## _cr05297

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### Executive summary — recent developments and outlook
- Real GDP grew by an estimated 4½ percent in 2004; staff estimate for 2004 elsewhere reported as 4.4 percent.
- Nonfinancial public sector deficit narrowed slightly to 6 percent of GDP; public debt remains high at 86 percent of GDP.
- External current account deficit widened to 10½ percent of GDP in 2004; balance of payments moved to a deficit of 5½ percent of GDP in 2004.
- Gross international reserves (GIR) fell to 3¾ months of imports of goods and nonfactor services in 2004; projected to fall to about three months in 2005 under baseline.
- Private sector credit grew by almost 17 percent during 2004; central bank tightened policy in 2005 (minimum deposit rate raised to 3.75 percent effective June 1, 2005).
- Staff projection: Real GDP projected to grow by about 3 percent in 2005 and remain strong until 2007 due to World Cup cricket buildup.
- Staff view: Decisive fiscal adjustment needed; under the mission’s active scenario, deficit would decline to less than 1 percent of GDP by the end of the decade.
- Authorities concurred broadly but preferred a more gradual adjustment to preserve public services and public investment.

### Fiscal policy, scenarios, and staff recommendations
- Authorities’ stated fiscal goals:
  - Gradually return the deficit to around "3 percent of GDP" after FY 2005/06.
  - Nonfinancial public sector deficit falling from around "7 percent of GDP" in FY 2005/06 to around "3¼ percent of GDP" from FY 2007/08 onward.
  - Reduce central government debt to "60 percent of GDP" by FY 2010/11.
- Staff (baseline and active scenarios):
  - Baseline (Scenario I): incorporates authorities’ targets with modest reforms; growth reverts to "2 percent" from 2008 onward; international reserves decline to less than two months of imports by 2007.
  - Active (Scenario II): accelerated reforms and ambitious fiscal adjustment over 2005–07; sustained growth at "3–4 percent" over the medium term; reserve cover maintained at three months.
  - Under staff’s active scenario:
    - Nonfinancial public sector balance would fall to "5¾ percent of GDP" in FY 2005/06 and to slightly less than "1 percent of GDP" by FY 2009/10 onward.
    - Public debt would decline to around "75 percent of GDP" by the end of the decade.
    - Net of government deposits, government and government-guaranteed debt (excluding the NIS) would fall to "60 percent of GDP" in FY 2012/13 and around "50 percent of GDP" in FY 2015/16.
- Fiscal adjustment measures proposed in active scenario:
  - Use privatization proceeds (about "1 percent of GDP") for debt reduction in the current year.
  - Incorporate revenue measures of "1 percent of GDP" thereafter (options: broaden VAT base, increase VAT rate, increase excises).
  - Additional tariff increases for water and public transportation to balance public enterprises by decade end.
- Risks to revenues:
  - Decline in import tariffs under the FTAA and phased income tax reductions projected to reduce revenues by "4–4½ percent of GDP".
  - By FY 2009/10, revenues projected to fall below "30 percent of GDP" ("3½ percentage points of GDP" below early-decade levels).
- Authorities’ preferred strategy:
  - Favor more gradual adjustment; argued a deficit of about "3 percent of GDP" is adequate and that debt is mainly resident-held and in local currency.

### Debt sustainability and stress tests
- Baseline public sector debt profile (Public Sector Debt Sustainability Framework 2002/03–2010/11):
  - Public sector debt (percent of GDP): 2004/05: 86.1; 2005/06: 88.0; 2006/07: 88.0; 2007/08: 87.0; 2008/09: 86.8; 2009/10: 86.6; 2010/11: 85.5.
  - Debt-stabilizing primary balance: 1.6 percent of GDP.
- Stress test outcomes (selected):
  - A2. No policy change (constant primary balance) in 2006/07–09/10: public sector debt rises from 88.0 to 104.5 by 2010/11.
  - B2. Real GDP growth at historical average minus two standard deviations in 2006/07 and 2007/08: public sector debt rises to 109.7 by 2010/11.
- Gross financing requirements are high: 25 percent of GDP; expected to be met mainly from domestic sources.

### Monetary policy, banking sector, and external position
- Exchange rate regime:
  - Fixed peg to the U.S. dollar remains appropriate; Barbados dollar pegged since mid-1975 at BDS$2.00 = US$1.00.
  - On May 15, 2005, official buying and selling rates were BDS$1.98 and BDS$2.04 per US$1.
- Monetary developments:
  - Central bank recommended to make greater use of indirect instruments and phase out the minimum deposit rate.
  - Authorities raised minimum deposit rate by 0.5 percentage point on April 1, 2005, and by 1 percentage point on June 1, 2005 (to 3.75 percent).
  - Central bank projects private sector credit growth will drop to less than half the pace of 2004.
- Financial sector soundness:
  - Commercial banks well capitalized and adequately provisioned; nonperforming loans fell with the economic rebound.
  - Capital adequacy ratio (indigenous banks): 2004: 17.9 percent.
  - NPLs/total loans: 2004: 7.5 percent.
- Reserve and balance of payments indicators:
  - Gross international reserves (US$ millions): 2004: 595.2; 2005: 472.5.
  - GIR in months of imports: 2004: 3.8; 2005: 2.9.
  - Current account (percent of GDP): 2004: -10.5; 2005: -10.4.
  - Balance of payments: deficit of 5½ percent of GDP in 2004.

### Structural reforms, competitiveness, and growth-enhancing measures
- Reforms undertaken:
  - Corporate and personal tax rates further lowered (continuation of FY 2002/03 multiyear reduction).
  - Telecommunications: final phase of reform began in early 2005; liberalization of external telecommunications and issuance of new fixed-line licenses.
  - Airport Authority legislation approved to corporatize management.
- Mission recommendations:
  - Accelerate structural reforms to raise competitiveness and supply response.
  - Trade liberalization: average tariff level is 16 percent; mission strongly recommended against imposing a surcharge on non-CARICOM imports and urged elimination of remaining import/export licensing.
  - Sugar sector reform: assess EU sugar regime changes (decision by end-2005); consider diversification including ethanol; prepare social safety nets for restructuring.
  - Privatization: privatize or place under private management public enterprises not serving public policy objectives; move forward on Gems hotels and state-owned insurance company divestment; set timetables.
  - Labor market: strengthen flexibility; streamline unemployment and severance benefits; improve worker training and Labor Market Information System.
  - Fiscal incentives: reassess activity-specific incentives; consider broader investment-climate measures to attract FDI beyond real estate.

### Vulnerabilities and contingency measures
- Key vulnerabilities:
  - High public debt, high external current account deficits, and declining international reserves threaten the sustainability of the peg.
  - High correlation with industrial countries (tourism dependence) increases exposure to external shocks.
  - Maintaining the primary deficit at current levels risks public debt rising to over 100 percent of GDP by the end of the decade.
- Banking sector vulnerabilities low at present due to strong capital and provisioning; privatization and ownership changes could expose the sector to regional shocks but parent banks are well capitalized.
- Weather/catastrophic risk:
  - Barbados is outside the usual hurricane path but participates in regional catastrophic-risk pooling; all public assets fully insured.

