines for wage increases. - Emphasized issues of job security and training. - Fourth protocol (2001–04) (currently in force): - Includes guidelines on workers’ health and safety, in addition to incomes policy issues. - A fifth protocol is being negotiated and an agreement is expected in the next few months. ### Labor and business representation - Labor representation in the protocols: - Barbados Workers Union (BWU) - National Union of Public Workers (NUPW) - Private sector employer representation: - Barbados Employers’ Confederation (with more than 300 members, including the Barbados Hotel and Tourism Association) - Sugar Producers Federation - Coverage: - Together, these cover around 50 percent of the private sector labor force and close to one-third of the working population. ### Institutional support - The government has established a National Productivity Council to facilitate implementation of productivity-based wage arrangements by disseminating technical expertise to labor unions and employers in designing measures of productivity on a company or industry basis. ### Policy ownership and outcomes - The protocols are considered by many in the country as an important reason for the generally orderly and peaceful labor relations in Barbados. - There appears to be a broad consensus among the social partners—government, labor, and employers—that the benefits of industrial peace as a result of the protocols far exceed the degree of inflexibility that they introduce in the labor market. *Source: _cr04154 - Box 5. Barbados: Income Policies* ### 1. Real GDP growth, real interest rate, and primary balance are at historical ### _cr04154 - 1. Real GDP growth, real interest rate, and primary balance are at historical ### Stress-test scenarios and impacts on debt ratios - Scenario 1: Real GDP growth, real interest rate, and primary balance are at historical averages in 2004/05–2007/08 - Series: 84.1, 83.7, 83.3, 83.0, 82.6, 82.2 - Scenario 2: Real interest rate is at historical average plus two standard deviations in 2004/05 and 2005/06 - Series: 84.1, 86.4, 88.6, 88.2, 87.7, 87.0 - Scenario 3: Real GDP growth is at historical average minus two standard deviations in 2004/05 and 2005/06 - Series: 84.1, 88.9, 93.8, 93.2, 92.5, 91.7 - Scenario 4: Primary balance is at historical average minus two standard deviations in 2004/05 and 2005/06 - Series: 84.1, 86.7, 89.8, 89.4, 88.9, 88.2 - Scenario 5: Combination of 2–4 using one standard deviation shocks - Series: 84.1, 89.0, 94.5, 91.9, 89.2, 86.3 - Scenario 6: One time 30 percent real depreciation in 2004/05 7/ - Series: 84.1, 96.1, 96.0, 95.7, 95.3, 94.7 - Scenario 7: Ten percent of GDP increase in other debt-creating flows in 2004/05 - Series: 84.1, 93.8, 93.7, 93.3, 92.9, 92.3 - Scenario 8: Impact on debt-to-GDP ratio if revenue-to-GDP ratio is at historical average minus two standard deviations in 2004/05–2005/06 - Debt-to-GDP series: 84.1, 88.9, 93.6, 93.3, 92.8, 92.2 - 8a. Impact on debt-to-revenue ratio if revenue-to-GDP ratio is at historical average minus two standard deviations in 2004/05–2005/06 - Debt-to-revenue series: 249.7, 308.3, 324.9, 278.9, 280.9, 282.5 ### Historical statistics for key variables (past 10 years) - Standard Deviation - Primary deficit: 1.9 - Real GDP growth (in percent): 2.6 - Nominal interest rate (in percent) 6/: 0.6 - Real interest rate (in percent): 1.6 - Inflation rate (GDP deflator, in percent): 1.7 - Revenue to GDP ratio: 1.3 ### External Sustainability Framework — key actuals and projections (selected series) - External debt/exports of G&S: - 2000/01–2008/09: 45.5, 58.9, 58.5, 56.9, 55.5, 52.6, 50.4, 47.9, 45.7 - External debt/GDP: - 2000/01–2008/09: 22.5, 28.8, 27.0, 26.1, 25.8, 24.6, 23.8, 22.6, 21.6 - Change in external debt/GDP: - 2000/01–2008/09: 4.1, 6.3, -1.9, -0.9, -0.3, -1.1, -0.9, -1.2, -1.0 - Net debt-creating external flows/GDP (5+9+12): - 2000/01–2008/09: 3.8, -1.5, 2.0, 6.8, 1.5, 2.0, 1.7, 1.3, 1.2 - Current account deficit, excluding interest payments/GDP: - 2000/01–2008/09: 4.2, 1.9, 4.6, 5.8, 4.3, 3.5, 2.8, 2.4, 2.4 - Exports of G&S/GDP: - 2000/01–2008/09: 49.5, 49.0, 46.1, 45.8, 46.5, 46.8, 47.1, 47.1, 47.1 - Imports of G&S/GDP: - 2000/01–2008/09: 60.4, 57.6, 53.9, 56.0, 58.3, 58.2, 57.9, 58.1, 59.4 - Net foreign direct investment, equity/GDP: - 