## _cr1207 ## Source details **Canonical URL:** [_cr1207](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1207.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1207.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1207.pdf.json) --- ### Recent developments in the tourism sector and macro outcomes - Background and policy response: - Barbados was severely affected by the global economic crisis; economic activity is estimated to have contracted by a cumulative 5 percent between 2008 and 2010. - Authorities implemented countercyclical social measures: Tourism Investment Relief Fund (2009) and an employment stabilization scheme allowing employers to defer for one year their contribution to the National Insurance Scheme (NIS) contingent on the maintenance of employment levels. - Exchange system: BD$2.00=US$1 peg since 1975; Barbados has accepted the obligations of Article VIII, Sections 2, 3, and 4. - The Medium Term Fiscal Strategy (MTFS) developed in early 2010 aimed to reduce the central government deficit and lower the debt-to-GDP ratio to 90.5 percent by 2014/15; the MTFS projected the fiscal deficit to GDP ratio to decline to 2.1 percent by 2013/14 and reach a balanced position by 2014/15. The MTFS went off track in its first year and was being revised; no date was established for the revised strategy to be in place. - Growth and tourism indicators: - Real GDP growth in 2010: 0.2 percent. - Estimated GDP growth for first nine months of 2011: around 1 percent (driven by tourism and construction). - Tourist arrivals increased by 8.7 percent y/y in August, 2011. - Real tourism expenditure declined by about 15 percent (y/y) in June 2011 as visitors cut length of stay and sought value. - Tourist arrivals (selected totals): 2008: 567,667; 2009: 518,564; 2010: 532,180; Growth Rate series: -8.6 / 2.6 / 8.7 (as shown). - Prices, money, labor, and external sector: - Inflation estimated July 2011: 10.4 percent (y/y); non-core inflation (food, fuel and transportation, about 57 percent of household consumption) increased by 14.4 percent. - Expected inflation path: slightly above 7 percent y/y in December 2011, with some easing in 2012. - Broad money growth in 2010: 2.8 percent. - Growth of credit to the private sector slipped by 0.2 percent (y/y) in September 2011. - Average loan rate declined to 9 percent. - Unemployment rose from 6.7 percent in 2007 to 12.1 percent in June 2011. - Average unemployment in tourism, construction, and wholesale and retail trade: from 9.8 percent in June 2007 to 16 percent in June 2011. - Current account deficit (first nine months of 2011): 9 percent of GDP (vs. 8.7 percent same period 2010). - Oil import prices surged by up to 42 percent, increasing the fuel import bill by about one-third despite lower import volumes. - International reserves at end-September 2011: 4.5 months of imports. - Fiscal and banking sector status: - FY 2010/11 central government deficit: about 8½ percent of GDP (from 8.2 percent in FY 2009/10). - Overall NFPS fiscal deficit FY 2010/11: 7.3 percent. - Total public sector debt at end FY2011: 117 percent of GDP (up from about 91 percent two years earlier); domestic debt ≈ 70 percent of public debt. - Bank capital averaged about 17.4 percent of risk-weighted assets at end-June 2011. - Non-performing loans: 7.9 percent in December 2009 → 10.3 percent in September 2011 (driven by two substandard hotel loans); provisioning remained around 3½ percent. - Liquid assets to total assets rose to 12.8 percent. ### Outlook, scenarios, and risks - Near-term projections: - Real GDP growth for remainder of year and 2012 expected to remain weak; real GDP growth expected to be just over 1 percent driven by anticipated tourism rebound. - External current account deficit projected to widen to about 10½ percent of GDP in 2011 and narrow in 2012. - Reserve coverage projected to remain around 4 months of imports by year-end supported by steady private and public capital inflows. - Medium-term outlook and downside risks: - Medium term prospects uncertain and tilted to the downside given tepid global recovery and weak labor markets in the U.K. and U.S. - Reserves projected to fall continuously in nominal terms due to weak external demand for tourism; reserve coverage above three months of imports could be sustained provided strong net FDI inflows occur. - Current account deficit projected to decline to 5.6 percent of GDP in 2016. - Scenario outcomes (staff projections): - Medium term active fiscal adjustment scenario: central government deficit falls from 8.3 percent in FY 2010/11 to a surplus of 3.2 percent in FY 2016/17. - Under staff adjustment scenario total public sector debt gradually falls to about 92 percent of GDP by end-FY 2016/17 and is about 15 percentage points of GDP lower than the baseline in FY 2016/17. ### Debt sustainability, baseline and adjustment scenarios (Appendix I and Table highlights) - Shared assumptions: - Economic growth subdued; recovery in demand for Barbados’ goods and services commences in 2013. - No fiscal cost to the budget from the resolution of CLICO. - Recent VAT increase made permanent; exchange rate remains stable; capital inflows increase to finance tourism-related investments. - Baseline scenario key projections: - NFPS deficit path (FY 2010/11 → FY 2016/17): 7.3 percent → 0.1 percent. - Public debt: decline from 117 percent (peak in 2010/11) to 107 percent in FY 2016/17. - Current account: adjust gradually to about 5.6 percent of GDP by 2016 (current account deficit). - Reserve coverage: decline from 4.1 months of imports in 2011 to 3.1 months in 2016. - Selected baseline table entries (2009–2016): Non-Financial Public sector balance: -7.2 -7.3 -4.1 -2.9 -1.9 -1.1 -0.2 -0.1; Primary balance: -3.2 -3.6 0.5 2.1 3.5 4.3 5.0 5.0; Revenues: 32.7 35.0 35.3 37.1 38.2 38.7 39.3 39.3; Expenditures: 39.9 42.2 39.4 40.0 40.1 39.8 39.6 39.3; Public debt: 104.0 116.8 116.6 116.4 115.0 112.8 110.3 107.6. - Adjustment scenario key projections: - NFPS balance improves from -7.3 percent of GDP to a surplus of 4.6 percent of GDP in 2016/17. - Public debt reduces from 117 percent of GDP in 2010/11 to 91.8 percent of GDP by end-FY 2016/17. - International reserves recover to around 4.5 months of imports by 2016 due to healthier private capital inflows. - Selected adjustment table entries (2009–2016): Non-Financial Public sector balance: -7.2 -7.3 -4.1 -1.4 0.6 2.4 4.0 4.6; Primary balance: -3.2 -3.6 0.5 3.6 6.0 7.7 9.2 9.6; Revenues: 32.7 35.0 35.3 38.2 40.0 41.1 42.1 42.2; Expenditures: 39.9 42.2 39.4 39.7 39.4 38.7 38.1 37.5; Public debt: 104.0 116.8 116.6 114.9 111.1 105.6 98.8 91.8; Gross international reserves (US$ million): 744 786 766 782 803 844 908 993; Gross international reserves (months of imports): 4.4 4.4 4.1 4.0 4.0 4.1 4.3 4.5. - Stress test findings: - Baseline vulnerabilities: public debt remains high and vulnerable to shocks; a permanent shock to growth of about a 1/4 standard deviation raises public debt to GDP ratio to 150 percent; if the primary balance follows historic trends public debt would reach 120 percent of GDP. - External debt sensitivity: a 30 percent real depreciation would increase external debt to 48 percent of GDP by 2016. - Adjustment scenario: debt profile improves and is more resilient, but public debt will not follow a sustained downward path under most standardized shocks in the short run; vulnerability persists until debt ratios decline further in the long run. ### Fiscal policy recommendations and contingency planning - Fiscal consolidation emphasis: - Priority: reduce public debt to below 100 percent of GDP in the medium term and implement a comprehensive MTFS based on realistic macro assumptions; broaden MTFS coverage to include public enterprises. - Staff recommended focusing consolidation on expenditure reductions since room for further tax increases is limited. - Specific recommended measures: - Increase the VAT by 3 percentage points to 18 percent and broaden the tax base (mission recommendation). - Make recent VAT increase permanent: authorities raised the VAT rate from 15 to 17.5 percent for 18 months (implemented). - Eliminate exemptions and improve tax administration; develop a plan to reduce tax exemptions (currently estimated at BD$500 million annually, 5.6 percent of GDP) by at least 15 percent by 2015. - Raise excise taxes on gasoline (authorities increased gasoline excise by 50 percent). - Contain public wage spending: freeze wages for at least two years to reduce the wage-to-GDP ratio from 10 percent to 8.5 percent. - Reduce transfers to GDP from current 12 percent to 10 percent. - Raise tariffs in public enterprises combined with efficiency improvements; consider privatization and outsourcing where feasible. - Explore scope for increasing the corporate tax rate, particularly for offshore operations as activity recovers. - Intensify monitoring of exemptions and publish data on companies receiving concessions to enhance transparency. - Continue efforts to improve revenue administration and public financial management. - Contingency planning and trade-offs: - Authorities and staff discussed developing fiscal contingency plans to reduce spending or increase revenues should global conditions worsen. - Under the active adjustment scenario nominal central government spending grows cumulatively by 16 percent between 2011 and 2016 versus 21 percent under the baseline; nominal revenues grow cumulatively by 56 percent over the same period compared with 45 percent under the baseline. Revenue gains accrue mainly from reduction in exemptions and improvements in tax administration. ### Public debt, NIS exposure, and debt management concerns - NIS reliance and exposures: - Staff urged authorities to reduce reliance on the NIS to finance public sector borrowing; NIS exposure to the government increased from 54 percent in 2005 to 69 percent in 2011. - At close to 70 percent, NIS’ exposure is well above the prudential guideline of below 54 percent recommended in the 2005 actuarial report. - Share of NIS assets held locally increased from 90 percent to 96 percent over the same period. - Staff recommended limiting further exposure to the public sector and intensifying efforts to promote development of domestic and regional capital markets to increase investment opportunities. - Debt profile observations: - Public sector debt: public debt-to-GDP series (baseline projections) — 2009: 104.0; 2010: 