### Statistical issues, data weaknesses, and recommendations
- General assessment:
  - Statistical information broadly adequate for surveillance but important weaknesses remain, especially for public enterprises, the capital account, and linkage of offshore sector to BOP and national accounts.
- National accounts weaknesses:
  - Lack of reliable and current data on nonsugar agriculture, private construction, and nontourism services.
  - GDP at constant prices based on 1974 weights; authorities updating weights to 2000; national accounts based on SNA 68 rather than SNA 93.
  - CPI uses a 1998–99 basket for the July 2001=100 series (introduced January 2002); comparisons across the break require care.
- Monetary and financial statistics issues:
  - Residency concept inconsistent with BPM5; some nonresident loans/deposits classified as domestic credit and broad money.
  - Coverage should be extended to offshore bank accounts.
  - Timeliness improved: central bank accounts lag reduced to about six weeks; monetary survey about ten weeks.
  - Accounting conventions (cash vs. accrual, valuation of securities, IMF positions) noted as areas for harmonization.
- Mission suggestions:
  - Improve coverage and timeliness of public enterprise data and capital account statistics; develop an index of real estate prices to assist stress testing.
  - Consider a Report on the Observance of Standards and Codes (ROSC) to improve fiscal transparency.

### Selected key indicators and exact figures (preserve source values)
- Population: about 272,000.
- Per capita income (PPP): about US$15,700.
- Real GDP (annual percent changes): 2000: 2.3; 2001: -2.6; 2002: 0.5; 2003: 2.0; 2004: 4.4; 2005: 3.1 (staff projection).
- Consumer prices (12-month increase): 2004: 1.4; 2005 projection: 3.2.
- Private sector credit growth (2004): almost 17 percent.
- Nonfinancial public sector deficit: FY 2004/05: 6 percent of GDP; FY 2005/06 projected about 7 percent of GDP (mission).
- Public debt (government and government-guaranteed, percent of GDP): 2004: 86.1; 2005: 88.0.
- Gross financing requirement (consolidated public sector, percent of GDP): 2004/05: 24.7; 2005/06: 25.0.
- Gross international reserves (US$ millions): 2004: 595.2; 2005: 472.5.
- Gross international reserves (months of imports): 2004: 3.8; 2005: 2.9.
- Current account (percent of GDP): 2004: -10.5; 2005: -10.4.
- Tourism receipts (travel credits, US$ millions): 2004: 701.4; 2005: 744.1.
- Public external debt (percent of GDP): 2004: 27.4; 2005: 24.9.

*Source: _cr05297 - Executive Summary and selected report sections*

### Executive Summary ......................................................................................................

### Executive Summary

### Recent developments
- A strong economic recovery appears to have taken hold in 2004. Real GDP grew by an estimated 4½ percent in 2004, led by the continued recovery of the tourism sector.
- The deficit of the nonfinancial public sector narrowed slightly to 6 percent of GDP, but public debt remains high at 86 percent of GDP.
- The balance of payments deficit widened in 2004, as a rapid expansion in private sector credit generated a surge in imports while private capital inflows declined.
- The banking system appears to be sound and financial sector indicators have improved with the rebound in economic activity.
- A modest program of structural reforms was undertaken during the past year: tax rates have been reduced, the airport has been corporatized, and the telecommunications sector has been further liberalized.

### Policy discussions
- Discussions focused on fiscal consolidation to reduce debt, enhancing the scope for utilizing indirect monetary policy instruments, reducing vulnerabilities, and structural policies to raise competitiveness and growth.
- Staff projection: Real GDP is projected to grow by about 3 percent in 2005 and remain strong until 2007 because of the stimulus from the buildup to the World Cup cricket games.
- Staff view: The recent buildup of public debt and rapidly declining foreign exchange reserves called for a decisive fiscal adjustment. Under the mission’s active scenario, fiscal adjustment would begin this year, with the deficit declining to less than 1 percent of GDP by the end of the decade.
- Authorities’ position: Concurred with the broad thrust of the mission’s views but were concerned that a sharp fiscal adjustment would be incompatible with their desire to continue to provide high-quality public services and maintain a high level of public investment spending to underpin economic growth.
- Exchange rate and monetary policy: Staff and authorities agreed that the fixed exchange rate regime remains appropriate for Barbados, provided it was accompanied by appropriate macroeconomic and structural policies and wage increases in line with developments in labor productivity.
- Structural reforms: Authorities are moving ahead with structural reforms. The mission endorsed the government’s efforts but urged a more ambitious agenda and suggested that the central bank phase out the minimum deposit rate and accelerate the adoption of indirect monetary policy instruments.

### Background (structural and historical context)
- Population is about 272,000, and per capita income (on a PPP basis) is about US$15,700.
- Poverty rates are the lowest in the Caribbean. In 2004, Barbados was ranked 29th among 177 countries on the United Nations Development Program’s Human Development Index.
- Barbados is one of only six countries in Latin America and the Caribbean with an investment grade rating.
- During the 1990s, after an IMF-supported adjustment program, Barbados grew at 3 percent, inflation was less than 2 percent, and public sector deficits were maintained at less than 3 percent of GDP over 1993–2000.
- Since 2001 macroeconomic imbalances emerged: the overall nonfinancial public sector fiscal deficit widened from about 2 percent of GDP in FY 2000/01 to about 13 percent of GDP in FY 2002/03, and the public sector debt-to-GDP ratio rose from 74 percent in March 2001 to 87 percent in March 2003.
- Interest rate spreads are at over 7 percent, reflecting features of the monetary policy regime such as a minimum deposit rate and capital controls.

### Recent economic developments and near-term prospects
- Growth: Real GDP growth in 2004 is estimated at 4.4 percent, led by a recovery in tourism, construction, and communications.
- Outlook: In 2005, real GDP growth is projected to ease to 3.1 percent, supported by public and private sector investment ahead of the cricket World Cup in 2007 and favorable global demand.
- Inflation: Administrative steps to pass through higher international oil prices to domestic prices in 2005 are projected to raise inflation above 3 percent for the year.
- Fiscal outlook: The fiscal position improved slightly in FY 2004/05 for the nonfinancial public sector as a whole, but is expected to deteriorate in FY 2005/06. The mission projects an increase in the deficit of about 1 percentage point of GDP to 7 percent of GDP in FY 2005/06, and public debt is projected to rise from 86 percent of GDP in FY 2004/05 to 88 percent of GDP in FY 2005/06.
- Credit and monetary developments: Private sector credit grew by almost 17 percent during 2004, reflecting strong demand for mortgages. Following accommodative policy, monetary conditions were tightened in early 2005: effective June 1, 2005, the minimum deposit rate was raised by 1 percentage point (to 3.75 percent), following a 0.5 percentage point increase on April 1. The central bank projects private sector credit growth will drop to less than half the pace of 2004.
- External sector: The external current account deficit increased from 7 percent of GDP in 2003 to 10½ percent of GDP in 2004. The balance of payments moved from a surplus to a deficit of 5½ percent of GDP in 2004, with gross international reserves (GIR) falling to 3¾ months of imported goods and nonfactor services. The external current account deficit is expected to remain high at about 10 percent of GDP in 2005, and external reserve coverage is expected to fall further to about three months.
- Financial sector: Commercial banks are well capitalized, with adequate provisioning; nonperforming loans have fallen with the rebound in economic growth.

### Regional perspective (Box 1 findings)
- Growth performance in 2003–04 at about 3 percent was slightly better than Jamaica and comparable to the rest of the Eastern Caribbean.
- The primary budget deficit is the highest in the region; public expenditure is significantly higher owing to high levels of nonwage expenditure.
- Rising deficits increased public debt by over 15 percentage points of GDP since the late 1990s; however, debt remains below that of other countries in the region except Trinidad and Tobago.
- External current account deficits are high, though lower in Barbados than in Jamaica and the ECCU territories. FDI is lower in Barbados than in regional counterparts.

