## _cr10363

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### Executive Summary
- Global crisis impact:
  - GDP declined 5 percent in 2009 and an estimated 1 percent in the first half of 2010.
  - Output expected to have contracted by a cumulative 6 percent from late 2007 through end-2010.
  - Construction contracted by a cumulative 26 percent between 2007 and 2009.
  - Unemployment rose from 7.4 percent in 2007 to 10.7 percent in Q2 2010.
  - Average inflation declined in 2009; fuel and food price rises expected to push up inflation in 2010.
  - Total factor productivity declined in the past 10 years.

- Public finances and reserves:
  - Public debt reached 110 percent of GDP in FY 2009/10 (public debt-to-GDP ratio 110.7 percent by end-FY2009/10).
  - External borrowing and the SDR allocation enabled an increase in international reserves.
  - Nonperforming loans rose significantly; collapse of CLICO and BAICO harmed insurance sector.

- Mission and composition:
  - IMF team visited Bridgetown September 12–24.
  - Team: Marcello Estevão (head), Gamal El-Masry, Carla Macario, John Ralyea; John Rolle participated in several meetings.

### Fiscal developments and risks
- Revenue and deficit:
  - Tax revenue, particularly corporate income taxes and VAT, declined considerably in FY09/10.
  - Central government deficit widened from 5 percent of GDP in FY2008/09 to more than 9 percent in FY2009/10.
  - NFPS deficit: 7⅓ percent of GDP in FY 2009/10.

- Debt structure and financing:
  - By end-FY2009/10 public debt-to-GDP ratio: 110.7 percent.
  - More than two-thirds of Barbados’s debt is domestic and denominated in local currency.
  - About one-third of central government debt is held by the National Insurance System.
  - External debt amortizations are strongly back-loaded.

- Medium-Term Fiscal Strategy (MTFS) objectives (issued March):
  - Reduce overall fiscal deficit and generate a balanced budget by 2014/15 and a surplus by 2015/16.
  - Focus growth on foreign-exchange-earning sectors.
  - Improve tax administration, contain wage bill and transfers, substitute expensive foreign private loans with cheaper multilateral financing.
  - Authorities expect fiscal adjustment would bring down public debt-to-GDP ratio by about 14 percentage points in five years.

### External sector and exchange rate
- Current account and reserves:
  - Current account deficit: 9.6 percent of GDP in 2008; narrowed to 5.5 percent of GDP in 2009.
  - In 2009 authorities issued US$120 million in external bonds and got US$85 million in SDR allocations.
  - By end-2010 under current plans authorities would have borrowed an additional net amount of US$145 million.
  - Without foreign borrowing and SDR allocations, foreign reserves would have halved in two years.
  - Gross international reserves (GIR) (months of imports): 2008 3.3; 2009 4.6; 2010 4.2 (selected table data).

- Exchange rate peg and competitiveness:
  - Barbados dollar pegged at BDS$2.00 = US$1.00 since 1975; Article VIII obligations accepted.
  - Staff analysis: real effective exchange rate appreciated 13 percent over the last 24 months relative to main competitors and exceeds estimated equilibrium by 5 to 10 percent.
  - Real exchange rate somewhat overvalued; fiscal imbalances pose external stability risks.

### Financial sector developments and vulnerabilities
- Banking sector indicators (selected):
  - Capital adequacy ratio: 2006 14.4; 2007 16.4; 2008 16.1; 2009 17.5; 2010 Jun 18.0.
  - NPLs to total loans: 2006 4.4; 2007 2.8; 2008 3.5; 2009 7.2; 2010 Jun 9.9.
  - Provision for loan loss to total loans: 2006 1.5; 2007 1.5; 2008 2.2; 2009 3.3; 2010 Jun 1.5.
  - Return on equity: 2006 14.3; 2007 13.5; 2008 11.5; 2009 9.9; 2010 Jun 7.9.
  - Credit to private sector, growth yoy: 2006 13.2; 2007 6.4; 2008 11.1; 2009 1.4; 2010 Jun 1.7.
  - Liquid assets to total assets: 2006 7.9; 2007 9.5; 2008 9.0; 2009 10.8; 2010 Jun 10.4.

- Sector developments and risks:
  - Banking sector: six foreign institutions; remains well capitalized but several indicators deteriorated.
  - NPLs averaged almost 10 percent of total loans in June 2010; one bank’s large NPL increase linked to tourism-project exposure.
  - Loss provisions remain low relative to international standards.
  - Preliminary stress tests suggest banking system would remain sound under substantial shocks.
  - Offshore financial institutions’ assets fell from 11 times GDP in 2007 to 9 times GDP in 2009.
  - Stock trading dropped from 7 percent of GDP in 2007 to less than ½ percent of GDP in 2009.
  - Credit unions: membership contracted, NPLs remain high but appear resilient.

### Insurance sector crisis
- CLICO and BAICO developments:
  - CL Financial asset values plummeted in 2008; in Feb 2009 authorities acknowledged difficulties in CLICO-Barbados.
  - CLICO-Barbados: mortgage business sold; negotiations for general insurance ongoing.
  - CLICO’s life-insurance arm net liabilities estimated at about 3¼ percent of GDP.
  - Central Bank deposited US$5 million into CLICO’s mortgage subsidiary in early 2009 and granted access to a special credit window; oversight committee set up.
  - BAICO placed under judicial management; government to request judicial manager appointment for CLICO.

### Staff recommendations (focus of consultation)
- Fiscal policy:
  - Go beyond planned expenditure controls and raise VAT and corporate tax rates while widening their base to stabilize and then reduce public debt-to-GDP ratio.
  - Examples listed by staff:
    - Increase VAT rate by 3 percentage points to 18 percent and broaden base by eliminating many exemptions and zero ratings.
    - Raise corporate tax rate (from 2 to 3 percent) and reduce exemptions over the medium term, particularly for offshore operations.
  - Expenditure measures:
    - Bring public sector wages and spending on goods and services down to mid-2000s ratios to GDP.
    - Adjust tariffs for public utilities and services to improve public enterprises’ finances and allow cuts in government transfers.
    - Combine measures with well-targeted transfers and allow moderate increases in capital spending.

- Monetary and exchange rate:
  - Decisive fiscal adjustment to contain pressures on the exchange rate peg.
  - Monetary policy rates should be set to manage capital flows; mission argued against further declines in policy interest rates.
  - Minimum deposit rate currently at 2½ percent and remains negative in real terms.

- Financial sector:
  - Intensify monitoring and reporting; conduct regular stress tests; strengthen prudential regulation for banks.
  - Reform regulatory and supervisory framework for nonbank financial institutions; consolidate supervision into planned Financial Services Commission (FSC) by spring 2011.
  - Resolve CLICO and BAICO; upgrade provisioning requirements to international practices.

### Authorities’ views and actions
- Authorities agreed with staff thrust; concurred deeper fiscal adjustment less disruptive than unsustainable public debt.
- Planning to have new Financial Services Commission operational by spring 2011.
- Some reluctance to major tax-code changes without further studies (including with CARTAC); committed to moderate public wage growth and reducing transfers to quasi-public enterprises.

### Outlook and risks
- Growth projections:
  - Marginal output contraction in 2010; moderate recovery in 2011 and onwards with growth rates of 2½–3 percent.
  - Real GDP projections (selected): 2008 -0.2; 2009 -4.7; 2010 -0.5; 2011 2.0–2.5 (varies by table).
- Downside risks:
  - Slow recovery in U.S. and U.K.; crisis-driven output gap expected to narrow only gradually.
- Labor market:
  - Unemployment expected to rise above 11 percent in 2011 before receding slowly.
- Inflation and reserves:
  - Inflation projected to moderate toward historic rates after a 2010 blip.
  - Current account projected to widen in 2010 to 7.9 percent of GDP despite projected 2 percent increase in tourism revenues.
  - Reserves projected to fall to 4.2 months of imports by end-2010 from 4.6 months at end-2009.
  - Without policy changes or significant new borrowing, reserves projected to fall to just over two months of imports in 2015.
  - Current and projected reserves fall short of covering 100 percent of short-term debt on a remaining-maturity basis.

### Debt Sustainability: Baseline vs Adjustment scenarios (selected numerical outcomes)
- Baseline scenario (continuation of current fiscal policies):
  - NFPS deficit path: 7⅓ percent of GDP FY2009/10 → 7 percent FY2010/11 → around 3 percent over medium term.
  - Gross public sector debt: 97.3; 110.7; 114.4; 116.9; 118.0; 119.1; 120.1; 121.1 (2008/09 through 2015/16).
  - GIR (months of imports): 3.3; 4.6; 4.2; 3.9; 3.3; 2.8; 2.5; 2.2 (2008/09 through 2015/16).
  - Real GDP (annual percent change): -0.2; -4.7; -0.5; 2.5; 3.0; 2.5; 2.5; 2.5 (2008/09 through 2015/16).