2000/01–2008/09: 2.1, 6.0, 4.9, 0.6, 4.2, 3.1, 2.3, 2.4, 2.4 - r (interest rate) times debt/GDP: - 2000/01–2008/09: 1.4, 1.7, 2.0, 2.0, 2.0, 2.1, 1.8, 1.7, 1.6 - minus g (real GDP growth rate) times debt/GDP: - 2000/01–2008/09: -0.2, 0.6, -0.1, -0.7, -0.8, -0.6, -0.6, -0.6, -0.6 - Residual, incl. change in gross foreign assets/GDP (3–4): - 2000/01–2008/09: 0.3, 7.8, -3.8, -7.7, -1.8, -3.1, -2.6, -2.5, -2.2 ### Baseline medium-term projections and sensitivity results (Table 11 excerpts) - Baseline scenario: If interest rate, real GDP growth rate, US$ GDP deflator growth, non-interest current account, and non-debt flows (in percent of GDP) in 2004/05–2008/09 are at average of past 10 years - Series (presumably external debt/GDP under this test): 26.1, 22.8, 18.2, 13.9, 9.8, 5.8 - Sensitivity 2: If interest rate in 2004/05 and 2005/06 is average plus two standard deviations, others at baseline - Series: 26.1, 26.3, 25.7, 24.9, 23.7, 22.7 - Sensitivity 3: If real GDP growth rate in 2004/05 and 2005/06 is average minus two standard deviations, others at baseline - Series: 26.1, 27.5, 28.1, 27.3, 26.2, 25.2 - Sensitivity 4: If US$ GDP deflator in 2004/05 is average minus two standard deviations, others at baseline - Series: 26.1, 26.4, 25.3, 24.4, 23.2, 22.2 - Sensitivity 5: If non-interest current account (percent of GDP) in 2004/05 and 2005/06 is average minus two standard deviations, others at baseline - Series: 26.1, 31.4, 36.8, 36.2, 35.3, 34.6 - Sensitivity 6: Combination of 2–5 using one standard deviation shocks - Series: 26.1, 27.3, 28.2, 27.4, 26.3, 25.4 - Sensitivity 7: One time 30 percent depreciation in year 2004/05 (-30 percent GDP deflator shock), others at baseline - Series: 26.1, 38.0, 37.3, 36.7, 35.8, 35.1 ### Memorandum items: selected key macro and external assumptions (values preserved) - Nominal GDP (local currency): - 2000/01–2008/09: 5172, 5154, 5246, 5459, 5729, 5990, 6263, 6550, 6849 - Nominal GDP (U.S. dollars): - 2000/01–2008/09: 2585.8, 2577.1, 2622.8, 2729.6, 2864.4, 2995.1, 3131.5, 3274.9, 3424.4 - Real GDP growth (in percent per year): - 2000/01–2008/09: 0.9, -2.7, 0.2, 2.4, 2.9, 2.5, 2.5, 2.5, 2.5 - Exchange rate (LC per U.S. dollar): - 2000/01–2008/09: 2.0, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0 - Nominal GDP deflator (in U.S. dollars, change in percent per year): - 2000/01–2008/09: 2.1, 2.4, 1.6, 1.6, 2.0, 2.0, 2.0, 2.0, 2.0 - External interest rate (percent per year): - 2000/01–2008/09: 7.7, 7.7, 6.9, 7.3, 7.7, 8.0, 7.1, 7.1, 7.0 - Growth of exports of G&S (U.S. dollar terms, in percent per year): - 2000/01–2008/09: 4.4, -1.4, -4.3, 3.6, 6.4, 5.4, 5.2, 4.6, 4.6 - Growth of imports of G&S (U.S. dollar terms, in percent per year): - 2000/01–2008/09: 3.3, -4.9, -4.7, 8.1, 9.2, 4.4, 4.0, 4.9, 6.9 ### Notes on definitions and methodology (as presented) - Debt dynamics derived using formula in footnote 2/: [(r - π(1+g) - g + αε(1+r) ]/(1+g+π+gπ) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation. - Real interest rate contribution derived as r - π(1+g); real growth contribution as -g (footnote 3/). - Exchange rate contribution derived as αε(1+r) (footnote 4/). - Public sector deficit definition includes public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period (footnote 5/). - Nominal interest rate measure derived as nominal interest expenditure divided by previous period debt stock (footnote 6/). - Real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator) (footnote 7/). ### Statistical issues and data quality (selected points) - National accounts: - Compilation hampered by lack of reliable and current data on non-sugar agriculture, private construction, and non-tourism service activities. - Weaknesses in external trade and private investment data on the expenditure side. - Authorities shifting base year of GDP at constant prices from 1974 to 1994. - CPI revised to reference base July 2001 = 100; no quarterly GDP estimates. - Nonfinancial public sector: - Coverage of general government operations is comprehensive and generally timely. - Discrepancies remain due to inadequate reporting by public enterprises; differences between public enterprise data and Ministry of Finance data noted. - Debt data centralized using Commonwealth Secretariat’s Data Recording and Management System (CS-DRMS 