*Source: _cr05297 - Executive Summary*

### 13.      Structural reforms have advanced in taxation, telecommunications, and the

### 13.      Structural reforms have advanced in taxation, telecommunications, and the

### Structural reforms and public enterprises
- Corporate and personal tax rates have been further lowered, in line with the multiyear reduction in these rates initiated in FY 2002/03.
- Telecommunications: the final phase of reform began in early 2005 and will involve the liberalization of external telecommunications and the issuance of new licenses for fixed telephone lines on a competitive basis.
- Legislation to corporatize the Airport Authority was recently approved to pave the way for more efficient management.

### Report on the discussions (overview)
- Discussions focused on:
  - The need for fiscal consolidation.
  - Enhancing the scope for indirect monetary policy instruments.
  - Structural policies to raise competitiveness and growth.
- Authorities generally agreed with staff recommendations but preferred a more gradual approach to implementation.
- Staff emphasized that the recent buildup of public debt and rapidly declining foreign exchange reserves required decisive fiscal adjustment; without it, monetary policy would bear the burden, crowding out private investment and dampening growth.
- Authorities noted concerns that sharp fiscal adjustment could conflict with providing high-quality public services and using public investment to boost potential growth.

### Competitiveness and wage policy
- Staff and authorities concurred that enhanced competitiveness is needed to support the fixed exchange rate regime.
- Staff recommended tighter linking of wage awards with productivity developments and structural reforms.
- Authorities agreed but expected modest near-term growth benefits from structural reforms, noting sectoral adaptation challenges.

### Medium-Term Scenarios
- Two scenarios guided policy discussions: Scenario I (baseline) and Scenario II (active).
- Scenario I (baseline):
  - Incorporates authorities’ fiscal policy targets and presumes relatively modest structural reforms.
  - Growth projected to revert closer to historical levels: "2 percent" from 2008 onward.
  - International reserves projected to decline to less than two months of imports of goods and services by 2007.
- Scenario II (active):
  - Envisages accelerated structural reforms, more ambitious fiscal adjustment, and a tighter monetary stance over 2005–07.
  - Sustained growth at "3–4 percent" achieved over the medium term.
  - Private investment maintained roughly at projected levels for the coming two years.
  - Current account deficits curtailed and reserve cover maintained at three months.

### Fiscal policy (authorities’ intentions and staff recommendations)
- Authorities’ stated fiscal goals:
  - Gradually return the deficit to around "3 percent of GDP", after allowing for an increase in FY 2005/06.
  - Nonfinancial public sector deficit falling from around "7 percent of GDP" in FY 2005/06 to around "3¼ percent of GDP" from FY 2007/08 onward.
  - Reduce central government debt to "60 percent of GDP" by FY 2010/11.
- Staff estimates:
  - Debt of the nonfinancial public sector would remain at between "86–88 percent of GDP" over the next five years.
- Authorities’ fiscal strategy relies heavily on expenditure reduction:
  - Capital expenditures projected to fall by over "2 percentage points of GDP".
  - Public enterprise balances projected to improve by over "1½ percent of GDP".
  - Subsidies to cover enterprises’ operating losses frozen in nominal terms, leading to decline as a share of GDP.
  - No additional revenue-raising measures contemplated except a possible import surcharge on non-CARICOM imports that could yield "½ a percentage point of GDP" in FY 2005/06.
- Revenue prospects and risks:
  - Decline in import tariffs under the FTAA and completion of phased reduction in income tax rates projected to reduce revenues by "4–4½ percent of GDP".
  - By FY 2009/10, revenues projected to fall below "30 percent of GDP" ("3½ percentage points of GDP" below their level at the beginning of the decade).
  - Central government expenditures projected to decline to about "32 percent of GDP" ("2–3 percentage points" below FY 2000/01).
  - Risks include future increases in public tariffs, fiscal incentives (e.g., for dairy and beef production) that could erode the tax base.
- Staff’s active scenario fiscal path:
  - Fiscal adjustment beginning in the current year to avoid reserves falling below three months of imports.
  - Under staff scenario, nonfinancial public sector balance would fall to "5¾ percent of GDP" in FY 2005/06 and to slightly less than "1 percent of GDP" by FY 2009/10 onward.
  - Public debt would decline to around "75 percent of GDP" by the end of the decade.
  - Note: Net of government deposits in the banking system, government and government-guaranteed debt (excluding the NIS) would fall to "60 percent of GDP" in FY 2012/13 and around "50 percent of GDP" in FY 2015/16.
- Revenue measures in the active scenario:
  - Use privatization proceeds expected for the current year (about "1 percent of GDP") for debt reduction rather than extra budgetary capital expenditure.
  - Incorporate revenue measures of "1 percent of GDP" thereafter, options including broadening the VAT base, increases in the VAT rate, or increases in excises.
  - Additional adjustment via increases in tariffs for water and public transportation to bring enterprises to a balanced position by the end of the decade.
- Petroleum pricing and tax harmonization recommendations:
  - Introduce a mechanism for automatic pass-through of international petroleum price fluctuations to domestic prices (a deterioration of the state oil-importing company of "¼ percent of GDP" resulted from delays in administered price adjustments).
  - Consider harmonization of domestic and offshore tax regimes, in line with FAD technical assistance, to improve tax system efficiency and the environment for international business services and FDI.

### Authorities’ view on fiscal strategy
- Authorities favored a more gradual and modest fiscal adjustment:
  - Stated that a nonfinancial public sector deficit of about "3 percent of GDP" was adequate.
  - Expressed concern that lower fiscal balance would be incompatible with the longstanding social pact among government, labor, and business.
  - Emphasized need for infrastructure investment ahead of the World Cup and maintaining high public services.
  - Argued government debt is mainly held by residents and in local currency, mitigating vulnerabilities given low external debt.
  - Preferred not to begin fiscal adjustment in FY 2005/06.

### Budget formulation and fiscal transparency
- Authorities preparing for adoption of a medium-term framework incorporating accrual and output-based budgeting targeted for implementation in FY 2007/08.
- Mission recommendations to improve public understanding and implementation:
  - Broaden coverage of fiscal data reported in budget documents to include fiscal operations not explicitly recorded in the central government budget (e.g., tax concessions).
  - Incorporate implications of public-private partnerships into medium-term fiscal projections and disclose them in budget documents.
- Authorities noted much of the suggested information was already in the public domain, though not in budget documents.
- Mission recommended considering a Report on the Observance of Standards and Codes (ROSC) to assist in improving fiscal transparency.

### Monetary, exchange rate, and financial sector policies
- Agreement that the fixed exchange rate regime (peg to the U.S. dollar) remains appropriate; it has increased credibility, anchored inflation, and supported investor confidence.
- Mission recommended additional monetary tightening to maintain adequate reserves and support the peg:
  - Slower credit growth appropriate in the coming years, particularly with the World Cup stimulus, to avoid a more abrupt future contraction.
  - Authorities envisaged a slowdown in commercial bank lending in 2005, though credit would still grow faster than nominal GDP over the next three years.
  - Authorities cited the central bank’s “second-tier” reserves arrangement as a mitigating factor; these reserves equaled about "½ month of imports of goods and services".
- Competitiveness indicators and labor costs:
  - Since 1999, labor productivity has fallen by about "3 percent".
  - Falling productivity and rising real wages led to an increase in real unit labor costs of approximately "11 percent" in 1999–2004.
  - Barbados’ share of tourism arrivals and expenditures in the Caribbean has declined; competition from low-cost neighboring countries intensified.
  - Authorities agreed on the need to better align wage increases with labor productivity and strengthen competitiveness, particularly in agriculture and manufacturing.
  - Authorities commissioned IDB studies to assist in policy formulation.
- Monetary instruments and banking sector:
  - Mission encouraged greater use of indirect monetary policy instruments and phasing out the minimum deposit rate.
  - Issuing additional treasury bills through the central bank, with proceeds placed in a blocked account, was suggested to enhance indirect instruments.
  - Authorities preferred to maintain the minimum deposit rate as the primary instrument, arguing phasing it out could increase spreads due to oligopolistic banking structure.
  - Staff analysis indicates a high degree of competition in the banking system.