116.8; 2011: 116.5; 2012: 116.3; 2013: 114.8; 2014: 112.6; 2015: 110.0; 2016: 107.2. - Debt-stabilizing primary balance (baseline table): 2.3. ### Monetary, exchange rate, and financial sector policy advice - Exchange rate and reserves: - Staff shares authorities’ view that the exchange rate peg has served the country and should be maintained; sustainability depends on addressing external sustainability risks including pressures on the current account from high fiscal deficits. - Real exchange rate assessments: FEER approach shows REER close to equilibrium at end-2010; macro balance and external sustainability approaches show overvaluation between 7 and 11 percent. - Declining reserves combined with persistently higher inflation relative to peers suggests a competitiveness challenge. - Staff urged avoidance of monetizing central government deficits and to maintain a positive interest rate differential vis-à-vis the United States to encourage capital inflows. - Monetary policy actions and guidance: - Central bank lowered the minimum deposit rate from 5 to 2½ percent. - Staff argued against further declines in interest rates due to potential pressure on reserves and the exchange rate. - Recent FX regulatory changes: surrender requirement of 5 percent of gross foreign exchange purchases by authorized dealers; reduction in central bank’s selling rate on currency trades from BDS$2.035 per US dollar to BDS$2.015 per US dollar. - Financial sector stability and insurance resolution: - NPLs excluding two large hotel loans: estimated around 6.6 percent (vs. central bank prudential guideline of 5 percent). - Central bank stress tests: loan delinquency expected to remain high under various macro stresses, but banks’ capital positions would remain sufficient to cover potential losses. - Staff recommended frequent monitoring, improved risk management, and upgrading provisioning requirements to international standards. - CLICO resolution: Judicial Manager submitted a final report with options ranging from liquidation to formation of a new company; decision needed by authorities. Judicial Manager’s preferred option considered unlikely due to weak financial positions of Barbadian and ECCU governments. Staff stressed seeking a private sector solution to resolve CLICO in absence of fiscal space. - BAICO resolution near completion with negligible costs to government expected. - Staff supported reform of the supervisory framework: Financial Services Commission began work in April 2011 to supervise insurance, pensions and securities; priority to strengthen FSC capacity and pursue coordinated regional approaches and crisis resolution mechanisms. ### Structural competitiveness and reform priorities - Competitiveness strengths: - Barbados rated 43rd among 139 countries in the 2011 Global Competitiveness Report. - Tourism competitiveness strong: Travel and Tourism Competitiveness Index ranked Barbados 28th (2010); in the Americas ranked 3rd behind the US and Canada. - Key strengths: institutional environment, educational system, infrastructure, technological readiness, strong destination marketing and sport events. - Competitiveness weaknesses and recommendations: - Factors negatively affecting ranking: small market size, high deficit and debt levels, trade barriers, crime and violence, HIV prevalence, inflexibility of wages/hiring/firing, low customer orientation, restrictions on capital flows, low domestic equity financing. - Tourism price competitiveness undermined by high energy costs, relatively high ticket taxes and airport fees, and high accommodation rates. - Policy recommendations: brand repositioning, further airlift capacity expansion, product reinvention and marketing, securing more airlift (especially from emerging markets), reduction in cost of access, reassess rules on foreign ownership, capital controls, ease and cost of setting up businesses, and invest in renewable energy. ### Sectoral balance sheet analysis and recommended risk mitigants - Balance sheet approach (2006–2009) findings: - Aggregate economy balance sheet weakened primarily due to deterioration in NFPS balance sheet; private sector balance sheet appears sound and resilient. - NFPS most vulnerable: negative net financial and net foreign currency positions; liabilities mostly in domestic currency but limited foreign currency assets create net negative foreign currency position. - Private sector: positive net financial and net foreign currency positions; financial sector not directly vulnerable to exchange rate devaluation due to regulatory liquidity and FX exposure limits. - Policy implications from balance sheet analysis: - Reduce macroeconomic vulnerabilities by lowering public debt. - Accumulate foreign reserves. - Promote market-based hedging mechanisms. - Strengthen prudential oversight to limit foreign currency mismatches in the financial sector. - Promote development of domestic securities markets for resident portfolio diversification away from public sector exposure. ### CLICO-Barbados resolution (Box summary) - Collapse context: - CL Financial Group collapse was a major regional shock; life insurance annuities (EFPA) financed expansion and yielded high returns; global deterioration in 2008 triggered liquidity/solvency pressures. - CLICO-Barbados status: - Judicial Manager (Deloitte Consulting Ltd.) appointed April 14, 2011 for CLICO International Life Insurance Ltd. (CIL). - Unaudited shortfall estimated at about US$196 million (4.4 percent of GDP) at that time. - Judicial Manager restructuring proposals and funding implications: - July 28 plan proposed a new company taking 60 percent of policyholder value transferred proportionately. - September revised plan provided four options with funding implications between US$28 million and US$76 million. - Effects across options vary by policyholder type (individual, corporate, quasi government) and funding injection (US$76m, US$52m, US$47m, US$28m) — details preserved in source. - Authorities’ decision process: - Government considering options including a fifth option involving sale of traditional insurance business and/or liquidation. - Time frame for CLICO resolution: end of 2012. - Regulatory implications: - Urgent need to operationalize FSC and strengthen insurance supervision; weaknesses highlighted by CLICO and BAICO failures. ### Data issues, statistical improvements, and operational notes - National accounts and rebasing: - National accounts compiled according to 1968 SNA; constant price GDP estimates used a 1974 base year; authorities updating base year to 2000 and BSS compiling VA by industry at constant prices since 2011 using 2006 base year work. - Revised current price GDP in 2008 revealed an underestimation of about 10 percent. - Priority: early rebasing of constant price GDP data; develop quarterly constant price estimates anchored to annual estimates. - Price indices and PPI: - CPI uses 1998–99 expenditure basket for July 2001=100 series. - PPI sample finalized: 27 industries and 68 establishments representing 90 percent of manufacturing output; initiation partly completed (12 of 68 establishments); BSS target to complete PPI by January 2012. - Government finance and external statistics gaps: - Off-budget transactions incompletely covered; public enterprise data not systematically reported; financial sector data on public sector net domestic borrowing not fully reconcilable with fiscal data. - External sector statistics limitations: merchandise trade data lags, infrequent offshore sector information, external financial account components need improvement. - Ongoing work with CARTAC to compile net international investment position. - Key data reporting frequencies and latest observation dates (selected): - International Reserve Assets and Reserve Liabilities: latest observation 7/31/11; date received 9/19/11; Frequency M/M/M. - Consolidated Balance Sheet of the Banking System: latest observation 6/30/11; date received 9/19/11; Frequency M/M/M. - Consumer Price Index: latest observation 7/31/11; date received 10/10/11; Frequency M/M/M. - GDP/GNP: latest observation 2010; date received 9/19/11; Frequency A/A/Q. - Gross External Debt: latest observation 3/31/11; date received 10/10/11; Frequency A/A/M. ### Executive Board assessment and priorities (Public Information Notice highlights) - Board conclusions (December 05, 2011): - Barbados was hit hard by the global crisis and has yet to fully recover; growth remains tepid despite tourism rebound. - Main challenge: undertake credible fiscal consolidation without jeopardizing fragile recovery and social cohesion. - Directors commended revised MTFS aimed at balanced budget and debt reduction. - Key Director recommendations: - Fiscal consolidation focused on expenditure reduction: lower wage bill, reduce transfers to public enterprises, minimize tax exemptions. - Make temporary VAT hike permanent and broaden tax base. - Expand fiscal strategy coverage to include public enterprises and develop contingency plans. - Engage social partners in debate on social spending level. - Close monitoring of net foreign reserves and policies to support the exchange rate peg. - Monetary and financial sector guidance: - Scope for monetary easing limited; not appropriate to further relax interest rates given dependence on foreign-earning sectors. - CBB measures: 5 percent surrender requirement on gross foreign exchange purchases by authorized dealers; reduction in FX sales margin; increased monitoring and daily FX transaction reporting. - Financial stability: strengthen FSC, publish financial stability report, minimize fiscal costs in insurance resolutions, pursue private sector solutions and regional coordination. _Italic: Source: Barbados — 2011 Article IV Report (sections and boxes reproduced from _cr1207)._ ### 1. Recent Developments in the Tourism Sector __________________________________________________ 17 ### 1. Recent Developments in the Tourism Sector __________________________________________________ 17 ### Background - Barbados was severely affected by the global economic crisis, curbing tourism and offshore activity with broader impact on other sectors; economic activity is estimated to have contracted by a cumulative 5 percent between 2008 and 2010. - Authorities implemented countercyclical social measures, including a Tourism Investment Relief Fund (2009) and an employment stabilization scheme allowing employers to defer for one year