- Adjustment scenario (front-loaded fiscal effort beginning FY2011/12):
  - NFPS deficit narrows by additional 2¼ percent of GDP in FY2011/12 to 2¾ percent of GDP.
  - NFPS balance swings from deficit of 7⅓ percent FY2009/10 to surplus of 2 percent FY2015/16 (cumulative improvement nearly 19 percent of GDP over five years vs baseline).
  - Gross public sector debt: peaks FY2010/11 at 114 percent of GDP → declines to 101 percent of GDP by end-2015/16.
  - GIR stabilises and recovers to about 4¾ months of imports by end of projection period.
  - Real GDP: weaker in 2011 relative to baseline, stronger rebound thereafter.
  - Selected adjustment projections (2008/09 through 2015/16):
    - Public sector balance (percent of GDP): -7.2; -7.3; -7.0; -2.8; -0.5; 1.1; 1.5; 2.0.
    - Primary balance (percent of GDP): -3.3; -2.9; -2.5; 1.9; 4.2; 6.0; 6.3; 6.4.
    - Public Debt (percent of GDP): 97.3; 110.6; 114.1; 113.0; 110.4; 107.7; 104.6; 101.3.
    - GIR (months of imports): 3.3; 4.6; 4.2; 4.3; 4.3; 4.3; 4.5; 4.7.
    - Real GDP (annual percent change): -0.2; -4.7; -0.5; 2.0; 2.5; 3.0; 3.0; 3.5.

### Debt Sustainability Analysis diagnostics and stress tests (selected)
- Baseline vulnerabilities:
  - Public debt rises to 121 percent of GDP by end of projection period under baseline.
  - Sensitivity to a permanent growth shock (-½ standard deviation) → public debt rises to 140 percent of GDP by end of period.
  - Sensitivity to fiscal (primary balance) shock following historic trends → public debt reaches 144 percent of GDP by end of period.
  - Real depreciation shock (one-time 30 percent) raises external debt to 53 percent of GDP by end of period.
  - Oil price shock (30 percent above WEO projections in 2011–15) would widen current account deficit by about 2 percent of GDP and could deplete reserves by 2015.

- External debt and financing need (baseline figures, selected):
  - External debt (percent of GDP): 2005 36.2; 2006 38.6; 2007 41.1; 2008 39.2; 2009 41.6; 2010 43.7; 2011 42.2; 2012 40.5; 2013 38.9; 2014 37.3; 2015 35.8.
  - Gross external financing need (percent of GDP): 2005 12.2; 2006 8.6; 2007 6.0; 2008 11.1; 2009 6.8; 2010 10.8; 2011 8.9; 2012 7.9; 2013 7.6; 2014 7.3; 2015 6.0.
  - External debt-to-exports ratio (percent): 2005 79.6; 2006 79.1; 2007 78.5; 2008 74.8; 2009 89.5; 2010 94.3; 2011 90.1; 2012 86.7; 2013 83.2; 2014 79.6; 2015 76.2.

### Structural, statistical, and institutional issues
- Productivity and competitiveness:
  - Barbados ranks top in CARICOM and fifth in the Western Hemisphere on the World Economic Forum Competitiveness Index.
  - Total factor productivity estimated to be declining; low productivity complicates fiscal consolidation and has welfare consequences.
  - Policy recommendations: improve government service efficiency, consolidate agencies, alleviate bureaucratic burdens, channel private capital to lower energy costs (example: private-financed underwater natural gas pipeline project), and diversify tourism sources (Brazil, Asia).

- Data and statistics:
  - National accounts revised (with CARTAC); current-price GDP was underestimated in 2008 by about 10 percent.
  - Constant price GDP series uses outdated 1974 base; authorities updating base year to 2000; need for consistent GDP deflator series.
  - Data gaps: timely financials of state-owned enterprises; granular bank asset/liability/capital composition data; merchandise trade lags; offshore sector information.
  - Data reporting timetable (selected): Exchange rates fixed; GIR latest observation 7/31/10; CPI latest 7/31/10; Revenue/expenditure central government data: date received 9/14/10 (frequency Q).

### Donor and multilateral lending (selected)
- World Bank:
  - Barbados Second HIV/AIDS Project (2008) US$35.0 approved; outstanding 28.8; disbursed 6.2.
  - Caribbean HIV/AIDS I-Barbados (2001) US$15.2 approved; disbursed 11.2.
  - Total IBRD outstanding loans summary: 153.4 28.8 17.5 (table entries as presented).
  - Disbursements by year (US$ millions): 2002 0.2; 2003 1.4; 2004 3.5; 2005 2.5; 2006 4.0; 2007 1.9; 2008 1.8; 2009 1.6; 2010 4.7.

- Inter-American Development Bank (IADB):
  - Portfolio as of Oct 27, 2010: eleven loans totaling US$184 million; US$9 million disbursed; US$175 million remaining.
  - Current Loan Portfolio (selected amounts and disbursed): Housing and Neighbourhood Upgrading Program (Jan 2008) 30,000,000 approved; 1,758,696 disbursed. Water & Sanitation System Upgrade (Dec 2009) 50,000,000 approved; 0 disbursed.
  - Total portfolio: 184,242,000 approved; 8,950,391 disbursed.
  - 2010 Lending Program (Public Sector): Sustainable Energy Implementation US$10 million; Coastal Risk Management US$30 million; Total US$40 million (note: excludes operations already approved in 2010).

- Caribbean Development Bank (CDB):
  - CDB approved US$291.3 million (net) to Barbados (1970–Sept 30, 2010).
  - Sectoral allocations: Productive sectors US$79.3 million (27.2 percent); Economic infrastructure US$158.3 million (54.3 percent); Multi-Sector US$53.7 million (18.6 percent).
  - Approvals by year (US$ millions): 2002 15.0; 2003 13.5; 2004 0.1; 2005 0.1; 2006 24.4; 2007 32.7; 2008 0.1; 2009 12.9; 2010 (Sept 30) 1.0.

### Supplementary budget (Minister Sinckler) — November 22 measures (selected)
- Net fiscal effort proposed: BDS$149 million (or 1¾ percent of GDP) annualized.
- Revenue measures (about BDS$180 million annualized):
  - Raise VAT from 15 percent to 17.5 percent for 18 months effective December 1, 2010.
  - Remove deductions for travel, entertainment, and investment; raise gasoline excise tax; raise some fees; reduce environmental levy on imports.
  - Raise public bus fares by one-third.
- Expenditure measures (additional net spending BDS$31 million):
  - Increase transfers to Barbados Tourism Authority; increase pension payments; increase welfare grants and food vouchers; establish textbook grants and limit free university enrollment; tax credit for businesses that generate employment; loan-guarantee facility for tourism investment.
- Staff assessment:
  - Measures help early-year consolidation and target vulnerable groups, but VAT increase is temporary (18 months) and fiscal effort smaller than staff’s adjustment scenario; under staff assumptions debt stabilizes about 114 percent of GDP in FY2015/16 but remains very elevated.

*Source: IMF staff report extracted from the provided content unit.*

### Executive Summary

### _cr10363 - Executive Summary

### Background
- The global economic crisis reduced tourism inflows and limited offshore activity in Barbados.
- GDP declined 5 percent in 2009 and an estimated 1 percent in the first half of 2010.
- External borrowing and the SDR allocation enabled an increase in international reserves.
- The public debt reached 110 percent of GDP in FY 2009/10.
- Nonperforming loans have risen significantly.
- The collapse of CLICO and BAICO has hurt the insurance sector.
- Output was expected to have contracted by a cumulative 6 percent from late 2007 through end-2010, with widespread weakness across tourism, financial services, and real estate.
- Construction contracted by a cumulative 26 percent between 2007 and 2009.
- Unemployment rose from 7.4 percent in 2007 to 10.7 percent in the second quarter of 2010.
- Inflation: average inflation declined in 2009 but increases in fuel and food prices should push up inflation in 2010.
- Total factor productivity declined in the past 10 years (Selected Issues Paper, Chapter I).

### Fiscal developments and risks
- Tax revenue, particularly corporate income taxes and VAT, declined considerably in FY09/10.
- The central government deficit widened from 5 percent of GDP in FY2008/09 to more than 9 percent in FY2009/10.
- By the end of FY 2009/10, the public debt-to-GDP ratio reached 110.7 percent.
- More than two-thirds of Barbados’s debt is domestic and denominated in local currency.
- About one-third of the central government debt is held by the National Insurance System, which will continue to buy government securities and hold them to maturity.
- External debt amortizations are strongly back-loaded.
- Authorities issued a “Medium-Term Fiscal Strategy” (MTFS) in March aiming to:
  - Reduce the overall fiscal deficit and generate a balanced budget by 2014/15 and a surplus by 2015/16.
  - Keep economic growth to acceptable levels by focusing on foreign exchange earning sectors.
  - Improve tax administration, contain growth of the wage bill and transfers, and substitute expensive foreign private loans with cheaper multilateral financing.
- Authorities expect the fiscal adjustment would bring down the public debt-to-GDP ratio by about 14 percentage points in five years.