*Source: _cr05297 - 13.      Structural reforms have advanced in taxation, telecommunications, and the*

### 34.      The mission and authorities agreed that a further deepening of capital account

### _cr05297 - 34.      The mission and the authorities agreed that a further deepening of capital account

### Capital account liberalization
- Further deepening of capital account liberalization should be contingent on macroeconomic conditions in Barbados.
- Staff endorsed the authorities’ strategy for capital account liberalization as envisaged under the Caribbean Single Market and Economy (CSME) initiative.
- Authorities reaffirmed commitment to implementing the last steps in the liberalization process, which relate to:
  - investment abroad in real estate,
  - the purchase of interest-bearing securities, and
  - private borrowing.
- Anticipated beneficial effects of easing capital market restrictions:
  - engendering competition for borrowing and lending,
  - expanding the menu of saving instruments for the population,
  - allowing institutional savers such as the pension funds greater choice to diversify their portfolio of assets.

### E. Addressing Vulnerabilities
- Fiscal sector vulnerabilities:
  - Appear moderate, although high debt, and rising interest rates and oil prices, make the economy susceptible to shocks.
  - Gross financing requirements are high: 25 percent of GDP.
  - Gross financing requirements are likely to be met mainly from domestic sources and appear manageable over the medium term.
  - Debt sustainability analysis (anchored on the baseline scenario) indicates the debt ratio could rise markedly in the context of adverse shocks (see Tables 8 and 9).
  - Maintaining the primary deficit at its current level would entail risks, with public debt rising to over 100 percent of GDP by the end of the decade.
  - High correlation of economic activity with industrial countries—owing to heavy dependence on tourism (Table 10)—increases vulnerability to a downturn in world economic activity or deterioration in international security.
- Banking sector resilience:
  - Current vulnerabilities are low given high levels of capital and provisioning in the banking sector.
  - Recent ownership changes, including privatization of the state-owned (and largest) bank, potentially expose Barbados’ financial sector to shocks in other regional economies; vulnerabilities arising from this appear to be low.
  - Parent banks are well capitalized.
  - Regional central banks have signed a memorandum of understanding for the consolidated supervision of interregional banks.
  - Authorities are progressing with outstanding FSAP issues, including:
    - preparation of guidelines for assessing market risks,
    - revisions to the Financial Institutions Act,
    - strengthening the regulation and supervision of the insurance sector.
- Weather-related and catastrophic risk mitigation:
  - Barbados lies outside the usual path for hurricanes in the Caribbean, but recent destructive hurricanes in Grenada and the Cayman Islands underscore regional financial sector ramifications.
  - Authorities participate in efforts to reinvigorate the regional initiative for the pooling of catastrophic risk.
  - National disaster preparedness plans reviewed annually.
  - All public assets are fully covered by insurance.

### F. Growth-Enhancing Measures
- Mission encouraged accelerated structural reforms to improve competitiveness and supply-side response.
- Measures already noted positively: reduction in corporate tax rates, telecommunications reform, corporatization of the airport.
- Recommended additional steps:
  - Trade liberalization:
    - Barbados’ trade regime is moderately restrictive, reflecting an average tariff level of 16 percent and some residual export and import licensing requirements.
    - This regime imposes costs on competitive activities, including tourism.
    - Mission strongly recommended against the imposition of a surcharge on non-CARICOM imports.
    - Staff supported authorities’ strategy to liberalize trade in the context of the CSME, including proposed liberalization of trade in services, and the FTAA.
    - Mission urged elimination of remaining import and export licensing requirements.
  - Reform of the sugar sector:
    - Potential effects of forthcoming changes in the European sugar regime—to be decided by the EU by end-2005—should be carefully assessed.
    - Government strategy involves diversification of the industry and promotion of new products, including ethanol.
    - Barbados is one of the world’s highest-cost producers of sugar; given expected price reductions under the EU sugar regime, the industry (or activities using raw sugar as an input) may not survive without high levels of public sector support.
    - Opportunity cost of land used for sugar production is high due to high population density.
    - Social costs of restructuring could be ameliorated by appropriate social safety nets for affected workers.
  - Privatization and enterprise reform:
    - Mission supported privatizing or placing under private management all public enterprises that do not serve public policy objectives.
    - Encouraged moving forward on divestment of shares in Gems hotels and the state-owned insurance company.
    - Encouraged development of an explicit timetable for privatizing remaining enterprises that fit the stated criterion.
  - Labor market flexibility:
    - Authorities encouraged to explore options to strengthen labor market flexibility, including suggestions in the recent IDB study on labor markets.
    - Examine scope to streamline unemployment and severance benefits given dual eligibility of workers for both payments.
    - Explore options to improve worker training and the Labor Market Information System.
  - Investment climate and fiscal incentives:
    - Existing incentives cover a wide range of activities and benefit both foreign and domestic producers; they are costly and their effectiveness is highly uncertain.
    - Rather than offering activity-specific tax incentives, staff suggested using surveys to guide efforts to strengthen the investment climate, especially given relatively low level of FDI outside of real estate.
    - Mission recommended reassessing recent initiatives to ensure market failures or public policy objectives justify government intervention costs.
    - Authorities stated recent initiatives were predicated on public policy concerns and explicit financial support was captured in the budget.
    - Regarding remittances, authorities indicated no impediments to investment or remittance flows and attributed relatively low remittances to Barbados’ high standard of living and underreporting of these inflows.

### G. Statistical Issues
- Statistical information provided by Barbados is broadly adequate for surveillance, though important weaknesses remain.
- Strengths and weaknesses:
  - Financial statistics are available on a timely basis.
  - Coverage of data on the operation of public enterprises and on the capital account of the balance of payments needs improvement.
  - Linkage between the offshore sector, the balance of payments, and the national income accounts merits strengthening.
  - An index of real estate prices would greatly facilitate stress testing of different scenarios in financial markets.