their contribution to the National Insurance Scheme (NIS) contingent on the maintenance of employment levels. - The Medium Term Fiscal Strategy (MTFS) developed in early 2010 aimed to reduce the central government deficit and lower the debt-to-GDP ratio to 90.5 percent by 2014/15; the MTFS projected the fiscal deficit to GDP ratio to decline to 2.1 percent by 2013/14 and reach a balanced position by 2014/15. The MTFS went off track in its first year and was being revised; no date was established for the revised strategy to be in place. - Exchange system: BD$2.00=US$1 peg since 1975; Barbados has accepted the obligations of Article VIII, Sections 2, 3, and 4. ### Recent developments and macroeconomic outcomes - Growth and tourism: - After two years of negative growth, real GDP growth in 2010 was 0.2 percent. - In the first nine months of 2011 GDP growth is estimated at around 1 percent, due mainly to improved activity in tourism and construction. - Tourist arrivals increased by 8.7 percent y/y in August, 2011. - Real tourism expenditure declined by about 15 percent (y/y) in June 2011 as visitors cut length of stay and sought value. - Inflation and prices: - Inflation is estimated to have reached 10.4 percent (y/y) in July 2011 due to high international oil and food prices. - Non-core inflation (food, fuel and transportation), which constitutes about 57 percent of household consumption, increased by 14.4 percent. - Higher international oil and food prices were expected to push inflation to slightly above 7 percent y/y in December 2011, with some easing in 2012. - Money, credit, and interest rates: - Broad money grew 2.8 percent in 2010. - Growth of credit to the private sector slipped further in September 2011 by 0.2 percent (y/y). - The average loan rate declined to 9 percent. - Labor market: - Unemployment rose from 6.7 percent in 2007 to 12.1 percent in June 2011. - The average unemployment rate in tourism, construction, and wholesale and retail trade increased from 9.8 percent in June 2007 to 16 percent in June 2011. - External sector and reserves: - The current account deficit rose to 9 percent of GDP for the first nine months of 2011, compared with 8.7 percent for the corresponding period of 2010, mainly due to higher oil and food prices. - Oil import prices surged by up to 42 percent, increasing the fuel import bill by about one-third despite lower import volumes. - International reserves reached 4.5 months of imports at end-September 2011. - Fiscal and public debt: - The FY 2010/11 central government deficit widened to about 8½ percent of GDP from 8.2 percent of GDP in FY 2009/10. - The overall fiscal deficit for the non-financial public sector (NFPS) reached 7.3 percent in FY 2010/11. - At the end of FY 2011, total public sector debt was 117 percent of GDP, up from about 91 percent two years earlier; domestic debt accounts for about 70 percent of public debt. - Debt rollover risks are limited given continued NIS purchases of government securities and a favorable amortization profile of external debt. - Banking sector soundness: - Bank capital averaged about 17.4 percent of risk-weighted assets at end-June 2011. - Non-performing loans increased from 7.9 percent in December 2009 to 10.3 percent in September 2011 (driven by two substandard hotel loans); provisioning remained at around 3½ percent. - Liquid assets to total assets rose to 12.8 percent. ### Outlook and risks - Near-term outlook: - Real GDP growth for the remainder of the year and 2012 was expected to remain weak; real GDP growth is expected to be just over 1 percent building on an anticipated further rebound in tourism. - The external current account deficit was projected to widen to about 10½ percent of GDP in 2011 and narrow in 2012. - Reserve coverage was projected to remain around 4 months of imports by year-end supported by steady private and public capital inflows. - Medium-term outlook and risks: - Medium term prospects are uncertain and tilted to the downside given a tepid global recovery and weak labor markets in the U.K. and U.S., Barbados’ main source markets. - Reserves are projected to fall continuously in nominal terms due to weak external demand for tourism; reserve coverage above three months of imports could be sustained provided strong net FDI inflows occur. - The current account deficit was projected to decline to 5.6 percent of GDP in 2016. - Scenario outcomes: - Under staff’s medium term active fiscal adjustment scenario, the central government deficit would fall from 8.3 percent in FY 2010/11 to a surplus of 3.2 percent in FY 2016/17. - Total public sector debt would gradually fall to about 92 percent of GDP by end-FY 2016/17 and be about 15 percentage points of GDP lower than the baseline in FY 2016/17. ### Policy discussions and recommendations - Fiscal consolidation emphasis: - Priority: reduce public debt to below 100 percent of GDP in the medium term and implement a comprehensive MTFS based on realistic macro assumptions; broaden MTFS coverage to include public enterprises. - Staff recommended focusing consolidation on expenditure reductions since room for further tax increases is limited. - Specific policy recommendations discussed: - Increase the VAT by 3 percentage points to 18 percent and broaden the tax base (mission recommendation). - Make recent VAT increase permanent: authorities raised the VAT rate from 15 to 17.5 percent for 18 months (implemented). - Eliminate exemptions and improve tax administration; develop a plan to reduce tax exemptions (currently estimated at BD$500 million annually, 5.6 percent of GDP) by at least 15 percent by 2015. - Raise excise taxes on gasoline (authorities increased gasoline excise by 50 percent). - Contain public wage spending: - Freeze wages for at least two years to reduce the wage-to-GDP ratio from 10 percent to 8.5 percent. - Reduce transfers to GDP from current 12 percent to 10 percent. - Raise tariffs in public enterprises combined with efficiency improvements; consider privatization and outsourcing where feasible. - Explore scope for increasing the corporate tax rate, particularly for offshore operations as activity recovers. - Intensify monitoring of exemptions and publish data on companies receiving concessions to enhance transparency. - Continue efforts to improve revenue administration and public financial management. - Contingency planning: - Authorities and staff discussed developing fiscal contingency plans to reduce spending or increase revenues should global conditions worsen to meet budget targets and maintain external stability. - Fiscal adjustment trade-offs: - Under the active adjustment scenario nominal central government spending grows cumulatively by 16 percent between 2011 and 2016 versus 21 percent under the baseline; nominal revenues grow cumulatively by 56 percent over the same period compared with 45 percent under the baseline. Revenue gains accrue mainly from reduction in exemptions and improvements in tax administration. *Source: Barbados — 2011 Article IV Report (section: Recent Developments and policy discussions).* ### 19. Barbados’ high level of public debt ### 19. Barbados’ high level of public debt ### Debt sustainability and macro outlook - Barbados’ high level of public debt raises debt sustainability concerns. - Debt sustainability analysis suggests that even under the adjustment scenario with the required aggressive fiscal efforts, the public debt would not follow a sustained downward path under most standardized shocks. - Debt sustainability will remain vulnerable until debt ratios decline further in the long run. - Real GDP growth will be tepid at less than 1 percent this year. - The medium term prospects are uncertain with risks tilted to the downside. ### Fiscal adjustment, MTFS, and budget targets - The FY 2011/12 budget proposes to reduce the central government deficit to 5.1 percent of GDP in line with the existing Medium Term Fiscal Strategy (MTFS). - The budget narrows the deficit by about 1 percentage point of GDP over the budget estimates. - Most projected savings are from improvements in the efficiency of government and cuts in spending on goods and services, wages, and transfers. - The overall deficit for the nonfinancial public sector is projected at 4½ percent of GDP in 2011/12. - Even under the best implemented MTFS, Barbados’ debt remains very high, above 90 percent of GDP. - Staff encouraged the authorities to develop contingency plans in the event uncertainties, especially on growth in the global and domestic environment, materialize. - Staff urged the authorities to identify concrete measures to help achieve the budget target as well as on a contingency basis. ### Reliance on the National Insurance Scheme (NIS) - Staff urged the authorities to reduce reliance on the NIS to finance public sector borrowing, while recognizing that NIS has limited investment opportunities. - NIS exposure to the government increased from 54 percent in 2005 to 69 percent in 2011. - At close to 70 percent, NIS’ current exposure to government is well above the prudential guideline of below 54 percent recommended in the 2005 actuarial report. - The share of NIS assets held locally increased from 90 percent to 96 percent over the same period. - Staff cautioned that NIS should better match its assets and liabilities by limiting further exposure to the public sector, noting increasing liabilities as the population ages. - To increase investment opportunities, staff recommended intensifying efforts to promote the development of domestic and regional capital markets. ### Monetary and external stability links - Staff shares the authorities’ view that the exchange rate peg has served the country and should be maintained, but sustainability of the peg depends on addressing external sustainability risks including pressures on the current account from high fiscal deficits. - Results from real exchange rate assessments: the fundamental equilibrium approach shows the real effective exchange rate close to its equilibrium level; the macro balance and external sustainability approaches show an overvaluation of between 7 and 11 percent. - Declining reserves combined with persistently higher inflation relative to peers suggests a challenge to competitiveness. - Staff argued against further declines in interest rates due to potential pressure on reserves and the exchange rate. - The central bank lowered the minimum deposit rate from 5 to 