### External sector and exchange rate
- The current account deficit more than doubled to 9.6 percent of GDP in 2008; narrowed to 5.5 percent of GDP in 2009.
- In 2009, the authorities issued US$120 million in external bonds and got US$85 million in SDR allocations.
- By the end of 2010, under current plans, the authorities would have borrowed an additional net amount of US$145 million.
- Without foreign borrowing and SDR allocations, foreign reserves would have halved in two years.
- The Barbados dollar has been pegged to the U.S. dollar at the rate of BDS$2.00 = US$1.00 since 1975.
- Barbados has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on current account transactions.
- Staff analysis suggests the real effective exchange rate has appreciated 13 percent over the last 24 months relative to main competitors and exceeds its equilibrium rate by 5 to 10 percent.
- The real exchange rate is not far from its estimated equilibrium but is somewhat overvalued; efforts should be intensified to address risks to external stability from large fiscal imbalances.
- Barbados’s share of the Caribbean tourism market slipped in 2009, though focus on high-end tourism may mitigate price-sensitivity concerns.

### Financial sector developments and vulnerabilities
- Barbadian banking sector: six foreign institutions; remains well capitalized but several indicators deteriorated.
- Non-performing loans increased on average to almost 10 percent of total loans in June 2010.
- One bank posted a large NPL increase due to exposure to tourism projects.
- Loss provisions remain low relative to international standards.
- Preliminary stress tests suggest the banking system would remain sound even under substantial shocks.
- Offshore financial institutions’ assets fell from 11 times GDP in 2007 to 9 times GDP in 2009.
- Stock trading dropped from 7 percent of GDP in 2007 to less than ½ percent of GDP in 2009 and has declined further in 2010.
- Credit unions: membership contracted and NPLs remain high, but they appear resilient.

Key financial soundness indicators (as presented)
- Capital adequacy ratio: 2006 14.4; 2007 16.4; 2008 16.1; 2009 17.5; 2010 Jun 18.0
- NPLs to total loans: 2006 4.4; 2007 2.8; 2008 3.5; 2009 7.2; 2010 Jun 9.9
- Provision for loan loss to total loans: 2006 1.5; 2007 1.5; 2008 2.2; 2009 3.3; 2010 Jun 1.5
- Return on equity: 2006 14.3; 2007 13.5; 2008 11.5; 2009 9.9; 2010 Jun 7.9
- Credit to the private sector, growth yoy: 2006 13.2; 2007 6.4; 2008 11.1; 2009 1.4; 2010 Jun 1.7
- Liquid assets to total assets: 2006 7.9; 2007 9.5; 2008 9.0; 2009 10.8; 2010 Jun 10.4

### Focus of consultation and staff recommendations
- Context: projected gradual recovery.
- Key focuses:
  - (i) the critical need to bring the public debt-to-GDP ratio down over the medium term;
  - (ii) the health of the banking sector;
  - (iii) measures to resolve CLICO Barbados; and
  - (iv) reforms to strengthen supervision and regulation of the nonbank financial sector.
- Staff recommendations:
  - Fiscal policy:
    - Go beyond the planned expenditure controls and raise VAT and corporate tax rates while widening their base to first stabilize and then put the public debt on a firm downward path as a ratio to GDP.
  - Monetary policy:
    - A decisive fiscal adjustment would help to contain pressures on the exchange rate peg, while monetary policy rates should be set to manage capital flows.
  - Financial sector policy:
    - Intensify monitoring and reporting requirements; conduct regular stress tests and strengthen prudential regulation for banks; reform the regulatory and supervisory framework of nonbank financial institutions; and resolve CLICO and BAICO.

### Authorities’ views and actions
- Authorities agreed with the thrust of the staff recommendations.
- They concurred that a deeper fiscal adjustment would bring less disruption to economic activity than an unsustainable public debt.
- They are planning to have the new Financial Services Commission up and running by the spring of 2011.

### Mission
- The IMF team visited Bridgetown during September 12–24.
- Team composition: Marcello Estevão (head), Gamal El-Masry and Carla Macario (all WHD) and John Ralyea (FIN). John Rolle (OED) participated in several meetings.

_Excerpted from “Executive Summary” (IMF staff country report)._

### 10.      The insurance sector faced a major crisis. In 2008, Trinidad and Tobago’s

### _cr10363 - 10.      The insurance sector faced a major crisis. In 2008, Trinidad and Tobago’s

### Insurance sector crisis
- CL Financial’s asset values plummeted in 2008, partly due to losses in Florida real estate and methanol production.
- In February 2009 the government of Barbados acknowledged difficulties in CL Financial’s domestic subsidiary, CLICO-Barbados.
- CLICO-Barbados: mortgage business sold; negotiations to sell general insurance business ongoing.
- CLICO’s life-insurance arm has sizeable net liabilities currently estimated at about 3¼ percent of GDP.
- To provide liquidity, the central bank deposited US$5 million into CLICO’s mortgage subsidiary in early 2009 and granted access to a special credit window; an oversight committee was set up to conduct the resolution process.
- British American Insurance Corporation (BAICO) was recently put under judicial management; the government will soon request the appointment of a judicial manager for CLICO.

### Outlook and risks
- Growth projections and near-term outlook:
  - Marginal output contraction in 2010.
  - Moderate recovery in 2011 and onwards with growth rates of 2½–3 percent.
- Key downside risks:
  - Slow recovery in the United States and United Kingdom (sources of tourism), due to weak household balance sheets, persistently high unemployment, and slow resolution of nonperforming mortgages.
  - Crisis-driven output gap expected to narrow only gradually.
- Inflation and labor market:
  - Inflation projected to moderate toward historic rates after a blip in 2010.
  - Unemployment expected to rise above 11 percent in 2011 before receding slowly toward historical averages.
- External sector and reserves:
  - Current account projected to widen in 2010 to 7.9 percent of GDP, despite a projected two-percent increase in tourism revenues.
  - Reserves projected to fall to 4.2 months of imports by end-2010 from 4.6 months of imports at end-2009.
  - In the absence of policy changes or significant new borrowing, foreign reserves projected to fall to just over two months of imports in 2015.
  - Current and projected future reserves fall short of covering 100 percent of short-term debt on a remaining-maturity basis.

### Medium-term vulnerabilities and scenarios
- Public debt risk:
  - Public debt could rise by about 10 to 15 percent of GDP over the next five years without measures to make the public deficit sustainable.
  - Contingent liabilities from CLICO (and possibly BAICO) and government guarantees to construction projects would exacerbate risks.
- MTFS and reform:
  - MTFS aims to reverse the negative scenario; reforms to raise trend growth would help.

### Fiscal policy (staff recommendations and illustrative scenario)
- Mission view:
  - Support for decisive fiscal adjustment to stabilize and then reduce debt-to-GDP ratio.
  - Adjustment should protect the poor and limit adverse growth impacts where possible.
- Assessment of FY 2010/11 budget:
  - Relies mainly on controlling public sector wages, transfers, and capital spending to produce a small, ½ percent of GDP improvement in the primary fiscal balance.
  - Preliminary tax revenue data weaker than expected, putting planned adjustment at risk.
- Proposed revenue measures (examples listed by staff):
  - Increase VAT rate by 3 percentage points to 18 percent, combined with base broadening by eliminating many exemptions and zero ratings, and improvements in tax administration.
  - Raise the corporate tax rate (from 2 to 3 percent) and reduce exemptions over the medium term, particularly for offshore operations.
- Proposed expenditure measures:
  - Bring down public sector wages and spending on goods and services to their mid-2000s ratio to GDP.
  - Adjust tariffs for public utilities and services to improve financial positions of loss-making public enterprises, allowing government to cut transfers to them.
- Social protection and capital spending:
  - Combine measures with well-targeted transfers to vulnerable social groups.
  - Calibrate adjustment to leave space for moderate increases in capital spending to support medium-term growth.
- Illustrative adjustment scenario outcomes:
  - Strengthen consolidated government budget from a deficit of 7.3 percent of GDP in FY2009/10 to a 2 percent surplus in FY2015/16.
  - Total public debt: peak in FY2010/11 at 114 percent of GDP, then fall to just over 100 percent of GDP by end of projection period.
  - Compared with baseline, public debt would be about 20 percentage points of GDP lower.
  - Foreign reserves stabilise at around 4¾ months of imports under the adjustment scenario.
- Authorities’ stance:
  - Agreed fiscal adjustment needs to be deepened; some reluctance to major tax-code changes without further studies (including with CARTAC).
  - Committed to moderate growth in public wages and reducing transfers to quasi-public enterprises.