### IV. STAFF APPRAISAL
- Recent performance and prospects:
  - A strong recovery of the Barbadian economy appears to have taken hold during the last year, spearheaded by the tourism sector.
  - Growth prospects for the next three years are favorable, reflecting the strong global environment and the expected fillip to activity from the buildup to the 2007 World Cup.
- Medium-term challenges:
  - Macroeconomic imbalances include high levels of public debt, high external current account deficits, and declining international reserves; these need to be addressed to preserve the fixed exchange rate regime and secure sustainable growth.
  - In the absence of fiscal consolidation, public debt would rise steadily and would exceed 100 percent of GDP by the end of the decade.
  - The post-recession import surge has contributed to a widening external current account deficit, projected to remain at historically high levels over the next several years.
  - Net international reserve position has weakened substantially during the last year and is projected to fall below two months of imported goods and services by 2007 under the baseline scenario.
- Policy priorities and recommendations:
  - Fiscal consolidation should be central to the strategy to address imbalances.
    - Primary deficit remains the highest in the region despite fiscal adjustment over the last two years.
    - Fiscal stimulus in FY 2005/06, amid a robust private-sector-led recovery, will make the path to debt sustainability more difficult.
    - The fiscal deficit needs to be reduced decisively while the external environment remains favorable to ensure adequate reserve cover and to place the government debt ratio on a declining path.
    - Fiscal consolidation would relieve pressure on monetary policy to shore up reserve position and facilitate adequate credit growth to support private investment and economic activity.
  - Revenue and expenditure policy:
    - Government’s effort to trim expenditures is commendable, but there is a need to intensify the revenue effort.
    - Tax measures would partially offset projected revenue loss from the decline in customs duties due to trade liberalization.
    - Authorities’ efforts to promote private sector participation in economic infrastructure and services are welcome, but expenditure commitments associated with these projects need careful monitoring and control.
    - Authorities are encouraged to rationalize tariffs of major public enterprises, in particular water and bus fares, to reduce subsidies.
  - Exchange rate and competitiveness:
    - Fixed exchange rate regime remains appropriate for Barbados; peg is a strong anchor of price stability and investor confidence.
    - To maintain the regime, macroeconomic imbalances must be addressed to avoid erosion of external reserves to very low levels.
    - Rising unit labor costs reduce competitiveness; declining real effective exchange rate (owing to the peg to the U.S. dollar) has provided some shielding.
    - To strengthen competitiveness, align wage increases with labor productivity developments and accelerate productivity growth through structural reforms.
  - Monetary and financial policy:
    - Authorities urged to make greater use of indirect monetary policy instruments.
    - Limited range of policy instruments has contributed to inefficient financial intermediation.
    - Recommended phasing out the administered minimum interest rate on savings deposits and consider accelerating the transition to market-based instruments of monetary control.
    - Staff welcomes actions to implement remaining FSAP recommendations.
  - Structural reforms:
    - Scope to accelerate structural reforms including removing import and export licenses; reforming the sugar sector; privatizing remaining public enterprises not meeting public policy objectives; enhancing labor market flexibility; and rationalizing fiscal incentives.
- Statistical data needs reiterated:
  - Flow and coverage of data on operations of public enterprises and on the capital account of the balance of payments need improvement.

*Source: _cr05297 - 34.      The mission and authorities agreed that a further deepening of capital account liberalization should be contingent on macroeconomic conditions in Barbados*

### 49.      It is proposed that the next Article IV consultation with Barbados be conducted on the

### _cr05297 - 49.      It is proposed that the next Article IV consultation with Barbados be conducted on the

### Summary macroeconomic outlook
- It is proposed that the next Article IV consultation with Barbados be conducted on the standard 12-month cycle.
- Real GDP (annual percent changes):
  - 2000: 2.3
  - 2001: -2.6
  - 2002: 0.5
  - 2003: 2.0
  - 2004: 4.4
  - 2005: 3.1
- GDP deflator (annual percent changes): 2000: 0.0; 2001: 2.8; 2002: -4.4; 2003: 4.6; 2004: 2.0; 2005: 3.2
- Consumer prices (12-month increase): 2000: 2.4; 2001: 2.8; 2002: 0.2; 2003: 1.6; 2004: 1.4; 2005: 3.2
- Projections (selected):
  - Real GDP (2006–2009, Scenario I baseline table): 3.3, 3.5, 2.0, 2.0 (years 2006–2009 as listed)
  - Average CPI (2006–2009): 2.0, 2.0, 2.0, 2.0
  - Nominal GDP (2006–2009, baseline): 5.4, 5.6, 4.0, 4.0

### Public finance: fiscal balances, revenue, and expenditure
- Fiscal year basis (April 1 start).
- Government revenue (percent of GDP): 2000: 33.3; 2001: 33.6; 2002: 33.9; 2003: 34.2; 2004: 33.0; 2005: 32.5
- Government expenditure (percent of GDP): 2000: 34.6; 2001: 38.3; 2002: 45.5; 2003: 39.6; 2004: 36.4; 2005: 37.0
- Government balance (percent of GDP): 2000: -1.3; 2001: -4.7; 2002: -11.6; 2003: -5.4; 2004: -3.5; 2005: -4.5
  - Budgetary balance (percent of GDP): 2000: -1.9; 2001: -4.2; 2002: -5.6; 2003: -2.4; 2004: -2.7; 2005: -3.4
- Central government operations (in millions of Barbados dollars, selected levels):
  - Budgetary revenue: 2000/01: 1,705; 2001/02: 1,703; 2002/03: 1,716; 2003/04: 1,865; 2004/05: 1,884; 2005/06: 1,971 (est./proj)
  - Budgetary expenditure: 2000/01: 1,803; 2001/02: 1,917; 2002/03: 1,997; 2003/04: 1,997; 2004/05: 2,039; 2005/06: 2,178
  - Budgetary balance (millions): 2000/01: -98; 2001/02: -214; 2002/03: -281; 2003/04: -133; 2004/05: -156; 2005/06: -207
  - Overall balance (millions): 2000/01: -65; 2001/02: -237; 2002/03: -586; 2003/04: -295; 2004/05: -198; 2005/06: -272
- Public debt (percent of GDP; end-of-period):
  - Government and government-guaranteed debt: 2000: 74.1; 2001: 82.9; 2002: 86.9; 2003: 85.0; 2004: 86.1; 2005: 88.0
  - Of which central government debt: 2000: 64.1; 2001: 73.6; 2002: 78.4; 2003: 75.3; 2004: 74.5; 2005: 74.7
- Gross financing requirement (consolidated public sector, percent of GDP): 2000/01: 19.8; 2001/02: 23.0; 2002/03: 32.8; 2003/04: 27.3; 2004/05: 24.7; 2005/06: 25.0
- Memorandum: Fiscal year GDP at market prices (millions of Barbados dollars): 2000/01: 5,115; 2001/02: 5,069; 2002/03: 5,062; 2003/04: 5,449; 2004/05: 5,715; 2005/06: 6,066

### Debt sustainability and stress scenarios
- Public Sector Debt Sustainability Framework (2002/03–2010/11) baseline:
  - Public sector debt (percent of GDP): 2002/03: 86.9; 2003/04: 85.0; 2004/05: 86.1; 2005/06: 88.0; 2006/07: 88.0; 2007/08: 87.0; 2008/09: 86.8; 2009/10: 86.6; 2010/11: 85.5
  - Debt-stabilizing primary balance (percent of GDP): 1.6 (reported in table)
- Identified debt-creating flows (example years, percent of GDP): 2002/03: 12.9; 2003/04: -3.4; 2004/05: 4.3; 2005/06: 0.9; 2006/07: 0.0; 2007/08: -1.1
- Automatic debt dynamics contribution (percent of GDP): 2002/03: 5.5; 2003/04: -1.3; 2004/05: 0.1; 2005/06: -0.2
- Stress test outcomes (selected):
  - A2. No policy change (constant primary balance) in 2006/07–09/10: public sector debt rises from 88.0 to 104.5 by 2010/11.
  - B2. Real GDP growth at historical average minus two standard deviations in 2006/07 and 2007/08: public sector debt rises to 109.7 by 2010/11.