2½ percent. - Inflation is close to 7 percent. - Staff urged the authorities to avoid monetizing central government deficits and to maintain a positive interest rate differential vis-à-vis the United States to encourage capital inflows. - Recent foreign exchange regulation changes include: - A surrender requirement whereby authorized foreign exchange dealers are required to surrender 5 percent of their gross foreign exchange purchases to the central bank. - Reduction in the central bank’s selling rate on currency trades from BDS$2.035 per US dollar to BDS$2.015 per US dollar. ### Financial sector stability and insurance sector resolution - Recent increase in non-performing loans (NPLs) requires closer supervision. - Excluding two large hotel loans concentrated in one bank, the NPL ratio is estimated around 6.6 percent, slightly higher than the central bank’s prudential guideline of 5 percent. - Central bank stress tests suggest that while loan delinquency is expected to remain high under various macroeconomic stresses, banks’ capital positions would remain sufficient to cover potential losses. - Staff stressed the need for frequent monitoring, improved risk management, and upgrading provisioning requirements to international standards. - CLICO resolution: - A final report of the Judicial Manager has been submitted to the Supreme Court with options ranging from outright liquidation to formation of a new company; a decision by the authorities is needed. - The Judicial Manager’s preferred option is unlikely due to weak financial positions of the Barbadian and ECCU governments. - In the absence of fiscal space, staff stressed the importance of seeking a private sector solution to the resolution of CLICO. - BAICO resolution is near completion; negligible costs to the government are expected. - Staff supported the reform of the supervisory framework, noting the new Financial Services Commission began work in April 2011 to supervise insurance, pensions and securities. - Staff encouraged prioritizing insurance supervision and strengthening the supervisory capacity of the FSC, including through technical assistance from CARTAC and other international agencies. - Staff emphasized the need for a coordinated regional approach to financial sector supervision and a mechanism for crisis resolution. ### Structural reforms and productivity - Raising total factor productivity is important to raising medium term growth prospects; total factor productivity has been declining. - Staff encouraged improving the efficiency of government services including consolidating agencies with complementary mandates and reducing the bureaucratic burden on the private sector. - Staff supported reforms in public financial management, tax administration and debt management, and improving the energy mix by investing in renewable energy. - Authorities have launched an IADB sponsored competitiveness project with four main pillars: incentives and regulations; business development architecture; improving trade logistics and trade facilitation; and strengthening public-private dialogue on competitiveness. - Authorities are modernizing public procurement practices to improve transparency and integrity and lower costs. ### Staff policy recommendations and priorities - Implement a credible fiscal consolidation strategy without jeopardizing the fragile recovery; urgent implementation of the MTFS is needed, beginning with concrete expenditure cutting measures. - Make the recent temporary hike in the VAT rate permanent. - Fiscal consolidation should have an expenditure focus since room for further tax increases is limited. - Reduce public wage spending (including a wage freeze) and transfers to public enterprises. - Reduce transfers and raise tariffs in public enterprises to limit losses. - Minimize tax exemptions. - Develop contingency plans to ensure budget execution exceeds targets given global and domestic uncertainties. - Intensify efforts to rein in government spending, better prioritize new government projects, and broaden the tax base to bring the debt on a firm downward trajectory. - Monitor net foreign reserves closely and maintain policies that support the exchange rate peg. - Improve financial sector resilience through frequent monitoring, improved risk management, better loan portfolio information from banks, and upgraded provisioning requirements. - Minimize fiscal costs in any plan to resolve CLICO and seek private sector solutions; pursue regional frameworks for financial sector problems and crisis resolution. - Continue efforts to improve productivity and the business environment, including investments in renewable energy. *Source: _cr1207 - 19. Barbados’ high level of public debt* ### 43. It is recommended that the next ### _cr1207 - 43. It is recommended that the next ### Article IV consultation timing - It is recommended that the next Article IV consultation with Barbados be held on the standard 12-month cycle. ### Box 1. Barbados: Recent Developments in the Tourism Sector - Overall trend and concern: - After a weakening in 2009 following the global financial crisis, tourism in Barbados has rebounded. - Tourist arrivals grew by 2.6 per cent in 2010. - The turnaround continues into the first eight months of 2011, but it has yet to reflect on foreign exchange reserves due to declining tourism spending. - Source markets and drivers: - Tourist arrivals from major source markets remain strong; data from January to August 2011 show arrivals from major source markets improved substantially, with Europe outpacing the others. - Growth in regional arrivals, especially from Trinidad and Tobago, underscores the importance of the Caribbean market to Barbados. - Growth in arrivals was enhanced by intensified marketing, air lift capacity expansion in source markets (due partly to the introduction of low-cost carriers), and a number of sporting events in Barbados. - Risks to near-term arrivals: - Arrivals may weaken next year as the UK Air Passenger Duty is re-introduced, airlines adopt the Emissions Trading Scheme (ETS), and London hosts the 2012 Summer Olympic Games. - Competitive pressures: - Barbados is one of the most mature tourist destinations in the Caribbean offering beach-type products for exclusive clientele. - Emerging tourist destinations in the region, particularly the Spanish-speaking countries, which account for 40–60 percent of the Caribbean market share, compete with Barbados for tourists from the same source markets, with the Canadian market being severely affected recently. - Available data indicate these rival destinations offer similar products at much lower prices. - Policy implications and priorities: - Brand repositioning, further airlift capacity expansion and global recovery are critical to improve tourism activity. - Barbados needs to continue to reinvent and expand its products, while engaging more in marketing. - Securing more airlift, especially from emerging markets, reduction in cost of access and global recovery are critical to enhancing growth in tourist arrivals in the near to medium term. - Key statistics (Tourist Arrivals in Barbados: Major Source Markets) - Canada: 2008: 57,335; 2009: 63,751; 2010: 72,351; Growth Rate: 11.2 / 13.5 / -2.3 (as shown) - UK: 2008: 219,953; 2009: 190,632; 2010: 181,054; Growth Rate: -13 / -0.5 / 10.2 (as shown) - Germany: 2008: 6,098; 2009: 7,020; 2010: 7,260; Growth Rate: 15.1 / 3.4 / 30.7 (as shown) - Other Europe: 2008: 25,727; 2009: 23,052; 2010: 23,962; Growth Rate: -10 / 3.9 / 14.5 (as shown) - United States: 2008: 131,795; 2009: 122,306; 2010: 134,969; Growth Rate: -7.2 / 10.4 / 7.8 (as shown) - Trinidad and Tobago: 2008: 28,385; 2009: 26,289; 2010: 27,259; Growth Rate: -7.4 / 3.7 / 26.9 (as shown) - Other CARICOM: 2008: 72,254; 2009: 62,482; 2010: 58,923; Growth Rate: -14 / -5.7 / 9.7 (as shown) - Other Countries: 2008: 26,120; 2009: 23,032; 2010: 26,402; Growth Rate: -12 / 14.6 / 4.1 (as shown) - Total: 2008: 567,667; 2009: 518,564; 2010: 532,180; Growth Rate: -8.6 / 2.6 / 8.7 (as shown) - Total Cruise Passenger Arrivals: 2008: 597,526; 2009: 635,212; 2010: 664,747; Growth Rate: 6.3 / 4.6 / 4.6 (as shown) - Long Stay Tourist Arrivals: Regional Comparison (selected): - Barbados: 2008: 567,667; 2009: 518,564; 2010: 532,180; Growth Rate: -8.6 / 2.6 / 5.8 (as shown) - British Virgin Island: 2008: 345,934; 2009: 308,793; 2010: 330,343; Growth Rate: -11 / 7.0 / 3.5 (as shown) - Martinique: 2008: 481,226; 2009: 443,202; 2010: 476,492; Growth Rate: -7.9 / 7.5 / 3.8 (as shown) - St. Lucia: 2008: 295,761; 2009: 278,491; 2010: 305,937; Growth Rate: -5.8 / 9.8 / 2.1 (as shown) - St. Maarten (Jan-Mar): 2008: 475,410; 2009: 440,185; 2010: 443,136; Growth Rate: -7.4 / 0.7 / -2.9 (as shown) - Source: Caribbean Tourism Organisation ### Box 2. Barbados: Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities - Overall assessment: - Macroeconomic vulnerabilities have increased in Barbados since 2006 due to the high public sector debt and the deterioration in the net financial position with nonresidents. - Staff used the Balance Sheet Approach to analyze changes between 2006 and 2009. - Main finding: the balance sheet of the aggregate economy has weakened by the recent deterioration in the balance sheet of the non financial public sector. The private sector, however, seems to be healthy and resilient to shocks. - A sensitivity analysis of the balance sheet impacts of a 30 percent devaluation shows that the economy would struggle to withstand large exchange rate devaluation with the public sector the most vulnerable. - The Non-Financial Public Sector (NFPS): - The NFPS appears to be the most vulnerable sector in Barbados because of its negative net financial and net foreign currency positions. - Recent high fiscal deficits have weakened the net financial position of the sector. - Most of the NFPS’ liabilities are denominated in domestic currency but the limited foreign currency assets have generated a net negative foreign currency position making it less resilient to exchange rate shocks. - However, the negative financial position does not seem to make the public sector particularly vulnerable to sudden shifts in investor sentiment because external debt is mostly long term and has a favorable amortization profile, while domestic debt is held by relatively stable investors, including the domestic financial system and the National Insurance Scheme. - The Private Sector: - The