### Monetary and exchange rate policies
- Policy rate considerations:
  - Mission argued against further declines in policy interest rates due to uncertain effects on activity and potential reserve pressure.
  - Minimum deposit rate currently at 2½ percent and remains negative in real terms.
  - Staff cautioned reductions in the minimum deposit rate could create misalignments with policy rates in core economies and exacerbate pressures on reserves and the peg.
- Capital controls:
  - Applied liberally; serve to smooth currency movements and limit impact of domestic policy rate changes on activity.
- Authorities’ position:
  - Impact of changes in deposit rate on real activity is fairly modest.
  - Minimum deposit rate used to maintain a reasonable spread vis-à-vis U.S. federal fund rates to manage reserve pressures.
  - Low deposit rates have contributed to somewhat lower lending rates and alleviated household balance-sheet pressures.
- Exchange rate peg:
  - Authorities reaffirmed strong commitment to the 2-to-1 peg to the U.S. dollar (in place since 1975).
  - Staff argued decisive fiscal adjustment is essential to protect the peg.

### Financial sector policies
- Banking sector soundness:
  - Significant increase in nonperforming loans in recent months; likely further increases even under baseline recovery.
  - Banking system has high capital ratio; MCM technical assistance indicated capital would remain well above regulatory threshold under plausible additional stress.
- Banking sector structure and supervision:
  - Large Canadian banks account for more than 70 percent of banking assets; remaining market share by large regional banks.
  - Central bank intensified monitoring, reporting, onsite inspections focusing on credit risk, and encouraging bank stress tests.
  - A financial stability unit will carry out quarterly stress tests and analytical studies.
- Regulatory improvements:
  - Authorities drafting regulations for prompt corrective action, signed MOUs with Canadian supervisors, participating in regional college of regulators.
  - Moving to consolidate supervision of onshore and offshore nonbank financial institutions into a planned Financial Services Commission (FSC) scheduled to be in place by next spring.
  - Staff noted provisioning levels were low and recommended upgrading requirements to international practices.
- Insurance resolution strategies:
  - Authorities discussing resolution strategies for CLICO-Barbados; awaiting more information about BAICO.
  - Resolution plans aim to address statutory gap in CLICO Life while protecting small individual investors.
  - Fiscal costs of a plan would be bound by CLICO-Life’s net liabilities of 3¼ percent of GDP and depend on guarantees to larger investors.
  - More concrete information expected as judicial managers of CLICO-Barbados and BAICO progress.
- Supervision of nonbank financial institutions:
  - Staff voiced concerns about quality of insurance sector supervision.
  - Consolidation into the FSC expected to improve transparency and market discipline.

### Structural issues
- Productivity and competitiveness:
  - Barbados ranks top in CARICOM and fifth in the Western Hemisphere on the World Economic Forum Competitiveness Index.
  - Staff estimates total factor productivity has been declining, with welfare consequences and complicating fiscal consolidation.
- Policy recommendations to raise productivity:
  - Improve efficiency of government services, consolidate agencies with complementary mandates, and alleviate bureaucratic burden on the private sector.
  - Facilitate private sector investment and diversify tourism sources (examples cited by officials):
    - Government project for an underwater pipeline to pump natural gas from Trinidad to Barbados, financed entirely by private capital, to lower energy costs and carbon emissions.
    - Efforts to access tourism source markets in Brazil and Asia.

### Statistical issues
- Data gaps and recent improvements:
  - Revised national accounts published (with CARTAC support), improving picture of nominal GDP growth and levels.
  - Need for official estimates of price deflators and a consistent real GDP series (central bank still uses old national accounts framework).
- Additional data needs:
  - Timely data on financial situation of state-owned enterprises to better assess public finances.
  - More granular information on banks’ assets, liabilities, and capital composition to improve central bank monitoring.

*Source: IMF staff report extracted from the provided content unit.*

### 30.      While the global crisis hit Barbados front and center, the outlook is for a gradual

### _cr10363 - 30.      While the global crisis hit Barbados front and center, the outlook is for a gradual

### Outlook and near-term projections
- Output will still contract in 2010, but at a much slower rate than in 2009.
- Recovery should be gradual with downside risks from uncertainties about activity in core economies, including protractedly high unemployment rates.
- Foreign reserves would remain under pressure, although government borrowing provides a protective cushion.

### Major fiscal challenge and recommendations
- Major challenge: put the public debt on a steady declining path to support domestic and external stability.
- Fiscal policy should focus squarely on bringing the debt-to-GDP ratio down in the medium term.
- The MTFS commits to adjustment but should be strengthened by concrete actions to improve revenue collection.
- Revenue measures recommended:
  - An increase in VAT and corporate tax rates, while broadening the tax base.
- Expenditure measures recommended:
  - Bring public sector wages and spending on goods and services down to their mid-2000s ratios to GDP.
  - Increase tariffs for public utilities and services to allow further cuts in government transfers to quasi-public enterprises.
  - Combine these measures with well-targeted transfers to vulnerable social groups.
  - Maintain moderate increases in capital spending to support medium-term growth.

### Exchange rate peg and monetary stance
- The peg to the U.S. dollar has worked as an effective nominal anchor for the past 35 years.
- Staff estimates suggest the real exchange rate is somewhat overvalued.
- Ongoing fiscal pressures are central to the problem; fiscal adjustment is the best policy for improving medium-term reserve dynamics and protecting the peg, including by reinforcing Barbados’ status as a desirable destination for foreign capital.
- Monetary posture:
  - The current monetary stance is broadly appropriate.
  - The minimum deposit rate should continue to be set to prevent misalignments vis-à-vis policy rates in core economies, given usual country spreads, thus avoiding disruptive capital movements.

### Banking sector health and regulatory recommendations
- Banks remain healthy, but tighter regulations are needed.
- Significant increase in nonperforming loans (NPLs) in recent months, with likely further increases, poses risks to the financial sector.
- Banks’ high capital ratios serve as effective cushions; Barbados’ banking system includes large and stable international institutions that provide resilience.
- Recommendations for the central bank and regulators:
  - Continue intensified monitoring of the banking system, now facilitated by its new financial stability unit.
  - Perform periodic stress tests.
  - Upgrade provisioning requirements to international practices.
  - Require banks to provide more granular information about their loan portfolio.

### Nonbank financial institutions and supervisory reform
- The bankruptcy of two important insurance companies illustrates weaknesses in the supervisory framework.
- Recommendations:
  - Consolidate supervision of onshore and offshore nonbank financial institutions into the planned Financial Services Commission (FSC).
  - Improve human capital in supervision.
  - Improve the timeliness and quality of information on nonbank financial institutions to enhance transparency and market discipline.
  - Smooth and swift resolutions of CLICO and BAICO would lift sectoral uncertainty and clarify the size of contingent fiscal liabilities.

### Productivity, diversification, and growth constraints
- Total factor productivity growth is estimated to be quite low, despite relatively good business conditions.
- Low productivity has welfare consequences and complicates sustainable fiscal consolidation.
- Recommendations to boost productivity and resilience:
  - Improve efficiency of government services, including consolidating agencies with complementary mandates and alleviating bureaucratic burdens on the private sector.
  - Channel private capital to investments that lower the cost of living and producing.
  - Diversify the tourism industry to boost resilience to regional shocks and open new medium-term growth sources.

### Institutional timing
- It is recommended to hold the next consultation on the standard 12-month cycle.

*Source: IMF staff report excerpt (chapter/section text provided).*

### Appendix I.  Illustrative Scenarios and Debt Sustainability Analyses (DSAs)

### Appendix I.  Illustrative Scenarios and Debt Sustainability Analyses (DSAs)

### A. Key Assumptions and Scenarios
- Common assumptions for baseline and adjustment scenarios:
  - Stable exchange-rate peg.
  - Recovery, albeit sluggish, in global demand for Barbados’s goods and services from 2011 onwards.
  - No additional budget costs from resolution of problems surrounding CLICO-Barbados.
  - Some private capital inflows resume in 2011 to finance stalled tourism projects; adjustment scenario presumes significantly larger inflow.

### Baseline scenario (continuation of current fiscal policies)
- Fiscal path:
  - NFPS deficit: 7⅓ percent of GDP in FY 2009/10 → 7 percent of GDP in FY 2010/11; expected to remain around 3 percent over the medium term despite National Insurance Scheme surpluses of about 3 percent of GDP.
  - Gross public sector debt: about 110 percent of GDP at end-FY 2009/10 → about 121 percent of GDP by end-FY 2015/16.
- External sector:
  - Current account deficit: widen to about 7–8 percent of GDP during 2011–12, and only gradually fall thereafter.
  - Capital flows: will continue but insufficient to cover current account deficit.
  - Gross international reserves (GIR): drop from about 4.2 months of imports at end-2010 to 2.2 months of imports at end-2015.
- Key baseline numerical projections (selected from Illustrative Scenarios table):
  - Public sector balance (in percent of GDP): FY 2008/09 -7.2; 2009/10 -7.3; 2010/11 -7.0; 2011/12 -5.0; 2012/13 -3.3; 2013/14 -3.0; 2014/15 -3.0; 2015/16 -3.0.
  - Primary balance (in percent of GDP): 2008/09 -3.3; 2009/10 -2.9; 2010/11 -2.5; 2011/12 -0.2; 2012/13 1.6; 2013/14 2.4; 2014/15 2.5; 2015/16 2.5.
  - Revenues: 40.6; 38.0; 37.6; 40.0; 41.8; 42.9; 43.0; 43.0 (2008/09 through 2015/16).
  - Total expenditure: 47.8; 45.3; 44.6; 45.0; 45.1; 45.9; 45.9; 46.0 (2008/09 through 2015/16).
  - Public Debt (percent of GDP): 97.3; 110.7; 114.4; 116.9; 118.0; 119.1; 120.1; 121.1 (2008/09 through 2015/16).
  - GIR (in months of imports): 3.3; 4.6; 4.2; 3.9; 3.3; 2.8; 2.5; 2.2 (2008/09 through 2015/16).
  - Real GDP (annual percent change): -0.2; -4.7; -0.5; 2.5; 3.0; 2.5; 2.5; 2.5 (2008/09 through 2015/16).