2000+); CBB, Accountant General’s Office, and MoF share updating responsibility. - Financial sector and monetary statistics: - Overall quality, coverage, and timeliness satisfactory, but residency concept inconsistent with the fifth edition of the Balance of Payments Manual. - Some loans to and deposits of non-residents classified as domestic monetary aggregates rather than net foreign assets. - Non-nationals recognized as residents only after residing continuously for at least three years; offshore bank accounts coverage needs extension. - Monetary data reported on a cash basis by CBB; commercial banks on accrual basis with some misclassification of accrued interest. - Marketable securities recorded at acquisition cost and revalued annually; treasury bills not revalued to market until maturity. - Positions with the IMF valued at the IMF holdings rate rather than end-of-period market rate. - Timeliness improvements: - Lag in submitting monetary data to STA decreased from about five months to about three weeks for central bank accounts, and to about six weeks for the monetary survey. - Publication gaps: - No data reported for publication in the GFS Yearbook or IFS. *Source: Barbadian authorities; and Fund staff estimates and projections (as presented in the source content).* ### 9. The latest data published in the Balance of Payments yearbook correspond to 2001. ### 9. The latest data published in the Balance of Payments yearbook correspond to 2001. ### Data and statistical limitations - The latest Balance of Payments yearbook data correspond to 2001. - Lags in the compilation of merchandise trade data limit the timeliness of estimating the external current account balance. - No clear distinction is currently made between current transfers and capital transfers. - Estimates of the components of the investment account need strengthening. - Coverage of foreign direct investment (FDI) is incomplete because the CBB does not include offshore enterprises. - FDI surveys are deficient: the distinction between transactions and positions is unclear in the survey reporting form. - Quarterly balance of payments estimates are not currently provided. - A mission by the IMF Multisector Statistics Advisor at the Caribbean Regional Technical Assistance Centre in March 2002 noted the above deficiencies. ### Macroeconomic overview and recent performance - Mainstays of the economy: tourism and financial services. - Population: about 275,000. - Per capita income: about US$9,500. - Unemployment rate: slightly less than 11 percent. - UNDP Human Development Index rank: 27th among 175 countries in 2003. - 1993–2000: per capita real GDP growth averaged 2.5 percent per year; annual inflation was 2 percent or less. - Real GDP dropped by a cumulative 4 percent in 2001–02. - Real GDP grew by an estimated 2 percent in 2003, led by a recovery in the tourism sector. - Inflation in 2003: 1.5 percent. - Net international reserves at end of year: US$751 million (six months of imports of goods and services). ### Fiscal developments and public debt - Central government deficit: - FY 2000/01 (April–March): 2.3 percent of GDP. - FY 2002/03: 9.5 percent of GDP, including extra-budgetary spending of about 4 percent of GDP. - FY 2003/04: 6.5 percent of GDP, including extra-budgetary spending of close to 4 percent of GDP. - Central government debt-to-GDP ratio: - March 2001: 63 percent. - March 2003: 76 percent. - After FY 2003/04: marginal decline to 75 percent. - More than half of the government deficit in FY 2003/04 was financed through privatization proceeds. - Authorities’ target deficit: around 1-2 percent of GDP "at the earliest opportunity." - Example tax policy change: corporation tax rate being reduced from 45 percent to 25 percent over a five year period (as stated by authorities). ### External sector - External current account balance: - 1999: -6.0 - 2000: -5.6 - 2001: -3.6 - 2002: -6.6 - 2003: -7.8 - Public external debt (percent of GDP): - 1999: 18.5 - 2000: 22.5 - 2001: 28.8 - 2002: 27.0 - 2003: 26.1 - Net international reserves (in millions of U.S. dollars): 306 (1999), 484 (2000), 707 (2001), 683 (2002), 751 (2003). - Authorities reported reserves at eight months of imports at end-December 2003 (statement by authorities). ### Monetary and financial sector - Broad money growth