balance sheet of the private sector appears sound because of its positive net financial and net foreign currency positions. - The financial sector does not appear vulnerable to the direct effects of exchange rate devaluation. - Regulatory requirements on liquidity and foreign exchange exposures have induced banks to remain liquid and only modestly exposed to foreign currency risk. - Declining profitability has affected the net financial position of the non financial corporate sector but net foreign currency position is still positive. - Policy recommendations from the analysis: - Reduce macroeconomic vulnerabilities by reducing the level of public debt. - Accumulate foreign reserves. - Promote market based hedging mechanisms. - Strengthen prudential oversight to limit foreign currency mismatches in the financial sector. - Promote the development of domestic securities markets to allow domestic residents to diversify their exposure from the non financial public sector. - Key charts referenced: - Barbados: Net Foreign Currency Position (Percent of GDP) for 2006–2009, showing net foreign currency position, public sector, private sector. - The Public Sector: Net Financial Position (Percent of GDP) for 2006–2009. ### Box 3. Barbados: Real Exchange Rate Assessments - Summary of empirical results: - CGER methodologies do not provide any conclusive evidence of a significant misalignment of the real exchange rate. - The fundamental equilibrium exchange rate approach suggests the real exchange rate was close to equilibrium level at the end of 2010. - The macro balance and external sustainability approaches suggest an overvaluation of between 7 and 11 percent. - The Fundamental Equilibrium Exchange Rate (FEER) Approach: - Relation specified between real exchange rate and fundamentals: productivity differentials, terms of trade, government consumption, and net foreign assets. - Estimation for Barbados based on Pineda et al. (2009) using a panel of 21 CARICOM and tourism-dependent economies including Barbados. - Results show the REER was close to equilibrium at the end of 2010. - The Macro Balance (MB) Approach: - Current account (CA) norm for Barbados computed in a pooled panel setting based on Lee et al. (2008). - WEO’s projections up to 2016 used for medium term fundamentals: fiscal and oil balance relative to GDP, relative output and income, lagged CA, population growth and old age dependency ratio. - Projected current account deficit of 5.6 per cent for 2016 is used as the underlying CA. - The difference between the underlying CA and the CA norm (-3.8) is -1.8 percent. - Using the export and import volume elasticities estimated by Lee et al (2008), the elasticity of the current account balance to the real exchange rate was computed as -0.3. - Result: the real exchange rate would be over-valued by 7 percent. - The External Sustainability (ES) Approach: - Computes the difference between the actual current account balance and the balance that would stabilize the net foreign asset (NFA) position at some benchmark level. - Assumptions: average medium term growth rate of 2 percent, medium term inflation rate for the US of 1.6 percent. - Stabilizing Barbados’ NFA at the 2010 benchmark level of -70 percent of GDP requires a current account deficit of 2.5 percent. - Using the elasticity of CA to REER and underlying CA, as in the MB approach, results point to an overvaluation of 11 percent. - Chart referenced: - Barbados: Equilibrium Real Effective Exchange Rate (1984–2010) showing SUR-PCSE equilibrium, actual effective real exchange rate, and 90 percent confidence band. ### Box 4. The Resolution of CLICO-Barbados - Background and shock: - The collapse of the Trinidad and Tobago-based CL Financial Group represented a major financial shock to the Caribbean region. - Expansion prior to the crisis was financed mainly by deposit-like annuity products (called EFPA) sold by CLICO and BAICO. - Returns offered on these annuities were substantially higher than bank deposit rates and not subject to stricter banking regulation and supervision. - Resources were channeled to finance real estate and other investments (mainly in U.S.). With the deterioration of the global economy in 2008, many subsidiaries faced liquidity and solvency pressures; investors rushed to withdraw funds, triggering the collapse of its three financial subsidiaries in Trinidad and Tobago and related companies throughout the Caribbean, including Barbados. - Status in Barbados and initial exposures: - The resolution in Barbados is under judicial management. - On April 14, 2011, the Supreme Court of Barbados appointed Deloitte Consulting Ltd. as Judicial Manager (JM) of CLICO International Life Insurance Ltd. (CIL). - At that time, unaudited figures for CIL indicated a shortfall of the life insurance company of about US$196 million (4.4 percent of GDP). - Judicial Manager restructuring proposals: - The July 28 CIL restructuring plan proposed incorporating a new company to hold the business of CIL and that on a proportionate basis 60% of policyholder value be transferred to the new company. - Both traditional and EFPA policyholders would be issued with common shares in the company in exchange for the 40 percent write off in their policy values. These shares would be issued at little value but shareholders may recover some or all amounts lost based on future growth. - The revised restructuring plan tabled in September provided four restructuring options with funding implications between US$28 million and US$76 million. - Effects across options (no financial impact on traditional policyholders; effects differ for EFPA policyholders): - Under US$76 million financing: - Individual and quasi government EFPA holders would receive full value for their policies in the form of annuities. - Corporate EFPA holders would get full value of their policies in equity in the new company. - With US$52 million injection: - Individual policyholders would be 100% refunded in the form of annuities. - Corporate and quasi government EFPA holders would get shares in the new company. - Under US$47 million funding: - Individual and quasi government EFPA holders would be entitled to annuities for the principal balance and shares for the interest on their policies. - Corporate EFPA holders would get full value of their policies in equity in the new company. - With US$28 million financing: - Individual policyholders would receive the principal in the form of annuities and the value of the interest in shares. - Corporate and quasi government EFPA holders would receive the full value of their investments in shares in the new company. - Authorities' decision process and timeline: - The government is in the process of deciding which option is best and is considering a fifth option, which may involve a sale of the traditional insurance business and or liquidation. - The time frame for CLICO resolution is end of 2012. - Regulatory implications: - The supervisory/regulatory needs in the non-bank sector calls for urgency to bring the Financial Services Commission (FSC) into operation. - The collapse of CLICO and BAICO highlights weakness of the insurance supervisory system, also responsible for supervising offshore companies. - Barbados faces urgent needs to address weaknesses in the insurance regulatory environment. *Source: BARBADOS 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND* ### Box 5. Barbados: Structural Competitiveness ### Box 5. Barbados: Structural Competitiveness ### Overall competitiveness assessment - Barbados has a good business environment as attested by the World Competitiveness Index and the Travel and Tourism Competitiveness Index. - Recent assessments by the World Economic Forum (WEF) show that Barbados has consolidated its global competitiveness position driven by "excellent institutional environment, a first-class educational system, a well developed infrastructure, and technological readiness." - Ranked "43rd among 139 countries in the 2011 Global Competitiveness Report", Barbados is more competitive than many countries in the Latin America and Caribbean region. - Factors that affected the country’s overall standing: - Small market size - High deficit and debt levels - To a lesser degree, the sophistication and innovation of its business sector ### Factors negatively affecting ranking - Trade barriers and tariffs - Crime and violence - HIV prevalence - Inflexibility of wages, hiring and firing practices - Low degree of customer orientation - Restriction on capital flows - Low financing through the domestic equity market ### Tourism competitiveness - "The tourism sector in Barbados is probably the most competitive in the Caribbean." - The World Economic Forum’s 2010 Travel and Tourism Competitiveness Index ranked Barbados "28th, up two places from 2009." - In the Americas, the country is "ranked 3rd behind the US and Canada." - Key strengths for tourism: - Affinity for tourism - Priority given to the sector through high government expenditure, strong destination marketing campaigns, presence at key international tourism fairs, and hosting of sport events ### Tourism weaknesses and policy environment - Two measures where Barbados displayed weaknesses: "price competitiveness and policy rules and regulations." - Price competitiveness drivers: - High energy cost - Relatively high ticket taxes and airport fees - High accommodation rates that drive up the overall cost of stay - Policy/regulatory observations: - Regulations on property rights, Visa requirements and openness of bilateral Air Service Agreements are commendable - The country "appears uncommitted to the General Agreement on Trade in Services (GATS)." - Policy recommendations: - Reassess rules and regulations concerning foreign ownership of investments - Reassess capital controls - Reassess the general ease and cost of setting up businesses *Source: 2011 ARTICLE IV REPORT BARBADOS — Box 5. Barbados: Structural Competitiveness* ### APPENDIX I: DEBT SUSTAINABILITY ANALYSIS ### APPENDIX I: DEBT SUSTAINABILITY ANALYSIS ### Overview and Methodology - The results are broadly similar to those of the 2010 Article IV consultation and update the previous debt sustainability analysis. - Staff conducted analyses based on a baseline scenario and an adjustment scenario. - Baseline scenario: assumes some fiscal adjustment based on the 2012 budget and continuation of current policies. - Adjustment scenario: assumes