### Adjustment scenario (front-loaded fiscal effort beginning FY 2011/12)
- Policy features:
  - Early and decisive strengthening of fiscal policies broadly in line with Medium-Term Fiscal Strategy (MTFS).
  - Revenue and expenditure actions, measures to increase efficiency and financial viability of public enterprises.
  - Moderate increase in capital spending and better targeting of social safety payments to support growth.
- Fiscal and debt outcomes:
  - NFPS deficit: narrows by additional 2¼ percent of GDP in FY 2011/12 to 2¾ percent of GDP.
  - NFPS balance swing: from deficit of 7⅓ percent of GDP in FY 2009/10 to surplus of 2 percent of GDP in FY 2015/16; cumulative improvement of nearly 19 percent of GDP over five years (compared with baseline).
  - Gross public sector debt: peaks in FY 2010/11 at 114 percent of GDP → declines to 101 percent of GDP by end of projection period.
  - Real GDP: weaker in 2011 relative to baseline due to demand withdrawal; stronger rebound thereafter due to higher investor confidence and private capital inflows.
  - GIR: ease somewhat through 2013, recover to about 4¾ months of imports by end of projection period.
- Key adjustment numerical projections (selected from Illustrative Scenarios table):
  - Public sector balance (in percent of GDP): 2008/09 -7.2; 2009/10 -7.3; 2010/11 -7.0; 2011/12 -2.8; 2012/13 -0.5; 2013/14 1.1; 2014/15 1.5; 2015/16 2.0.
  - Primary balance (in percent of GDP): 2008/09 -3.3; 2009/10 -2.9; 2010/11 -2.5; 2011/12 1.9; 2012/13 4.2; 2013/14 6.0; 2014/15 6.3; 2015/16 6.4.
  - Revenues: 40.6; 38.0; 37.5; 41.4; 43.5; 44.9; 45.0; 45.0 (2008/09 through 2015/16).
  - Total expenditure: 47.8; 45.3; 44.5; 44.2; 43.9; 43.9; 43.5; 43.1 (2008/09 through 2015/16).
  - Public Debt (percent of GDP): 97.3; 110.6; 114.1; 113.0; 110.4; 107.7; 104.6; 101.3 (2008/09 through 2015/16).
  - GIR (in months of imports): 3.3; 4.6; 4.2; 4.3; 4.3; 4.3; 4.5; 4.7 (2008/09 through 2015/16).
  - Real GDP (annual percent change): -0.2; -4.7; -0.5; 2.0; 2.5; 3.0; 3.0; 3.5 (2008/09 through 2015/16).

### B. Assessment of DSAs
- Baseline scenario vulnerabilities and sensitivities:
  - Under baseline, public debt rises to 121 percent of GDP over projection period.
  - Sensitivity to growth shock: permanent decline in economic growth by ½ standard deviation → public debt rises to 140 percent of GDP by end of projection period.
  - Sensitivity to fiscal (primary balance) shock: if primary balance follows historic trends → public debt reaches 144 percent of GDP by end of projection period.
  - External debt less sensitive to standard shocks due to external debt share being less than one-third of total debt.
  - Total private and public external debt: about 42 percent of GDP at end-2009; under baseline, falls to about 36 percent of GDP by end of projection period.
  - Real depreciation shock: illustrative 30 percent depreciation raises external debt to 53 percent of GDP by end of projection period.
  - Oil price shock: 30 percent increase above current WEO projections in 2011–15 would widen current account deficit by about 2 percent of GDP and could, everything else unchanged, effectively deplete reserves by 2015.
- Adjustment scenario resilience:
  - Active fiscal consolidation leads public debt to peak in FY 2011/12 then decline, due to positive sustained fiscal balances, higher growth, and lower interest rates/payments.
  - Bound tests show public debt-to-GDP ratios generally continue to decline even under some shocks.
  - Stress tests show similar, though less pronounced, improvements in external debt outlook.

### Selected DSA framework diagnostics (baseline tables and indicators)
- Public sector debt dynamics (selected lines, Appendix Table 1, baseline):
  - Public sector debt (percent of GDP): 2005 76.6; 2006 79.6; 2007 90.4; 2008 97.3; 2009 110.7; 2010 114.4; 2011 116.9; 2012 118.0; 2013 119.1; 2014 120.1; 2015 121.1.
  - Debt-stabilizing primary balance: 3.1 (last column entry in table).
  - Change in public sector debt: -5.3; 3.0; 10.8; 6.9; 13.4; 3.8; 2.5; 1.1; 1.1; 1.0; 1.0 (2005–2015).
  - Identified debt-creating flows: -5.8; 3.7; 9.8; 11.7; 11.6; 7.1; 2.5; 1.1; 1.1; 1.0; 1.0 (2005–2015).
  - Primary deficit (percent of GDP): 4.5; 2.3; 5.8; 4.4; 3.8; 3.1; 0.8; -1.1; -2.0; -2.1; -2.1 (2005–2015).
  - Automatic debt dynamics contribution: -10.3; 1.4; 3.9; 7.2; 7.7; 3.9; 1.7; 2.2; 3.0; 3.1; 3.1 (2005–2015).
  - Public sector debt-to-revenue ratio: 181.8; 190.5; 200.1; 199.0; 245.4; 255.6; 249.1; 241.9; 240.3; 241.8; 243.8 (2005–2015).
  - Gross financing need (percent of GDP): 19.7; 16.9; 21.0; 22.3; 23.6; 28.2; 18.2; 16.3; 16.2; 16.2; 16.2 (2005–2015).
- External debt dynamics (selected lines, Appendix Table 2, baseline):
  - External debt (percent of GDP): 2005 36.2; 2006 38.6; 2007 41.1; 2008 39.2; 2009 41.6; 2010 43.7; 2011 42.2; 2012 40.5; 2013 38.9; 2014 37.3; 2015 35.8.
  - Change in external debt: -6.7; 2.4; 2.5; -1.9; 2.4; 2.1; -1.5; -1.7; -1.6; -1.6; -1.5 (2005–2015).
  - Identified external debt-creating flows: -1.1; 2.3; -2.7; 5.4; 5.2; 5.1; 3.3; 3.0; 2.9; 2.7; 2.1 (2005–2015).
  - Current account deficit, excluding interest payments: 8.5; 4.6; 1.5; 6.5; 2.7; 4.5; 4.3; 4.3; 3.9; 3.7; 3.4 (2005–2015).
  - Net non-debt creating capital inflows (negative): -1.7; -2.7; -5.8; -4.7; -1.2; -3.0; -3.0; -3.0; -3.0; -3.0; -3.0 (2005–2015).
  - Gross external financing need (percent of GDP): 12.2; 8.6; 6.0; 11.1; 6.8; 10.8; 8.9; 7.9; 7.6; 7.3; 6.0 (2005–2015).
  - External debt-to-exports ratio (percent): 79.6; 79.1; 78.5; 74.8; 89.5; 94.3; 90.1; 86.7; 83.2; 79.6; 76.2 (2005–2015).

*Source: Barbados authorities; and IMF staff estimates and projections.*

### Appendix Figure 2. Barbados: External Debt  Sustainability: Bound Tests  1/

### Appendix Figure 2. Barbados: External Debt Sustainability: Bound Tests 1/

### Overview and scenario design
- Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
- Shock types shown:
  - Non-interest current account shock.
  - Growth shock.
  - Combined shock (permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance). 2/
  - Real depreciation shock: One-time real depreciation of 30 percent occurs in 2010 (end-2010 in Appendix Figure 4 notes). 3/
- Gross financing need under baseline is shown on the right scale in the figures.