decelerated in 2003 but remained faster than GDP growth; banks became increasingly liquid. - Central bank policy actions: - Reduced government securities ratio to 16 percent in November 2002. - In December 2002, reduced the minimum administered interest rate on time and savings deposits from 3 percent to 2.5 percent. - Discontinued setting maximum indicative lending rates for banks on selected loans. - Banking sector indicators: - Ratio of nonperforming loans to total loans increased to about 9 percent. - Profitability indicators have weakened somewhat. - Directors recommended moving to more market-based mechanisms of monetary control, phasing out administered minimum interest rate on savings and time deposits in due course, and preparing for open market operations. ### Structural reforms and policy recommendations (Executive Board) - Fiscal policy: - Reduce the fiscal deficit to ensure adequate reserve cover and a declining debt ratio. - Combine gradual fiscal tightening with growth-enhancing structural reforms. - Intensify revenue effort: consider measures to reduce exemptions from the VAT, and increases in the rates of the VAT and excises. - Privatization proceeds should be allocated mainly to the retirement of government debt. - Review tariffs of major public enterprises concurrently with a reduction in government transfers. - Monetary and financial sector reforms: - Move to market-based monetary instruments; enhance control of credit expansion. - Implement remaining Financial Sector Assessment Program recommendations, including increasing the independence of the central bank and strengthening Anti-Money Laundering/Combating the Financing of Terrorism efforts. - Sequence capital account liberalization in line with financial sector strengthening. - Structural agenda: - Continue reforms in budget process, tax policy, government pensions, and measures to enhance supply responsiveness. - Continue trade liberalization within CARICOM, the WTO, and the envisaged FTAA. - Enhance labor market flexibility. - Directors noted that statistical information is broadly adequate for surveillance but urged substantial improvement, particularly for operations of public enterprises and the capital account of the balance of payments. ### Selected economic indicators (annual data and percent changes/highlights) - Real GDP (annual percentage changes): 1999: 0.5; 2000: 2.4; 2001: -3.4; 2002: -0.4; 2003: 2.1. - Consumer prices (12-month increase): 1999: 1.6; 2000: 2.4; 2001: 2.8; 2002: 0.2; 2003: 1.5. - Tourist arrivals (annual percentage changes): 1999: 0.4; 2000: 5.8; 2001: -6.9; 2002: -1.8; 2003: 6.7. - Unemployment (percent of labor force): 1999: 10.4; 2000: 9.4; 2001: 9.9; 2002: 10.3; 2003: 10.7. - Money and credit (changes in percent of beginning-of-period broad money): - Net domestic assets: 1999: 7.8; 2000: -4.2; 2001: -8.6; 2002: 5.7; 2003: -2.7. - Public sector credit (net): 1999: -0.4; 2000: -4.3; 2001: -8.1; 2002: 12.2; 2003: 3.6. - Private sector credit: 1999: 11.6; 2000: 2.1; 2001: -0.3; 2002: 2.4; 2003: 0.6. - Broad money: 1999: 11.6; 2000: 7.9; 2001: 5.6; 2002: 10.4; 2003: 6.5. - Public sector operations (percent of GDP, fiscal years April–March): - Nonfinancial public sector balance: 1999: -1.2; 2000: -3.1; 2001: -5.2; 2002: -10.4; 2003: -7.5. - Central government: 1999: -1.3; 2000: -2.3; 2001: -4.9; 2002: -9.5; 2003: -6.5. - Surplus of National Insurance Scheme: 1999: 1.0; 2000: 1.2; 2001: 1.6; 2002: 1.5; 2003: 1.5. - Public enterprises: 1999: 0.0; 2000: -0.8; 2001: -0.4; 2002: -0.9; 2003: -1.0. *Source: IMF staff report and Public Information Notice (PIN) material as of May 14, 2004.* ### 6. As part of its policy on expenditure restraint, non-wage current expenditure growth ### 6. As part of its policy on expenditure restraint, non-wage current expenditure growth ### Expenditure policy and public enterprises - Non-wage current expenditure growth will be limited to a rate not exceeding the rate of inflation. - Wage increases will be linked to productivity gains as part of an agreement with its social partners. - Transfers to public enterprises (PEs), particularly those which carry out quasi commercial functions, will be contained by capping transfers at their FY 2003/04 level. - Public enterprises will be required to finance more of their own