additional policy measures starting in FY 2012/13 and continuing in the medium term, emphasizing expenditure reduction, reduced tax exemptions, and improved tax administration. ### Shared Assumptions (Baseline and Adjustment) - Economic growth remains subdued and a recovery in the demand for Barbados’ goods and services commences in 2013. - There is no fiscal cost to the budget from the resolution of CLICO. - The recent increase in the VAT rate is made permanent and the fiscal balance improves in the medium term. - The exchange rate remains stable and capital inflows increase to finance tourism related investments. ### Baseline Scenario — Key Projections and Figures - NFPS (Non-Financial Public Sector) deficit path: - FY 2010/11: 7.3 percent (deficit) - Projected to decline to 0.1 percent in FY 2016/17. - Public debt trajectory: - Decline from 117 percent (peak in 2010/11) to 107 percent in FY 2016/17. - Current account: - Expected to adjust gradually to about 5.6 percent of GDP by 2016 (current account deficit). - Reserve coverage: - Decline from 4.1 months of imports in 2011 to 3.1 months in 2016. - Selected baseline table entries (Fiscal year columns labeled Act./Est. and 2009–2016): - Non-Financial Public sector balance: -7.2 -7.3 -4.1 -2.9 -1.9 -1.1 -0.2 -0.1 - Primary balance: -3.2 -3.6 0.5 2.1 3.5 4.3 5.0 5.0 - Revenues: 32.7 35.0 35.3 37.1 38.2 38.7 39.3 39.3 - Expenditures: 39.9 42.2 39.4 40.0 40.1 39.8 39.6 39.3 - Public debt: 104.0 116.8 116.6 116.4 115.0 112.8 110.3 107.6 - Current account (percent of GDP): -5.6 -8.5 -10.5 -9.8 -8.2 -7.7 -6.5 -5.6 - Current account balance after FDI (percent of GDP): -5.2 -5.3 -4.4 -2.0 -1.3 -0.9 -0.2 -0.6 - FDI inflows (percent of GDP): 0.4 3.2 6.2 7.8 6.9 6.8 6.3 5.0 - Gross international reserves (millions of US $): 744 786 764 741 721 683 685 692 - Gross international reserves (months of imports): 4.4 4.4 4.1 3.8 3.6 3.3 3.2 3.1 ### Adjustment Scenario — Key Projections and Figures - Fiscal stance: - NFPS balance improves from a deficit of 7.3 percent of GDP to a surplus of 4.6 percent of GDP in 2016/17. - This represents a cumulative improvement in the public debt to GDP ratio of about 16 percentage points over the medium term relative to the baseline. - Public debt trajectory: - After peaking at 117 percent of GDP in 2010/11, public debt reduces to 92 percent of GDP by end-FY 2016/17. - Composition and spending: - Scenario assumes changes in the composition of spending in favor of capital spending and better targeting of social spending. - Reserves and current account: - International reserves recover to around 4.5 months of imports by 2016 due to healthier private capital inflows. - Selected adjustment table entries (Fiscal year columns labeled 2009–2016): - Non-Financial Public sector balance: -7.2 -7.3 -4.1 -1.4 0.6 2.4 4.0 4.6 - Primary balance: -3.2 -3.6 0.5 3.6 6.0 7.7 9.2 9.6 - Revenues: 32.7 35.0 35.3 38.2 40.0 41.1 42.1 42.2 - Expenditures: 39.9 42.2 39.4 39.7 39.4 38.7 38.1 37.5 - Public debt: 104.0 116.8 116.6 114.9 111.1 105.6 98.8 91.8 - Current account (percent of GDP): -5.6 -8.5 -10.5 -9.8 -8.0 -7.1 -5.8 -4.9 - Current account balance after FDI (percent of GDP): -5.2 -5.3 -4.3 -1.2 -0.5 0.6 1.0 0.7 - FDI inflows (percent of GDP): 0.4 3.2 6.2 8.6 7.5 7.7 6.8 5.6 - Gross international reserves (in US $ million): 744 786 766 782 803 844 908 993 - Gross international reserves (months of imports): 4.4 4.4 4.1 4.0 4.0 4.1 4.3 4.5 ### Assessment of Vulnerabilities and Stress Tests Baseline Scenario - Public debt remains high and vulnerable to shocks under the baseline. - Bound tests indicate vulnerability to standard shocks: - A permanent shock to growth of about a 1/4 standard deviation from historic levels will raise public debt to GDP ratio to 150 percent. - If the primary balance were to follow historic trends, public debt would reach 120 percent of GDP. - A growth slowdown in the UK and the US would raise the public debt to GDP ratio under the baseline. - External debt sensitivity: - External debt after peaking at about 43 percent of GDP in 2010 is expected to decline to 32 percent of GDP in 2016. - External debt is mostly sensitive to exchange rate devaluation: a 30 percent real depreciation would increase external debt to 48 percent of GDP by 2016. Adjustment Scenario - Public debt profile improves significantly and is more resilient to standard shocks due to sustained fiscal adjustment and higher growth. - Bound tests show public debt will not continue to decline under most standard shocks in the short run, and the fiscal account remains vulnerable until debt ratios decline further in the long run. - External debt also improves and is more resilient under standard stress tests. ### Detailed DSA Table Highlights (Baseline, Selected Lines) - Public sector debt (percent of GDP) 2005–2016 (baseline projections): - 2005: 75.0 - 2006: 73.2 - 2007: 81.8 - 2008: 90.9 - 2009: 104.0 - 2010: 116.8 - 2011: 116.5 - 2012: 116.3 - 2013: 114.8 - 2014: 112.6 - 2015: 110.0 - 2016: 107.2 - Debt-stabilizing primary balance (baseline table): 2.3 - Identified debt-creating flows (2005–2016 sample): -1.6 -1.3 7.7 11.1 10.3 11.7 1.3 -0.3 -1.3 -2.1 -2.6 -2.6 - Primary deficit (2005–2016 sample): 3.3 2.1 5.3 3.9 4.4 3.7 -0.1 -2.0 -3.5 -4.2 -4.9 -4.9 - Public sector debt-to-revenue ratio (2005–2016 sample): 180.6 189.9 199.5 204.1 267.8 276.1 269.6 260.3 253.5 245.8 236.8 231.1 - Gross financing need (percent of GDP) (2005–2016 sample): 18.2 15.5 19.0 20.3 22.3 30.2 19.7 18.2 17.3 16.4 15.5 15.3 - Key macro assumptions (Real GDP growth, percent) (2009–2016 sample): -5.3 3.6 2.8 -1.2 -3.1 0.4 1.0 1.3 1.5 2.0 2.5 2.5 - Average nominal interest rate on public debt (percent) (2009–2016 sample): 7.2 7.0 7.7 6.6 6.6 6.6 6.3 6.7 7.3 7.2 7.2 7.2 ### Bound Test Figures (Summary) - Public debt bound tests (baseline): show outcomes under permanent one-half and one-quarter standard deviation shocks to real interest rate, growth rate, and primary balance; one-time real depreciation of 30 percent; and contingent liabilities shocks. - External debt bound tests (baseline): show sensitivity to interest rate shocks, current account shocks, growth shocks, combined shocks, and a 30 percent real depreciation; external debt projections and gross financing need are presented on the right scale. *Sources: Ministry of Finance; Central Bank of Barbados; and IMF staff estimates and projections.* ### Appendix Table 3. Barbados: Public Sector Debt Sustainability Framework, 2005-2016 ### Appendix Table 3. Barbados: Public Sector Debt Sustainability Framework, 2005-2016 ### Public debt baseline and scenario projections - Public debt (percent of GDP) — Baseline: 99 (figure in boxes represents average projection for baseline). - Individual shocks presented as permanent one-half standard deviation shocks; combined scenarios include permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. - One-time real depreciation of 30 percent and a 10 percent of GDP shock to contingent liabilities occur in 2011 under specified scenarios (real depreciation defined as nominal depreciation measured by percentage fall in dollar value of local currency minus domestic inflation based on GDP deflator). ### Bound tests (Adjustment Scenario, public debt in percent of GDP) - Growth shock path: Baseline 99; Growth shock case label 138 in figure. - Primary balance shock path: Baseline 99; Primary balance shock case label 108 in figure. - Interest rate shock path: Baseline 99; Interest rate shock case label 119 in figure. - Historical and baseline comparison shown: Historical figure in box 132; Baseline figure 99. - Combined shock results: Combined shock box labeled 123 (with Baseline 99). - Real depreciation and contingent liabilities scenario labels: 30% depreciation box 117 (Baseline 99); contingent liabilities shock box 110 (Baseline 99). - Gross financing need under baseline and scenarios reported on right scale in figure (numerical gross financing need values appear in table below). ### Key projections and flows (2005–2016, percent of GDP unless otherwise indicated) - External debt (Baseline): 36.2 (2005), 35.8 (2006), 37.0 (2007), 36.0 (2008), 37.0 (2009), 41.3 (2010), 40.2 (2011), 38.0 (2012), 35.8 (2013), 34.0 (2014), 31.7 (2015), 30.1 (2016). - Change in external debt: -6.7, -0.4, 1.2, -1.0, 1.0, 4.3, -1.1, -2.1, -2.2, -1.8, -2.3, -1.6 (2005–2016). - Identified external debt-creating flows (sum of components 4+8+9): -1.8, -1.0, -3.5, 5.8, 4.8, 5.2, 4.0, 0.7, -0.2, -1.4, -1.9, -1.7 (2005–2016). - Current account deficit, excluding interest payments: 7.8, 3.8, 1.3, 6.8, 3.2, 5.7, 7.7, 7.0, 5.2, 4.4, 3.4, 2.6 (2005–2016). - Deficit in balance of goods and services: 8.3, 4.5, 3.8, 7.4, 4.1, 6.1, 8.2, 8.2, 7.1, 6.3, 5.3, 4.5 (2005–2016). - Exports (percent of GDP): 46.4, 46.2, 45.6, 48.1, 42.3, 44.2, 42.2, 41.1, 40.9, 40.5, 40.6, 40.7 (2005–2016). - Imports (percent of GDP): 54.7, 50.8, 49.4, 55.5, 46.4, 50.3, 50.4, 49.3, 48.1, 46.8, 46.0, 45.2 (2005–2016). - Net non-debt creating capital inflows (negative values): -1.7, -2.5, -5.2, -5.0, -0.4, -3.2, -6.2, -8.6, -7.5, -7.7, -6.8, -5.6 (2005–2016). - Automatic debt dynamics (component 1/): -7.9, -2.3, 0.4, 4.1, 2.1, 2.6, 2.5, 2.3, 2.1, 1.9, 1.5, 1.3 (2005–2016). - Contribution from nominal interest rate: 2.2, 2.2, 2.7, 2.9, 2.4, 2.7, 2.8, 2.8, 2.8, 2.7, 2.4, 2.3 (2005–2016). - Contribution from real GDP growth: -1.3, -1.1, -1.3, 0.1, 1.5, -0.1, -0.4, -0.5, -0.7, -0.8, -1.0, -1.0 (2005–2016). - Contribution from price and exchange rate changes (defined as in note 2): -8.8, -3.3, -1.0, 1.1, -1.9, ... (table continues; ellipsis indicates continuation in source). - Residual, including change in gross foreign assets (2-3): -4.9, 0.5, 4.8, -6.9, -3.8, -0.9, -5.1, -2.9, -2.0, -0.4, -0.3, 0.1 (2005–2016). - External debt-to-exports ratio (in percent): 78.0, 77.3, 81.2, 74.9, 87.4, 93.3, 95.1, 92.6, 87.5, 84.0, 78.0, 73.9 (2005–2016). - Gross external financing need (in billions of US dollars): 0.4, 0.3, 0.2, 0.5, 0.3, 0.6, 0.6, 0.5, 0.5, 0.4, 0.4, 0.3 (2005–2016). - Gross external financing need (in percent of GDP): 11.5, 7.5, 5.3, 11.0, 6.8, 13.1, 12.9, 11.2, 9.3, 8.0, 7.2, 4.9 (2005–2016). ### Scenario with key variables at their historical averages (note 5/) - Scenario values given in source: 41.3, 40.7, 42.2, 44.3, 47.8, 51.2, 54.2, -1.3 (sequence as printed in source; table continues in original). ### Key macroeconomic assumptions underlying baseline (selected