### Baseline external debt projections (Adjustment Scenario; external debt in percent of GDP)
- External debt (baseline, in percent of GDP) by year:
  - 2005: 36.2
  - 2006: 38.6
  - 2007: 41.1
  - 2008: 39.2
  - 2009: 41.6
  - 2010: 43.7
  - 2011: 42.4
  - 2012: 40.9
  - 2013: 39.1
  - 2014: 37.3
  - 2015: 35.4
- Change in external debt (percent of GDP) by year:
  - 2005: -6.7
  - 2006: 2.4
  - 2007: 2.5
  - 2008: -1.9
  - 2009: 2.4
  - 2010: 2.1
  - 2011: -1.3
  - 2012: -1.6
  - 2013: -1.8
  - 2014: -1.8
  - 2015: -1.9

### Identified external debt-creating flows and financing need
- Identified external debt-creating flows (4+8+9), percent of GDP:
  - 2005: -1.1
  - 2006: 2.3
  - 2007: -2.7
  - 2008: 5.4
  - 2009: 5.2
  - 2010: 5.1
  - 2011: 2.3
  - 2012: 1.9
  - 2013: 1.5
  - 2014: 1.3
  - 2015: 0.8
- Current account deficit, excluding interest payments (percent of GDP):
  - 2005: 8.5
  - 2006: 4.6
  - 2007: 1.5
  - 2008: 6.5
  - 2009: 2.7
  - 2010: 4.5
  - 2011: 3.0
  - 2012: 2.9
  - 2013: 2.6
  - 2014: 2.5
  - 2015: 2.4
- Net non-debt creating capital inflows (negative) (percent of GDP):
  - 2005: -1.7
  - 2006: -2.7
  - 2007: -5.8
  - 2008: -4.7
  - 2009: -1.2
  - 2010: -3.0
  - 2011–2015 (each year): -3.0
- Automatic debt dynamics (percent of GDP):
  - 2005: -7.9
  - 2006: 0.5
  - 2007: 1.6
  - 2008: 3.6
  - 2009: 3.7
  - 2010: 3.5
  - 2011: 2.3
  - 2012: 2.0
  - 2013: 1.9
  - 2014: 1.8
  - 2015: 1.4
- Contribution from nominal interest rate (percent of GDP):
  - 2005: 2.2
  - 2006: 2.3
  - 2007: 3.0
  - 2008: 3.1
  - 2009: 2.8
  - 2010: 3.3
  - 2011: 3.1
  - 2012: 3.0
  - 2013: 3.0
  - 2014: 2.9
  - 2015: 2.6
- Contribution from real GDP growth (percent of GDP):
  - 2005: -1.3
  - 2006: -1.2
  - 2007: -1.4
  - 2008: 0.1
  - 2009: 1.9
  - 2010: 0.2
  - 2011: -0.8
  - 2012: -1.0
  - 2013: -1.2
  - 2014: -1.1
  - 2015: -1.2

### Gross external financing need and ratios
- Gross external financing need (in percent of GDP) by year:
  - 2005: 12.2
  - 2006: 8.6
  - 2007: 6.0
  - 2008: 11.1
  - 2009: 6.8
  - 2010: 10.8
  - 2011: 7.6
  - 2012: 6.7
  - 2013: 6.3
  - 2014: 6.1
  - 2015: 5.0
- Gross external financing need (in billions of U.S. dollars) by year:
  - 2005: 0.4
  - 2006: 0.3
  - 2007: 0.2
  - 2008: 0.4
  - 2009: 0.3
  - 2010: 0.4
  - 2011: 0.3
  - 2012: 0.3
  - 2013: 0.3
  - 2014: 0.3
  - 2015: 0.3
- External debt-to-exports ratio (in percent):
  - 2005: 79.6
  - 2006: 79.1
  - 2007: 78.5
  - 2008: 74.8
  - 2009: 89.5
  - 2010: 94.3
  - 2011: 90.1
  - 2012: 86.8
  - 2013: 83.2
  - 2014: 79.5
  - 2015: 75.9

### Key macroeconomic assumptions underlying the baseline
- Real GDP growth (in percent) by year:
  - 2005: 3.9
  - 2006: 3.6
  - 2007: 3.8
  - 2008: -0.2
  - 2009: -4.7
  - 2010: -0.5
  - 2011: 2.0
  - 2012: 2.5
  - 2013: 3.0
  - 2014: 3.0
  - 2015: 3.5
- GDP deflator in US dollars (change in percent):
  - 2005: 25.9
  - 2006: 1.8
  - 2007: 0.1
  - 2008: -1.0
  - 2009: 2.5
  - 2010: 2.2
  - 2011: 2.8
  - 2012: 1.8
  - 2013: 2.0
  - 2014: 2.0
  - 2015: 2.0
- Nominal external interest rate (in percent):
  - 2005: 6.9
  - 2006: 6.8
  - 2007: 8.1
  - 2008: 7.5
  - 2009: 6.9
  - 2010: 8.2
  - 2011: 7.5
  - 2012: 7.4
  - 2013: 7.8
  - 2014: 7.8
  - 2015: 7.4
- Growth of exports (US dollar terms, in percent):
  - 2005: 18.4
  - 2006: 13.1
  - 2007: 11.5
  - 2008: -1.1
  - 2009: -13.5
  - 2010: 1.5
  - 2011: 6.4
  - 2012: 4.3
  - 2013: 4.8
  - 2014: 4.9
  - 2015: 5.0
- Growth of imports (US dollar terms, in percent):
  - 2005: 16.4
  - 2006: 3.4
  - 2007: 7.4
  - 2008: 6.4
  - 2009: -22.7
  - 2010: 4.6
  - 2011: 3.5
  - 2012: 4.3
  - 2013: 4.4
  - 2014: 4.8
  - 2015: 5.1
- Current account balance, excluding interest payments (percent of GDP):
  - 2005: -8.5
  - 2006: -4.6
  - 2007: -1.5
  - 2008: -6.5
  - 2009: -2.7
  - 2010: -4.5
  - 2011: -3.0
  - 2012: -2.9
  - 2013: -2.6
  - 2014: -2.5
  - 2015: -2.4
- Net non-debt creating capital inflows (percent of GDP, positive in table indicates inflows):
  - 2005: 1.7
  - 2006: 2.7
  - 2007: 5.8
  - 2008: 4.7
  - 2009: 1.2
  - 2010: 3.0
  - 2011–2015 (each year): 3.0

### Average-box projections and historical averages shown in the figure boxes
- Growth (box averages):
  - Baseline: 7.5
  - Scenario: 7.9
  - Historical: 7.5
- (Box values for other variables shown in the figure):
  - Baseline: 2.6
  - Scenario: 1.1
  - Historical: 1.4
  - Baseline: -3.9
  - Scenario: -5.3
  - Historical: -4.3

*Source: International Monetary Fund, country desk data, and staff estimates.*

### 1. Barbados graduated from World Bank financing in 1993, but has continued to borrow on

### _cr10363 - 1. Barbados graduated from World Bank financing in 1993, but has continued to borrow on

### World Bank financing and HIV/AIDS projects
- Two regional HIV/AIDS projects were approved in 2001 and 2008.
- The second HIV/AIDS Project (US$35 million), effective January 2009, supports implementation of the 2008–2013 Barbados National HIV/AIDS Strategic Plan to promote:
  - (i) adoption of safe behaviors, in particular amongst the most vulnerable groups;
  - (ii) access to prevention, treatment and social care, in particular for the most vulnerable groups;
  - (iii) capacity of organizational and institutional structures that govern the NAP; and
  - (iv) use of quality data for problem identification, strategy definition and measuring results.

- Statement of World Bank Loans (In millions of U.S. dollars)
  - Total IBRD: 153.4 28.8 17.5
  - of which outstanding loans:
    - Barbados Second HIV/AIDS Project 2008 35.0 28.8 6.2
    - Caribbean HIV/AIDS I-Barbados 2001 15.2 - 11.2

- Disbursements and Debt Service (Fiscal Year ending June 30th - in millions of U.S. dollars)
  - Total Disbursements by year: 2002 0.2; 2003 1.4; 2004 3.5; 2005 2.5; 2006 4.0; 2007 1.9; 2008 1.8; 2009 1.6; 2010 4.7
  - Repayments by year: 2002 2.2; 2003 1.9; 2004 1.9; 2005 1.9; 2006 1.9; 2007 2.1; 2008 1.0; 2009 0.9; 2010 1.3
  - Net Disbursements by year: 2002 -2.1; 2003 -0.5; 2004 1.6; 2005 0.6; 2006 2.0; 2007 -0.2; 2008 0.7; 2009 0.7; 2010 3.3
  - Interest and fees by year: 2002 1.1; 2003 0.8; 2004 0.6; 2005 0.5; 2006 0.5; 2007 0.6; 2008 0.7; 2009 0.8; 2010 0.7

### Relations with the Inter-American Development Bank (IADB)
- Portfolio summary as of October 27, 2010:
  - IADB portfolio of eleven loans to Barbados totaling US$184 million of which US$9 million has been disbursed, leaving US$175 million remaining to be disbursed.
  - Portfolio composition: only one operation approved before 2005; eight operations amounting to 90 percent of the portfolio in value terms approved since 2008.
  - Execution of this portfolio is programmed to take until 2015.