### Monetary and financial sector
- Summary monetary survey (millions of Barbados dollars, end-of-period or changes):
  - Net foreign assets (M2 relation, percent changes): 2000: 12.0; 2001: 14.2; 2002: 4.7; 2003: 5.6; 2004: -8.8; 2005: -5.3
  - Net domestic assets (percent change): 2000: -4.2; 2001: -8.6; 2002: 5.7; 2003: 0.8; 2004: 25.2; 2005: 11.7
  - Net credit to public sector (percent change): 2000: -4.3; 2001: -8.1; 2002: 12.2; 2003: 3.6; 2004: 4.1; 2005: 7.4
  - Credit to private sector (percent change, 12-month increase): 2000: 2.6; 2001: -0.4; 2002: 3.3; 2003: 0.9; 2004: 16.7; 2005: 6.5
  - Broad money (M2, percent change): 2000: 7.9; 2001: 5.6; 2002: 10.4; 2003: 6.5; 2004: 16.4; 2005: 6.4
- Central Bank balance sheet (millions of Barbados dollars, end-of-period stocks):
  - Net international reserves: 2000: 96; 2001: 1,414; 2002: 1,366; 2003: 1,503; 2004: 1,190; 2005: 945
  - Monetary base (end-of-period): 2000: 563; 2001: 647; 2002: 908; 2003: 1,083; 2004: 771; 2005: 746
  - Gross international reserves (U.S. dollars, millions): 2000: 484.4; 2001: 707.0; 2002: 683.2; 2003: 751.7; 2004: 595.2; 2005: 472.5
  - Gross international reserves (in months of imports of goods & services): 2000: 3.7; 2001: 5.7; 2002: 5.8; 2003: 5.8; 2004: 3.8; 2005: 2.9
- Financial soundness indicators (selected, percent of GDP or relevant ratios):
  - Capital adequacy ratio (indigenous banks): 2000: 15.9; 2001: 18.2; 2002: 18.8; 2003: 25.0; 2004: 17.9
  - NPLs/total loans: 2000: 3.8; 2001: 5.0; 2002: 7.9; 2003: 9.3; 2004: 7.5
  - Three-month T-bill rate (percent): 2000: 3.9; 2001: 2.0; 2002: 1.5; 2003: 0.6; 2004: 2.8

### External sector and balance of payments
- Current account balance (U.S. dollars, millions): 2000: -145.0; 2001: -93.8; 2002: -185.5; 2003: -186.3; 2004: -295.4; 2005: -311.9
- Current account (percent of GDP): 2000: -5.7; 2001: -3.7; 2002: -7.5; 2003: -6.9; 2004: -10.5; 2005: -10.4
- Exports of goods (f.o.b., millions US$): 2000: 286.3; 2001: 271.2; 2002: 233.3; 2003: 245.0; 2004: 293.0; 2005: 315.2
  - Domestic exports (millions US$): 2000: 189.6; 2001: 176.3; 2002: 148.8; 2003: 147.9; 2004: 173.4; 2005: 187.5
- Tourism receipts (millions US$ or percent of GDP depending on table):
  - Tourism receipts (Table 1, percent of GDP contribution): 2000: 28.3; 2001: 28.0; 2002: 26.6; 2003: 28.1; 2004: 28.8; 2005: 28.4
  - Travel (credit, millions US$): 2000: 628.9; 2001: 613.1; 2002: 558.9; 2003: 653.4; 2004: 701.4; 2005: 744.1
- Merchandise trade balance (millions US$): 2000: -743.9; 2001: -681.1; 2002: -719.8; 2003: -818.6; 2004: -964.9; 2005: -1,029.6
- Imports (millions US$): 2000: 1,030.2; 2001: 952.2; 2002: 953.1; 2003: 1,063.6; 2004: 1,257.9; 2005: 1,344.8
- Gross international reserves (US$ millions): 2000: 484.4; 2001: 707.0; 2002: 683.2; 2003: 751.7; 2004: 595.2; 2005: 472.5
  - In months of imports of goods and services: 2000: 3.7; 2001: 5.7; 2002: 5.8; 2003: 5.8; 2004: 3.8; 2005: 2.9
- Public external debt (US$ millions): 2000: 578.1; 2001: 744.5; 2002: 730.8; 2003: 734.1; 2004: 770.0; 2005: 735.1
  - Public external debt (percent of GDP): 2000: 22.6; 2001: 29.1; 2002: 29.5; 2003: 27.2; 2004: 27.4; 2005: 24.9

### Selected vulnerability indicators
- Tourist sector, percent of GDP (hotels and restaurants): 2000: 15.8; 2001: 15.2; 2002: 14.7; 2003: 15.5; 2004: 16.0; 2005: 16.4
- Travel receipts, percent of total exports: 2000: 56.5; 2001: 56.6; 2002: 55.3; 2003: 57.7; 2004: 57.5; 2005: 57.3
- Fiscal vulnerability indicators (percent of GDP): overall balance of public sector: 2000: -2.1; 2001: -5.0; 2002: -12.5; 2003: -6.4; 2004: -5.9; 2005: -6.9
- External indicators (selected ratios):
  - Gross official reserves to short-term debt (percent): 2000: 18.0; 2001: 17.1; 2002: 11.6; 2003: 14.4; 2004: 12.6; 2005: 9.0
  - Total external debt to exports of goods and services (percent): 2000: 45.2; 2001: 59.0; 2002: 61.4; 2003: 55.9; 2004: 54.7; 2005: 49.5

### Fund relations and technical assistance
- Membership: Joined 12/29/1970; Article VIII.
- Quota: 67.50 SDR million (100.00 percent of quota).
- Fund holdings of currency: 62.30 (92.30 percent of quota).
- Reserve position in Fund: 5.20 (7.71 percent of quota).
- SDR Department net cumulative allocation: 8.04 SDR million (100.00 percent); holdings: 0.02 (0.20 percent).
- Outstanding Purchases and Loans: None.
- Financial arrangements (historical): Stand-by approvals on 02/07/1992 (amount approved 23.89 SDR million; amount drawn 14.67 SDR million) and 10/01/1982 (amount approved 31.88 SDR million; amount drawn 31.88 SDR million).
- Projected obligations to Fund (SDR million, charges/interest): 2005: 0.10; 2006: 0.20; 2007: 0.20; 2008: 0.20; 2009: 0.20
- Exchange rate arrangements:
  - Barbados dollar pegged to the U.S. dollar since mid-1975 at BDS$2.00 = US$1.00.
  - On May 15, 2005, official buying and selling rates for the U.S. dollar were BDS$1.98 and BDS$2.04 per US$1.
  - Exchange restrictions: no restrictions on payments and transfers for current international transactions subject to Article VIII approval; exchange controls on some invisibles; all capital outflows and certain capital inflows require approval. Authorities accepted obligations of Article VIII, Sections 2, 3, and 4 on November 3, 1993.
- Last Article IV consultation: 2004 Article IV consultation concluded by the Executive Board on May 5, 2004; Barbados is on the standard 12-month consultation cycle.
- Technical assistance (selected 1994–2005):
  - STA: Sep. 23, 2003–Sep. 22, 2005 — Multisector statistics advisor.
  - FAD: September 6–13, 2004 — Tax policy.
  - CARTAC: March 8–19, 2004 — Regional BOP methodology course.
  - CARTAC: January 26–30, 2004 — Development of supply and use tables.
  - FAD: July 3–18, 2003 — Further reform of indirect taxes.
  - CARTAC: March 18–29, 2002 — Balance of payments technical assistance mission.
  - FAD: May 28−June 8, 2001 — Uniform taxation of domestic and offshore activities, and review of tax incentive regime.
  - STA: Jan. 25−Feb. 2, 1999 — Development of metadata for the General Data Dissemination System.
  - FAD: Nov. 6−17, 1995 and Feb. 28−Mar. 12, 1996.

*Source: IMF staff report and accompanying tables as provided in the content unit.*

### Introduction of a value-added tax

### Introduction of a value-added tax

### Financial sector assessment and institutional presence
- In late 2002, an FSAP mission (joint Fund-Bank) assessed the Barbadian financial system.
- The resident representative’s post was closed in January 1995.