operations through greater cost recovery and efficiency gains. - For capital expenditure, increased use will be made of public/private sector partnerships and build operate-lease arrangements to carry out major investments. ### Public sector debt and medium-term target - Total public sector debt was 83.8 percent of GDP in FY 2002/03. - Authorities agree on the importance of reducing debt levels and containing debt service costs. - Medium-term debt target: reduce the debt level to 60 percent of GDP. - Key debt management commitment: not to raise any new commercial loans on the international market during 2004. - Authorities indicate a preference for a more gradual fiscal adjustment than staff recommend, citing: - the need to refurbish and expand the airport and other tourism related facilities; - the large share of domestic debt in overall debt composition, which they judge reduces vulnerability associated with a high debt ratio. ### Monetary and exchange rate policy - Main objectives: safeguard the fixed exchange rate and create a stable environment conducive to economic growth. - Authorities differ with staff on the assessment that the fixed exchange rate could be at risk under some scenarios in the medium term. - Official reserves: $US 750 million, or eight months of imports, at the end of March 2004. - Authorities note that even in the baseline scenario, the level of reserves remains high, and expect ongoing reforms to facilitate higher private capital inflows. - Policy instrument reform: - Authorities acknowledge limitations of existing monetary policy instruments. - Preparations have begun to enable the Bank to conduct open market operations. - Gradual liberalization of the capital account is intended, particularly to facilitate regional transactions under the CARICOM Single Market and Economy (CSME). - On a pilot basis and subject to continuing review, the CBB will delegate more selected capital account transactions to commercial banks and substantially increase the value limits of these transactions. ### Growth, competitiveness, and structural reform - Policy focus: fine-tune the framework to enhance growth and competitiveness; re-tool and retrain in weaker tradeable sectors (particularly manufacturing and agriculture) while developing services. - Financial instruments: establishment of the Enhanced Guarantee Scheme and the Enterprise Growth Fund to support sector strengthening. - Services development priorities: - promote professional services, cultural services, entertainment services, and health tourism services; - seek full access for these services in Barbados’ trading partners’ markets and attract investment. - Structural reform record: - corporatization of key public enterprises; - privatization of the Barbados National Bank (BNB); - liberalization of telecommunications; - diversification of agriculture. ### Agriculture and sectoral adjustments - Sugar industry restructuring: - Sugar production declined from about 200,000 tonnes in the mid-nineteen sixties to a more sustainable level of about 40,000 tonnes at present. - Ongoing rationalization and restructuring in response to the expected loss of preferential arrangements. - Non-sugar agriculture: efforts to develop production where there is significant domestic demand and niche markets; noticeable increase in cotton production over the last two years. ### Labor market and regional integration - Improvements in labor market flexibility are important to enhance growth prospects. - Consistent with CSME efforts: - Legislation enacted for free movement of university graduates. - Legislation covering other categories of skilled labor under the revised treaty of Chaguaramas presented to Parliament in 2003 and expected to be passed in 2004. ### Conclusion - The Barbadian economy has returned to a positive growth path following a difficult recent period. - Prospects are tied significantly to the international economy, whose recent performance is welcome. - Authorities are resolved to implement appropriate fiscal, monetary, and structural policies to support domestic economic conditions. *Source: IMF staff report excerpt (content unit: _cr04154 - 6. As part of its policy on expenditure restraint, non-wage current expenditure growth).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04154.pdf_