- Current Loan Portfolio (Name — Approval Date — Amount in US$ Approved — Disbursed)
  - Administration of Justice 2001 8,750,000 2,743,210
  - Modernization of Customs, Excise and VAT 2005 4,400,000 2,594,930
  - Modernization of the Barbados National Standards System December 2007 5,000,000 669,050
  - Housing and Neighbourhood Upgrading Program - Phase I January 2008 30,000,000 1,758,696
  - Modernization of the Barbados Statistical Service July 2008 5,000,000 292,305
  - PEF:Agricultural Health and Food Safety Program Preparation (Project Preparation Facility) December 2008 1,092,000 392,200
  - Modernization of the Barbados National Procurement System December 2008 5,000,000 500,000
  - Water & Sanitation System Upgrade December 2009 50,000,000 0
  - Agricultural Health & Food Control December 2009 20,000,000 0
  - Competitiveness Program December 2009 10,000,000 0
  - Support for Sustainable Energy Framework September 2010 45,000,000 0
  - Total 184,242,000 8,950,391

- Technical cooperation portfolio:
  - Active technical cooperation portfolio of twelve operations totaling US$5.4 million, six of which are Multilateral Investment Fund grants amounting to US$2.1 million.

- 2010 Lending Program:
  - Two loans totaling US$40 million are scheduled for approval in the 4th quarter of 2010, in addition to US$45 million already approved in September for the Sustainable Energy Framework support loan.
  - Lending Program 2010 (Public Sector) Amount (in US$ millions):
    - Sustainable Energy Implementation 10
    - Coastal Risk Management 30
    - Total 40
  - Note: this lending program does not include operations already approved in 2010.

- Net Cash Flow and Cash Flow Indicators:
  - Barbados experienced a negative net cash flow with respect to the IADB over 2001-09 averaging negative US$7 million and reaching negative US$20 million in 2006.
  - Following a significant rise in disbursements in 2009, net cash flow turned positive and is expected to reach US$29 million in 2010.
  - Cash Flow Indicators (US$ million):
    - Approvals by year: 2001 8.8; 2002 17.0; 2003 0.0; 2004 0.0; 2005 4.4; 2006 0.7; 2007 5.0; 2008 41.1; 2009 49.0; 2010 85.0
    - Disbursements by year: 2001 24.2; 2002 15.8; 2003 16.0; 2004 7.9; 2005 4.4; 2006 2.2; 2007 2.8; 2008 18.5; 2009 30.4; 2010 54.9
    - Repayments by year: 2001 7.9; 2002 8.1; 2003 11.0; 2004 13.8; 2005 12.2; 2006 15.6; 2007 15.9; 2008 19.7; 2009 18.7; 2010 20.0
    - Interest and Commissions by year: 2001 7.9; 2002 7.2; 2003 8.2; 2004 7.4; 2005 7.1; 2006 6.5; 2007 6.3; 2008 6.2; 2009 6.2; 2010 6.3
    - Net cash flow by year: 2001 8.4; 2002 0.5; 2003 -3.2; 2004 -13.3; 2005 -14.9; 2006 -19.9; 2007 -19.4; 2008 -7.4; 2009 5.5; 2010 28.6
    - Debt outstanding by year: 2001 143.9; 2002 151.6; 2003 156.6; 2004 150.7; 2005 150.1; 2006 140.6; 2007 133; 2008 149.1; 2009 160; 2010 157.6
  - Note: The projections and approvals for 2010 includes a PBL of $45 million.

### Relations with the Caribbean Development Bank (CDB)
- Aggregate approvals and sectoral allocation (1970 to September 30, 2010):
  - CDB approved US$291.3 million (net) in loans, contingent loans, equity and grants to Barbados.
  - This represents 8.9 percent of total approvals to CDB’s borrowing member countries.
  - Sectoral allocations:
    - Productive sectors total US$79.3 million or 27.2 percent (Agriculture, Manufacturing, Tourism)
      - Manufacturing US$45.5 million or 15.7 percent
      - Tourism US$29.5 million or 10.1 percent
    - Economic infrastructure US$158.3 million or 54.3 percent
      - Transportation and communication US$101.0 million or 34.6 percent
      - Education US$50.8 million or 17.4 percent
      - Health US$3.2 million or 1.1 percent
    - Multi-Sector US$53.7 million or 18.6 percent
    - Total US$291.3 million or 100.0 percent

- Table 1 summary (CDB Loans, Equity and Grants Approved (Net) to Barbados 1970− September 30, 2010):
  - Sector totals (US million) and percent:
    - Agriculture 4.2 1.4
    - Manufacturing 45.5 15.7
    - Tourism 29.5 10.1
    - Mining 0.1 0.0
    - Sub-total 79.3 27.2
    - Power and Energy 0.1 0.0
    - Water 1.8 0.6
    - Transportation & Communication 101.0 34.6
    - Housing 1.4 0.5
    - Education 50.8 17.4
    - Health and Sanitation 3.2 1.1
    - Sub-total 158.3 54.2
    - Multi-Sector 53.7 18.6
    - Sub-total 53.7 18.6
    - Total 291.3 100.0

- Approvals of Loans, Contingent Loans, Equity and Grants (Net) 2002–10 (US$ Millions):
  - 2002 15.0
  - 2003 13.5
  - 2004 0.1
  - 2005 0.1
  - 2006 24.4
  - 2007 32.7
  - 2008 0.1
  - 2009 12.9
  - 2010 (September 30) 1.0

- CDB Disbursements and Undisbursed Balances to Barbados 2002 – September 30, 2010 (US$ millions):
  - Disbursements during the year and Undisbursed Balance at end of year:
    - 2002 Disbursements 3.8 Undisbursed Balance 79.7
    - 2003 Disbursements 17.2 Undisbursed Balance 76.0
    - 2004 Disbursements - Undisbursed Balance 19.9 56.1
    - 2005 Disbursements 8.6 Undisbursed Balance 47.5
    - 2006 Disbursements 9.3 Undisbursed Balance 62.2
    - 2007 Disbursements 23.6 Undisbursed Balance 71.3
    - 2008 Disbursements 25.2 Undisbursed Balance 47.2
    - 2009 Disbursements 16.8 Undisbursed Balance 46.1
    - 2010 (September 30) Disbursements 1.3 Undisbursed Balance -
  - Source: Caribbean Development Bank.

### Statistical issues and data adequacy
- Overall assessment:
  - Data provision has some shortcomings, but is broadly adequate for surveillance purposes.
  - Barbados participates in the General Data Dissemination System, with metadata and plans for improving the statistical base posted on the Fund’s Dissemination Standards Bulletin Board.

- Real sector:
  - National accounts compiled according to the 1968 SNA manual.
  - Lack of current, reliable source data on nonsugar agriculture, private construction, and nontourism service activities affects production-based GDP estimates.
  - Authorities initiated a census of economic activity in June 2005 covering tourism, financial businesses, and transport and communications.
  - Expenditure-based GDP estimates derive from selected surveys; household survey yields a reliable estimate of aggregate consumption, but external trade and investment surveys suffer weaknesses.
  - Constant price GDP estimates compiled by the Central Bank of Barbados (CBB) have an outdated 1974 base year; authorities are updating the base year to 2000.
  - Revision: authorities, with CARTAC assistance, completed a revision of national accounts data and published revised GDP series in current prices, revealing that current GDP had been underestimated in 2008 by about 10 percent.
  - Revised current price GDP data are not consistent with constant price GDP data (base year 1974); no meaningful GDP deflator data linking both series.
  - Recommendation: an early rebasing of the constant price GDP data should be a high priority.

- Price and production indices:
  - CPI 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 from 1982; authorities working to rebase the series to 1994.
  - Absence of a systematic index of property prices means potential misalignments in real estate prices are not addressed.

- Government finance statistics:
  - Fairly comprehensive and up-to-date above-the-line data available for general government, but government transfers reported with a lag.
  - Incomplete coverage of off-budget transactions creates discrepancies between overall balance and financing data in some years.
  - Public enterprise data 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 due to limited availability of nonbank financial sector information.
  - Authorities introduced accrual accounting of public finance in April 2007.

- Monetary and financial statistics:
  - Weaknesses remain in quality, coverage, and timeliness, but do not hinder Fund surveillance.
  - 2007 and 2008 STA missions found methodological problems, misclassifications, and inconsistent application of residency criterion.
  - CBB assisted in compiling standardized report forms (SRFs) and has recently started compiling monetary statistics based on the SRFs including comprehensive detailed depository corporations’ data.

- External sector statistics:
  - Lags in compilation of merchandise trade data and infrequent/incomplete information on offshore sector limit timeliness of external current account balance estimates.
  - Estimates of components of the external financial account need improvement.
  - Authorities, with CARTAC assistance, are working on compiling data on the net international investment position of Barbados.