### Relations with the Inter-American Development Bank — active loans (as of June 17, 2005)
- Active loans to Barbados (In millions of U.S. dollars):
  - Bridgetown roads — Approval Date: May. 1993 — Amount: 18.5 — Amount Disbursed: 17.2 — Amount Available: 1.2
  - Solid waste management program — Approval Date: Oct. 1998 — Amount: 13.0 — Amount Disbursed: 0.0 — Amount Available: 13.0
  - Education sector enhancement program — Approval Date: Dec. 1998 — Amount: 85.0 — Amount Disbursed: 26.3 — Amount Available: 58.7
  - Administration of justice — Approval Date: Aug. 2001 — Amount: 8.8 — Amount Disbursed: 0.5 — Amount Available: 8.3
  - Coastal infrastructure — Approval Date: Jan. 2002 — Amount: 17.0 — Amount Disbursed: 0.1 — Amount Available: 16.9
- Total: Amount: 142.3 — Amount Disbursed: 44.1 — Amount Available: 98.2

### IDB net cash flow and balance outstanding (selected annual figures)
- Loan approvals: 1997: 0.0; 1998: 98.0; 1999: 0.0; 2000: 0.0; 2001: 8.7; 2002: 17.0; 2003: 0.0; 2004: 0.0; 2005: 38.0
- Repayments: 1997: 7.3; 1998: 7.5; 1999: 8.1; 2000: 7.3; 2001: 7.3; 2002: 8.1; 2003: 11.0; 2004: 13.8; 2005: 12.1
- Disbursements: 1997: 15.1; 1998: 17.9; 1999: 5.8; 2000: 10.4; 2001: 24.2; 2002: 15.8; 2003: 16.0; 2004: 7.9; 2005: 7.5
- Net loan flow: 1997: 7.8; 1998: 10.4; 1999: -2.3; 2000: 3.1; 2001: 16.9; 2002: 7.7; 2003: 5.0; 2004: -5.9; 2005: -4.6
- Interest and charges: 1997: 7.9; 1998: 8.2; 1999: 9.7; 2000: 10.0; 2001: 8.7; 2002: 7.2; 2003: 8.2; 2004: 7.4; 2005: 9.4
- Net cash flow: 1997: -0.1; 1998: 2.2; 1999: -12.0; 2000: -6.9; 2001: 8.2; 2002: 0.5; 2003: -3.2; 2004: -13.3; 2005: -14.0
- Debt service: 1997: 15.2; 1998: 15.7; 1999: 17.8; 2000: 17.3; 2001: 16.0; 2002: 15.3; 2003: 19.2; 2004: 21.2; 2005: 21.5
- Debt outstanding: 1997: 133.5; 1998: 143.9; 1999: 141.6; 2000: 127.0; 2001: 143.9; 2002: 151.6; 2003: 156.6; 2004: 150.7; 2005: 146.1
- Source: Inter-American Development Bank. (1/ Provisional.)

### Relations with the Caribbean Development Bank — approvals 1970−2004
- Aggregate approvals: US$224.4 million (represents 9.0 percent of total approvals to CDB’s borrowing member countries).
- Sectoral allocations:
  - Productive sectors: US$61.7 million — 27.5 percent
    - Agriculture: US$4.2 million — 1.9 percent
    - Manufacturing: US$45.5 million — 20.3 percent
    - Tourism: US$12.0 million — 5.3 percent
  - Economic infrastructure: US$112.9 million — 50.3 percent
    - Power and energy: US$0.1 million — 0.0 percent
    - Water: US$0.8 million — 0.4 percent
    - Transportation: US$52.4 million — 23.4 percent
    - Housing: US$1.4 million — 0.6 percent
    - Education: US$55.0 million — 24.5 percent
    - Health: US$3.2 million — 1.4 percent
  - Multisector: US$49.7 million — 22.2 percent
  - Total: US$224.4 million — 100.0 percent
- Recent approvals: Approximately US$13.5 million in new loans (multi-sector) approved in 2003; no new loans approved in 2004.
- Source: Caribbean Development Bank.

### Statistical issues — general assessment
- The statistical information provided by Barbados is broadly adequate for surveillance purposes, although some important weaknesses remain.
- Barbados participates in the General Data Dissemination System (GDDS).
- Metadata and authorities’ plans for improving the statistical base are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB).

### National accounts — key weaknesses and initiatives
- Compilation hampered by lack of reliable and current data on nonsugar agriculture, private construction, and nontourism service activities.
- A census of economic activity covering tourism, financial businesses, and transport and communications is scheduled to be initiated in June 2005.
- National accounts estimation notes:
  - Estimates by expenditure are based on selected surveys.
  - Household survey yields a reliable estimate of aggregate consumption.
  - Weaknesses in external trade and private investment data.
  - Figures for gross domestic product at constant prices are based on 1974 price weights; authorities are updating weights to 2000.
  - National accounts are based on SNA 68 rather than SNA 93.
- Price and production indices:
  - Consumer price index uses an expenditure basket for 1998–99 for its July 2001=100 series introduced in January 2002.
  - Index of industrial production is based on sectoral weights prevailing in 1982; authorities working towards rebasing to 1994.
  - Absence of a systematic index of property prices leaves potential misalignments in real estate prices unattended.
- Cautionary note: Given the infrequent CPI basket change, comparisons of CPI data prior to 2002 with CPI data after 2002 should be undertaken with care.

### Nonfinancial public sector — data coverage issues
- Fairly comprehensive and up-to-date data above the line are available for the general government, but there is a lag in the reporting of transfers.
- Under-reporting of off-budget transactions leads to a significant discrepancy between the overall balance and financing data.
- Data on public enterprises are not systematically and promptly reported to the ministry of finance.
- Financial sector data on public sector net domestic borrowing usually cannot be fully reconciled with above the line fiscal data, partly because of limited availability of nonbank financial sector information.
- Data supplied by public enterprises (e.g., government transfers and capital spending) often differ from those provided by the ministry of finance.

### Financial sector — statistical weaknesses and ongoing improvements
- Weaknesses in overall quality, coverage, and timeliness of monetary accounts.
- Residency concept in monetary statistics is not consistent with the fifth edition of the Balance of Payments Manual:
  - The CBB classifies some loans to and deposits of non-residents as credit to the private sector and part of broad money rather than as net foreign assets of commercial banks.
  - Non-national individuals are recognized as residents only after continuous residence in Barbados for at least three years.
  - Need to extend coverage to include offshore bank accounts.
- Timeliness improvements reported:
  - Lag in submitting monetary data decreased from about five months to about six weeks for central bank accounts, and about ten weeks for the monetary survey.
- Accounting conventions concerns:
  - CBB data reported on a cash basis and do not include accrued receivables and payables.
  - Commercial banks’ positions recorded on an accrual basis; accrued interest receivable and payable classified under other assets and other liabilities rather than under domestic credit.
  - Marketable securities recorded at acquisition cost and revalued to market value only on an annual basis (as of December 31).
  - Short-term zero-coupon securities (treasury bills) recorded at acquisition cost and not revalued to market value until redemption at maturity.
  - Positions with the IMF (SDR holdings, Reserve Tranche Position, and SDR Allocation) valued at the IMF holdings rate rather than at the end-of-period market rate.
- These issues are being addressed in the context of the GDDS.

*Source: _cr05297 - Introduction of a value-added tax*

### 5. Lags in the compilation of merchandise trade data limit the timeliness of estimating

### 5. Lags in the compilation of merchandise trade data limit the timeliness of estimating

### Data limitations and statistical concerns
- Lags in the compilation of merchandise trade data limit the timeliness of estimating the external current account balance, in particular information on the activities of the offshore sector.
- Estimates of the components of the financial account need to be strengthened.
- Quarterly balance of payments estimates are no longer provided.
- Directors observed that statistical information provided by Barbados is broadly adequate for surveillance purposes, but noted the need to strengthen the quality, coverage, and timeliness of data for the public enterprises and the capital account of the balance of payments.

### Economic context and recent developments
- Barbados is heavily dependent on tourism and financial services; population about 272,000; per capita income (on a PPP basis) about US$15,700.
- During 1993–2000: Real GDP grew at 3 percent; inflation was less than 2 percent; public sector deficits were maintained at less than 3 percent of GDP.
- The economy suffered a sharp recession in 2001–02 after the September 11th attacks and the global slowdown.
- Public sector fiscal deficit rose from about 2 percent of GDP in FY 2000/01 to about 13 percent of GDP in FY 2002/03; public sector debt-to-GDP rose from 74 percent in March 2001 to 87 percent in March 2003.
- External current account deficit remained at around 6 percent of GDP over 2001–03.
- A strong recovery appears to have taken hold in 2004: Real GDP growth in 2004 is estimated at 4.4 percent, led by tourism, construction, and communications.
- Public sector deficit fell to 6½ percent of GDP in FY 2003/04 and 6 percent of GDP in FY 2004/05 as capital expenditures declined.
- Private sector credit grew by almost 17 percent during 2004, reflecting strong demand for mortgages.
- External current account deficit rose from 7 percent of GDP in 2003 to 10½ percent of GDP in 2004.
- Balance of payments moved from a surplus to a deficit of 5½ percent of GDP in 2004; gross international reserves (GIR) fell to 3¾ months of imported goods and nonfactor services.
- Structural reforms advanced in taxation, telecommunications, and the public enterprise sector; corporate and personal tax rates further lowered; final phase of telecommunications reform began in early 2005; legislation to corporatize the Airport Authority recently approved.

### Executive Board assessment and policy recommendations
- Key macroeconomic imbalances identified: high level of public debt, large fiscal and external current account deficits, and declining international reserves.
- Directors urged authorities to reduce the fiscal deficit decisively to place public debt on a firmly declining path and build a fiscal cushion against negative shocks.
- Faster fiscal consolidation recommended to strengthen external reserves without overburdening monetary policy and to allow credit to be channeled to the private sector to support growth.
- Directors welcomed government plans to reduce public expenditure over the medium term and recommended complementing these with revenue measures and rationalization of tariffs of major public enterprises to reduce subsidies.
- Authorities encouraged to implement output-based budgeting within a medium-term framework to improve budget formulation.
- Directors cautioned that expenditure commitments associated with private-sector participation in infrastructure and services should be carefully monitored and accounted for in budget documents.
- A few Directors recommended considering a fiscal Report on the Observance of Standards and Codes to assist fiscal transparency.
- Directors supported preserving Barbados’ fixed exchange rate regime as an anchor for price stability and investor confidence, emphasizing the need for sound policies to address macroeconomic imbalances.
- To strengthen competitiveness: tighten the link between wage increases and labor productivity; accelerate productivity growth through structural reform.
- Monetary and financial sector recommendations:
  - Continue steps to slow the growth of credit and consider further tightening to help arrest the decline in foreign reserves.
  - Make greater use of indirect monetary policy instruments and enhance competition in the banking system.
  - Gradually phase out the minimum deposit rate to improve efficiency of financial intermediation.
  - Monitor risks related to the large share of public debt held by domestic financial institutions.
  - Strengthen efforts to curb money laundering and the financing of terrorism.
- Structural reform priorities:
  - Encourage foreign direct investment, improve competitiveness, and enhance long-term growth potential.
  - Further reforms: removal of import and export licenses; reform of the sugar sector; restructuring or privatization of public enterprises that do not meet public policy objectives; enhanced labor market flexibility; rationalize costly fiscal incentives to investment.
- Directors welcomed progress on tax rate reductions, telecommunications reform, airport corporatization, and commitments to trade and capital account liberalization within regional and hemispheric initiatives.

### Key statistics and indicators (preserve exact figures)
- Population: about 272,000.
- Per capita income (PPP): about US$15,700.
- Public sector deficit: about 2 percent of GDP in FY 2000/01; about 13 percent of GDP in FY 2002/03.
- Public sector debt-to-GDP: 74 percent in March 2001; 87 percent in March 2003.
- External current account deficit: around 6 percent of GDP over 2001–03.
- Real GDP growth (2004): 4.4 percent.
- Public sector deficit: 6½ percent of GDP in FY 2003/04; 6 percent of GDP in FY 2004/05.
- Private sector credit growth (2004): almost 17 percent.
- External current account deficit: 7 percent of GDP in 2003; 10½ percent of GDP in 2004.
- Balance of payments: deficit of 5½ percent of GDP in 2004.
- Gross international reserves (GIR): 3¾ months of imported goods and nonfactor services (2004).
- Selected annual indicators (2000–2004):
  - Real GDP: 2000: 2.3; 2001: -2.6; 2002: 0.5; 2003: 2.0; 2004: 4.4.
  - Consumer prices (12-month increase): 2000: 2.4; 2001: 2.8; 2002: 0.2; 2003: 1.6; 2004: 1.4.
  - Tourist arrivals: 2000: 5.8; 2001: -6.9; 2002: -1.8; 2003: 6.7; 2004: 3.8.
  - Unemployment (percent of labor force): 2000: 9.4; 2001: 9.9; 2002: 10.3; 2003: 11.0; 2004: 9.6.
  - Net domestic assets (changes in percent of beginning-of-period broad money): 2000: -4.2; 2001: -8.6; 2002: 5.7; 2003: 0.8; 2004: 25.2.
  - Public sector credit (net): 2000: -4.3; 2001: -8.1; 2002: 12.2; 2003: 3.6; 2004: 4.1.
  - Private sector credit: 2000: 2.1; 2001: -0.3; 2002: 2.4; 2003: 0.6; 2004: 11.0.
  - Broad money: 2000: 7.9; 2001: 5.6; 2002: 10.4; 2003: 6.5; 2004: 16.4.
  - Nonfinancial public sector balance (percent of GDP): 2000: -2.2; 2001: -4.7; 2002: -12.8; 2003: -6.4; 2004: -5.9.
  - Central government (percent of GDP): 2000: -1.3; 2001: -4.7; 2002: -11.6; 2003: -5.4; 2004: -3.5.
  - Public enterprises (percent of GDP): 2000: -0.9; 2001: -0.0; 2002: -1.2; 2003: -1.0; 2004: -2.4.
  - Public debt (percent of GDP): 2000: 74.1; 2001: 82.9; 2002: 86.9; 2003: 85.0; 2004: 86.1.
  - External current account balance (percent of GDP): 2000: -5.7; 2001: -3.7; 2002: -7.5; 2003: -6.9; 2004: -10.5.
  - Public external debt (percent of GDP): 2000: 22.6; 2001: 29.1; 2002: 29.5; 2003: 27.2; 2004: 27.4.
  - Gross international reserves (in millions of U.S. dollars): 2000: 484; 2001: 707; 2002: 683; 2003: 752; 2004: 595.

*Source: IMF Executive Board discussion and Public Information Notice on the 2005 Article IV consultation with Barbados (as of August 15, 2005).*

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