### Data reporting timetable (selected items, as of September 30, 2010)
- Exchange Rates: Fixed
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 7/31/10; Date received 7/31/10; Frequency D/W/M as indicated
- Reserve/Base Money: 7/31/10; 7/31/10; Frequency M M M
- Broad Money: 5/31/10; 8/22/10; Frequency M M M
- Central Bank Balance Sheet: 5/31/10; 8/22/10; Frequency M M M
- Consolidated Balance Sheet of the Banking System: 5/31/10; 8/22/10; Frequency M M M
- Interest Rates: 7/31/10; 7/31/10; Frequency M M M
- Consumer Price Index: 7/31/10; 7/31/10; Frequency M M M
- Revenue, Expenditure, Balance and Composition of Financing – General Government: 6/30/10; 9/14/10; Frequency Q Q Q
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: 6/30/10; 9/14/10; Frequency Q Q Q
- Stocks of Central Government and Central Government-Guaranteed Debt: 3/31/09; 9/14/10; Frequency Q Q Q
- External Current Account Balance: 12/09; 9/14/10; Frequency A A Q
- Exports and Imports of Goods and Services: 12/09; 9/14/10; Frequency A A M
- GDP/GNP: 2009; 9/14/10; Frequency A A Q
- Gross External Debt: 12/31/09; 9/14/10; Frequency A A M
- International Investment Position: (no date provided)

### Supplementary budget (Minister Sinckler) — November 22 presentation and fiscal measures
- Net fiscal effort proposed: BDS$149 million (or 1¾ percent of GDP) on an annualized basis.
- Revenue measures (about BDS$180 million higher revenue on an annualized basis):
  - Raise the VAT rate from 15 percent to 17.5 percent for a period of 18 months effective December 1, 2010.
  - Remove various deductions for travel, entertainment, and investment from taxable income.
  - Raise the gasoline excise tax and some other fees, while reducing the environmental levy on imported goods.
  - Raise by one-third public bus fares (which have remained unchanged since the early 1990s), allowing lower government transfers to the transport board.

- Expenditure measures (additional net spending of BDS$31 million):
  - Increase transfers to the Barbados Tourism Authority.
  - Increase pension payments.
  - Increase welfare grants and food voucher payments.
  - Establish a grant to finance primary school textbooks, while limiting the free enrollment period in the public university.
  - New programs to shore up the private sector: a tax credit for businesses that generate additional employment, and a loan-guarantee facility to support investment in the tourism sector.

- Staff assessment:
  - The proposed measures would contribute to fiscal consolidation, particularly in early years, and some additional spending targets vulnerable segments and business investment.
  - The fiscal effort would not be as large as in the staff’s adjustment scenario, most notably because the VAT increase would be reversed in 18 months.
  - Under the staff’s economic assumptions, while debt would stabilize at about 114 percent of GDP in FY 2015/16, it would remain very elevated.

*International Monetary Fund — Staff Report for the Article IV Consultation—Supplementary Information (Prepared by the Western Hemisphere Department; Approved by David J. Robinson and James Roaf; November 30, 2010)*

### 3.      Overall, the staff believes that the recently announced supplementary budget is

### IMF Executive Board Concludes 2010 Article IV Consultation with Barbados

### Background and macroeconomic context
- The global economic crisis adversely impacted tourism, financial services, and real estate investment.
- Real GDP contracted by almost 5 percent in 2009 and is expected to continue its decline in 2010, albeit at a slower rate.
- Unemployment rose to 10.7 percent in the second quarter of 2010, up from 7.4 percent in 2007.
- Average inflation fell in 2009 but picked up in 2010 and is expected to end the year at about 5 percent, fueled by higher energy prices.
- The nonfinancial public sector deficit is expected to remain at around 7 percent of GDP in Fiscal Year 2010/11 (April to March), only marginally lower than in the previous two fiscal years.
- Public debt could approach 115 percent of GDP by the end of the current fiscal year.
- The external current account deficit narrowed in 2009 to 5.5 percent of Gross Domestic Product, down from almost 10 percent in the previous year.
- Reserves pressures arose from lower tourism receipts, the near-stop in foreign direct investment inflows in 2009, and a US$100 million bond repayment in mid-2010.
- Special Drawing Rights allocations of US$85 million in 2009, plus two foreign bond placements in 2009 and 2010 totaling US$220 million, boosted international reserves, which are expected to end 2010 above US$700 million.

### Executive Directors’ assessment and recommendations
- Directors noted the severe impact of the global crisis on Barbados and that the economy is expected to rebound gradually, with downside risks from the uncertain global environment.
- Directors commended the authorities’ Medium-Term Fiscal Strategy aimed at generating a balanced budget and reducing the high public debt-to-GDP ratio.
- Directors welcomed recent measures to raise VAT rates and public transportation tariffs, while boosting spending targeted at vulnerable segments of society.
- Directors emphasized that additional measures will be necessary to place public debt on a sustainable path and encouraged:
  - broadening the tax base;
  - making the VAT increase permanent;
  - raising corporate tax rates;
  - streamlining government operations;
  - continuing to rein in current spending.
- Directors advised prioritizing expenditure to make room for moderate increases in capital spending to support medium-term growth.
- On the exchange rate regime, Directors observed the U.S. dollar peg provides a valuable anchor, noted Barbados’ real exchange rate may have become somewhat overvalued, and called for decisive fiscal adjustment to safeguard the peg’s viability.
- Directors viewed the current monetary policy stance as broadly appropriate and recommended maintaining spreads between the minimum deposit rate and policy rates in core economies consistent with prevailing market conditions.
- On financial sector stability:
  - Directors noted banks remain healthy with increased nonperforming loans but robust capital bases.
  - They commended strengthened bank oversight, including creating a financial stability unit in the central bank.
  - They recommended implementing the 2008 FSAP Update recommendations and more detailed data collection on banks’ loan portfolios to strengthen supervision and stress testing.
  - Directors welcomed efforts to improve supervision of nonbank financial institutions and called for timely consolidation of nonbank supervision into the Financial Services Commission.
  - They underscored the need to resolve problematic insurance companies to lift market uncertainty and clarify contingent fiscal costs.
- Directors encouraged further streamlining of government agencies and procedures to address weak productivity growth and broaden growth sources.

### Selected economic indicators (as reported)
- Real GDP: 2006 3.6; 2007 3.8; 2008 -0.2; 2009 -4.7; 2010 -0.5; 2011 2.5 (Annual percentage change)
- Nominal GDP: 2006 5.4; 2007 3.9; 2008 -1.2; 2009 -2.3; 2010 1.7; 2011 5.3 (Annual percentage change)
- Consumer prices: 2006 7.3; 2007 4.0; 2008 8.1; 2009 3.7; 2010 5.0; 2011 3.5 (Annual percentage change)
- Net domestic assets: 2006 14.2; 2007 9.4; 2008 11.3; 2009 3.1; 2010 4.0; 2011 8.2 (Annual percentage change)
  - Of which: private sector credit: 2006 13.2; 2007 6.4; 2008 11.1; 2009 1.4; 2010 -0.2; 2011 4.1
- Broad money: 2006 11.3; 2007 13.2; 2008 2.8; 2009 2.8; 2010 4.6; 2011 6.3 (Annual percentage change)
- Public sector overall balance (percent of GDP, fiscal year April to March): 2006 -3.9; 2007 -8.6; 2008 -7.2; 2009 -7.3; 2010 -7.0; 2011 -5.0
  - Central government balance: 2006 -2.7; 2007 -5.0; 2008 -5.0; 2009 -9.1; 2010 -8.8; 2011 -6.9
  - Off-budget activities: 2006 -3.5; 2007 -5.0; 2008 -3.3; 2009 0.1; 2010 0.0; 2011 0.0
  - National Insurance Scheme balance: 2006 3.4; 2007 3.2; 2008 3.1; 2009 2.9; 2010 2.9; 2011 3.1
  - Public enterprises’ balance: 2006 -1.2; 2007 -1.8; 2008 -2.0; 2009 -1.2; 2010 -1.2; 2011 -1.2
- Primary balance (percent of GDP): 2006 -0.8; 2007 -4.7; 2008 -3.3; 2009 -2.9; 2010 -2.5; 2011 -0.2
- Public sector debt (end of fiscal year, includes central government and government-guaranteed debt): 2006 79.6; 2007 90.4; 2008 97.3; 2009 110.7; 2010 114.4; 2011 116.9 (In percent of GDP)
- External current account balance (percent of GDP): 2006 -6.9; 2007 -4.5; 2008 -9.6; 2009 -5.5; 2010 -7.9; 2011 -7.4
- External debt (end of fiscal year, includes public sector and nonfinancial private sector debt): 2006 24.5; 2007 28.3; 2008 28.1; 2009 31.9; 2010 33.7; 2011 32.1 (In percent of GDP)
- Gross international reserves (in millions of US$): 2006 597.0; 2007 774.0; 2008 678.1; 2009 745.4; 2010 706.5; 2011 691.7
- Nominal GDP (in millions of Barbados dollars, memorandum): 2006 7,769; 2007 8,075; 2008 7,976; 2009 7,790; 2010 7,925; 2011 8,347

*Source: IMF Executive Board discussion of the 2010 Article IV consultation with Barbados, Public Information Notice No. 10/159 (December 15, 2010).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10363.pdf_