series) - Real GDP growth (in percent): 3.9, 3.6, 3.8, -0.2, -4.2, 0.2, 0.9, 1.2, 2.0, 2.5, 3.0, 3.0 (2005–2016). - GDP deflator in US dollars (change in percent): 25.9, 10.0, 2.9, -2.9, 5.5, -3.2, 4.1, 3.9, 3.2, 2.9, 2.4, 2.4 (2005–2016). - Nominal external interest rate (in percent): 6.9, 6.8, 8.1, 7.5, 6.9, 7.1, 7.2, 7.3, 7.8, 8.0, 7.5, 7.5 (2005–2016). - Growth of exports (US dollar terms, in percent): 20.8, 13.5, 5.4, 2.1, -11.0, 1.4, 0.2, 2.3, 4.9, 4.3, 6.0, 5.7 (2005–2016). - Growth of imports (US dollar terms, in percent): 11.4, 5.7, 3.9, 8.9, -15.4, 5.2, 5.2, 2.8, 2.6, 2.7, 3.6, 3.7 (2005–2016). - Current account balance, excluding interest payments: -7.8, -3.8, -1.3, -6.8, -3.2, -5.7, -7.7, -7.0, -5.2, -4.4, -3.4, -2.6 (2005–2016). - Net non-debt creating capital inflows (sign convention appears inverted between figure and table): 1.7, 2.5, 5.2, 5.0, 0.4, 3.2, 6.2, 8.6, 7.5, 7.7, 6.8, 5.6 (2005–2016) — note: table reports negative values for net non-debt creating capital inflows elsewhere; preserve figures as printed. ### Definitions and methodological notes (as in source) - Automatic debt dynamics derived using formula in note 1/ with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate; e = nominal appreciation; a = share of domestic-currency denominated debt in total external debt. - Contribution from price and exchange rate changes defined per note 2/ as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock; r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). - Gross financing need defined in note 4/ as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. - Debt-stabilizing non-interest current account 6/ defined as long-run constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year. ### External debt sustainability — bound tests and shocks (Appendix Figure 4) - Baseline external debt box: 32 (average projection). - Historical and scenario boxes: Historical baseline box 32; Historical scenario boxes labeled 33 (growth shock), 39 (current account shock), 36 (combined shock), 48 (real depreciation shock 30%). - Scenario statistics printed in figure boxes (baseline, scenario, and historical) include: - Baseline: 7.6; Scenario: 7.9; Historical: 7.5 (context in figure: unspecified variable—preserve as printed). - Baseline: 1.9; Scenario: 0.4; Historical: 1.4. - Baseline: -5.5; Scenario: -6.9; Historical: -4.2. - Individual shocks for external debt stress tests include permanent one-half standard deviation shocks to interest rate (i-rate), growth, and current account balance; permanent 1/4 standard deviation shocks also referenced for combined tests; one-time real depreciation of 30 percent occurs in 2011 under specific scenarios. ### Gross financing needs and primary balance scenarios (figure text) - Baseline primary balance: 5.9 (figure label). - Scenario primary balance: 3.4. - Historical primary balance: -2.2. - Baseline (another variable in figure): 2.1; Scenario: -1.0; Historical: 1.5. - Baseline: 4.2; Scenario: 7.3; Historical: 2.6. (Values are presented in figure panels; preserve numeric values as printed.) ### Progress on FSAP 2008 update recommendations (implementation status) - Amendments under consideration regarding asset classification and provisioning: Phase 1 is a research project for delivery in 2012; Phase II is part of the Basel II project to be finalized in 2015. Industry practices and international accounting standards are under review. - Capital adequacy regulations to be adjusted to include requirement to support the Market Risk Amendment. Internal training and preliminary discussions with banks have commenced. - Approach to Basel II implementation updated, focusing on Pillar 2 of the New Accord. The Bank has identified several projects to strengthen compliance and prepare for full implementation; plans underway to conduct an in-depth Basel II quantitative impact study. - Amendments to legislation drafted relating to third party transactions and an aggregate limit for large exposures. - Revised consolidated returns being devised to strengthen supervision. - All amendments to legislation expected to be passed into law in 2012 would also address consolidated supervision, the enforceability of the Bank’s guidelines and intervention measures, and powers to impose sanctions. *Source: Appendix Table 3. Barbados: Public Sector Debt Sustainability Framework, 2005-2016 (Adjustment Scenario) — 2011 Article IV Report, Barbados; figures, notes, and text reproduced exactly as in source.* ### 2011. This represents 9.2 percent of total ### _cr1207 - 2011. This represents 9.2 percent of total ### CDB Approvals and Sectoral Allocation (to Barbados) - Total funds approved: US$351.7 million (100.0 percent). - Productive sectors (agriculture, forestry & fishing; manufacturing; tourism): US$91.7 million (26.1 percent). - Agriculture, Forestry & Fishing: US$4.4 million (1.3 percent). - Manufacturing: US$45.5 million (12.9 percent). - Tourism: US$41.8 million (11.9 percent). - Economic infrastructure: US$180.8 million (51.4 percent). - Power and Energy: US$0.1 million (0.0 percent). - Water: US$1.8 million (0.5 percent). - Transportation & Communication: US$88.1 million (25.0 percent). - Housing: US$37.4 million (10.6 percent). - Education: US$50.2 million (14.3 percent). - Health and Sanitation: US$3.2 million (0.9 percent). - Multi-Sector: US$79.2 million (22.5 percent). ### CDB Strategic Focus for Barbados (2010–13) - Overall objectives stated in the Country Strategy Paper (CSP): - Macroeconomic stability. - Renewed and improved physical and environmental infrastructure. - A more competitive productive sector. - Enhanced social development. - CSP alignment: Consistent with the Government’s own development objectives. ### Annual Approvals 2002–11 (US$ 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: 62.0 - 2011 (October 31): 0.25 ### CDB Disbursements and Undisbursed Balances to Barbados (2002–October 31, 2011) (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 19.9; Undisbursed Balance 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: Disbursements 32.8; Undisbursed Balance 43.2 - 2011 (October 31): Disbursements 10.7; Undisbursed Balance - ### Real Sector Statistical Issues and Recommendations - Current compilation practices: - National accounts compiled according to the 1968 SNA manual. - Constant price GDP estimates compiled by the Central Bank of Barbados (CBB) use an outdated 1974 base year; authorities are updating the base year to 2000. - Data weaknesses and recent revisions: - Lack of current, reliable source data on nonsugar agriculture, private construction, and nontourism services affects production-based GDP estimates. - A census of economic activity was initiated in June 2005 covering tourism, financial businesses, and transport and communications. - Revised GDP series in current prices revealed current GDP had been underestimated in 2008 by about 10 percent. - Revised current price GDP data are not consistent with constant price GDP data; no meaningful GDP deflator data link both series. - Priorities and actions: - An early rebasing of the constant price GDP data should be a high priority. - BSS (Barbados Statistical Services) responsibilities and improvements: - Since 2011, BSS compiles value added (VA) by industry at constant prices (previously BCB). - BSS, with CARTAC assistance, improved methodology using 2006 as a base year. - Preliminary constant price estimates by industry completed; continuous improvement needed. - Work underway on import/export price index and producer’s price index (PPI). - BSS should create a section responsible for editing data and classification of administrative data (VAT and Inland Revenue). - BSS should develop quarterly constant price estimates anchored to annual estimates. ### Producer Price Index (PPI) Progress and Actions - CARTAC mission findings (October 3–7, 2011): - Sample finalized: 27 industries and 68 establishments representing 90 percent of manufacturing output. - Initiation process partly completed: 12 of 68 establishments initiated. - Required actions for BSS: - Complete initiation by selecting representative products and transactions in remaining establishments. - Finalize PPI compilation spreadsheet. - Collect back prices for June–October period. - Begin monthly price collection for PPI sample with reference to prices on the fifteenth of the month. - Target completion: BSS will try to complete the PPI by January 2012. ### Price Indices and Base-Year Issues - Consumer Price Index (CPI): - Uses an expenditure basket for 1998–99 for its July 2001=100 series introduced in January 2002. - Index of Industrial Production: - Based on sectoral weights from 1982; authorities working towards rebasing to 1994. - Absence of a systematic property price index noted; potential misalignments in real estate prices are not addressed. ### Government Finance Statistics and Data Gaps - Above-the-line general government data: Fairly comprehensive and up-to-date, but government transfers are reported with a lag. - Coverage issues: - 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 cannot be fully reconciled with above-the-line fiscal data due to limited nonbank financial sector information. - Accounting framework: - Authorities introduced accrual accounting of public finance in April 2007. ### Monetary and Financial Statistics - Quality, coverage, and timeliness: Some weaknesses remain but do not hinder Fund surveillance. - 2007–2008 STA missions identified methodological problems, misclassifications, and inconsistent residency criterion application. - Actions taken: - Recommendations to correct misclassifications and assistance for CBB in compiling standardized report forms (SRFs). - CBB has recently started compiling monetary statistics based on SRFs, including comprehensive detailed depository corporations’ data. ### External Sector Statistics - Key limitations: - Lags in merchandise trade data compilation. - Infrequent and incomplete information on offshore sector activities limit timeliness of external current account estimates. - Estimates of components of the external financial account need improvement. - Ongoing work: - Authorities, with CARTAC assistance, are working on compiling data on the net international investment position of Barbados. ### Common Indicators Required for Surveillance (As of October 31, 2011) — Selected entries and latest observation dates - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 7/31/11; Date received 9/19/11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication W. - Reserve/Base Money: Date of latest observation 7/31/11; Date received 9/19/11; Frequency M/M/M. - Broad Money: Date of latest observation 7/31/11; Date received 9/19/11; Frequency M/M/M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 6/30/11; Date received 9/19/11; Frequency M/M/M. - Interest Rates: Date of latest observation 9/30/11; Date received 10/31/11; Frequency M/M/M. - Consumer Price Index: Date of latest observation 7/31/11; Date received 10/10/11; Frequency M/M/M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 9/30/11; Date received 10/10/11; Frequency Q/Q/Q. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 9/30/11; Date received 10/10/11; Frequency Q/Q/Q. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 9/30/11; Date received 10/10/11; Frequency Q/Q/Q. - External Current Account Balance: Date of latest observation 6/30/11; Date received 9/19/11; Frequency A/A/Q. - Exports and Imports of Goods and Services: Date of latest observation 6/30/11; Date received 9/19/11; Frequency Q/Q/Q. - GDP/GNP: Date of latest observation 2010; Date received 9/19/11; Frequency A/A/Q. - Gross External Debt: Date of latest observation 3/31/11; Date received 10/10/11; Frequency A/A/M. ### Public Information Notice (PIN) — IMF Article IV Consultation with Barbados (December 7, 2011) - Executive Board concluded the 2011 Article IV consultation with Barbados on December 05, 2011. - Economic performance and indicators: - Real GDP growth: 0.2 percent in 2010. - Estimated expansion for first nine months of 2011: 1 percent (due mainly to improved tourism and construction activities). - Unemployment rate: 6.7 percent in 2007 to 12.1 percent in June 2011. - Inflation estimated to have reached 10.6 percent (year-over-year) in August 2011. - Fiscal developments: - Fiscal Year (FY) 2010/11 central government deficit: about 8.5 percent of GDP (up from 8.2 percent of GDP in FY 2009/10). - Expenditures increased by 0.5 percentage points of GDP. - Budget execution for first half of 2011/12 appears on track to achieve an overall central government deficit target of 5.1 percent of GDP. - Total public sector debt at end of FY2011: 117 percent of GDP (up from about 90 percent of GDP two years earlier). - External sector: - Current account deficit widened from 5.6 percent of GDP in 2009 to 8.5 percent in 2010. - Estimated current account deficit around 10.5 percent of GDP in the first nine months of 2011 due to higher oil and food prices and higher import bill despite contracted import volumes. *Source: IMF staff report and associated annexes (2011 Article IV Report — Informational Annex, Barbados).* ### 2011. International reserves, however, reached a comfortable 4.5 months of imports at end- ### _cr1207 - 2011. International reserves, however, reached a comfortable 4.5 months of imports at end- ### Economic outlook and external sector - International reserves reached a comfortable 4.5 months of imports at end-September 2011, having been boosted by public and private capital inflows. - The economic outlook for 2011 is weak with growth expected to remain soft. - Tourism is recovering, but the rest of the economy is sluggish. - Real GDP growth is therefore expected to turn out at less than 1 percent this year despite higher tourist arrivals. - The medium term prospects are uncertain with risks tilted to the downside. - A strong pick-up in economic activity depends heavily on improvements in labor market conditions in the U.K. and the U.S. - International reserves are projected to come under pressure in the near to medium term. - External current account balance (selected from table): - External current account balance -9.6-5.6-8.5 -10.5-9.8 - External debt 3/ 25.528.832.1 30.728.9 - Gross international reserves (millions of U.S. dollars) 680744786 764741 - Memorandum: Nominal GDP (in millions of Barbados dollars) 8,6918,7868,529 8,955 9,412 ### Executive Board assessment — main findings and priorities - Barbados was hit hard by the global crisis and has yet to fully recover; growth remains tepid despite a rebound in tourism. - Authorities’ policy response cushioned the crisis but put pressure on public finances and further raised public debt. - Main challenge: undertake a credible fiscal consolidation without jeopardizing the fragile recovery and social cohesion. - Directors commended adoption of a revised Medium Term Fiscal Strategy aimed at generating a balanced budget and reducing the high public debt-to-GDP ratio. - Key Director recommendations: - Fiscal consolidation should focus on expenditure reduction, including lowering the wage bill, reducing transfers to public enterprises, and minimizing tax exemptions. - Make further sustained efforts to curtail and prioritize government spending, and enhance revenue, including by broadening the tax base and making permanent the temporary hike in the Value-Added Tax. - Expand the coverage of the fiscal strategy to include public enterprises. - Develop contingency plans to ensure achievement of the fiscal targets given global and domestic uncertainties. - Engage social partners in a national debate on the level of social spending. - Exchange rate peg assessment: - Directors observed the exchange rate peg has served the country well. - A credible fiscal consolidation together with efforts to enhance competitiveness is crucial to support the peg and external stability. - With the projected medium-term decline in international reserves, Directors recommended close monitoring of net foreign reserves levels. ### Fiscal situation and policy recommendations - Public finances: Authorities revised the Medium Term Fiscal Strategy (MTFS) to aim at rebuilding fiscal buffers and reducing the debt-to-GDP ratio. - Staff and Directors emphasized: - Focus on expenditure control—wage bill restraint, more targeted subsidies and transfers, reduced transfers to public enterprises. - Revenue enhancement—broaden tax base, minimize tax exemptions, consider making the temporary VAT hike permanent. - Expand fiscal strategy coverage to include public enterprises. - Develop contingency plans for achieving fiscal targets. - Authorities’ actions and stance: - Adopted significant revenue-enhancing measures and tightened spending controls. - Central Revenue Authority (CRA) established in November 2011 to consolidate tax administration. - Authorities requested IMF assistance for a comprehensive tax framework review. - Hesitancy to impose higher corporate taxes on offshore operations to avoid reducing competitiveness. - Public sector operations (table highlights): - Overall balance -6.5-7.1-7.3 -4.1-2.9 - Central government balance -4.6-8.2-8.3 -5.1-4.0 - Off-budget activities -3.00.10.0 0.00.0 - National Insurance Scheme balance 2.93.23.4 2.82.6 - Public enterprises balance -1.8-2.3-2.3 -1.9-1.5 - Primary balance -2.9-3.2-3.6 0.52.2 - Public sector debt 2/ 90.9104.0116.8 116.5 116.3 ### Monetary and financial sector policies - Monetary policy: - Scope for monetary easing is limited given dependence on foreign-earning sectors; further relaxation of interest rates is not appropriate at this time. - CBB measures to remedy FX market information asymmetries: August 2011 imposition of a 5 percent surrender requirement on gross purchases by authorized dealers and reduction in the margin on foreign exchange sales by dealers. - CBB increased monitoring and communication with authorized dealers; began circulating daily reports on FX transactions. - Financial sector supervision: - Banking system is stable and healthy overall, but recent increase in nonperforming loans and low loan-loss provisioning require close monitoring and improved risk management. - Commercial banks have strong capital buffers under CBB-imposed stress tests. - Consolidation of nonbank supervision under the newly operational Financial Services Commission (FSC); recommendation to strengthen FSC supervisory capacity. - CBB to begin regular publication of a financial stability report in December 2011. - Anti-Money Laundering Act approved by Parliament on November 11, 2011. - CLICO and BAICO insurance failures: - Barbados moving closer to resolution of failed CLICO and BAICO with aim of keeping fiscal costs minimal. - Contingent exposure expected to be negligible for BAICO; more substantial liabilities possible for CLICO. - Judicial management process for CLICO set in motion in collaboration with OECS governments; judicial managers expected to present final reports in December. - Authorities expect to conclude sale of CLICO’s operations in 2012. - Directors encouraged minimizing fiscal costs in any resolution plan and seeking private sector solutions; recommended coordinated regional approach to supervision and crisis resolution framework. ### Growth, competitiveness, and structural policies - Growth prospects: - Barbados’ economy expected to grow very mildly in 2011, strengthening only modestly over the medium term. - Non-traded sector activity should cushion negative contribution from traded production; net foreign exchange earnings compressed by slightly decreased real tourism receipts and elevated oil import bill. - Recovery hampered by cautious consumer behavior in advanced economies and slower international business sector momentum. - FDI flows likely to recover at a tempered pace. - Structural reform priorities: - Enhance and diversify medium-term growth by public sector investments in infrastructure and efficiency gains in government services. - Improve business environment and reduce bureaucratic burden. - Increase workforce productivity and reduce energy costs; promote renewable energy sources such as wind and solar. - Bolster international business sector compliance with evolving global regulatory standards. - Tourism initiatives to increase business from non-traditional sources, e.g., Latin America. - Social and labor policies: - Wage freeze in government for the last three years and moratorium on hiring expected to continue in near term. - Reforms to social entitlements and targeting of subsidies and transfers needed, to be pursued through consensus with social partners. - State-owned enterprise subsidies capped or reduced in current budget; agencies required to identify compensating savings. ### Debt management, NIS exposure, and vulnerabilities - Debt profile: - Authorities aim to reduce debt-to-GDP ratio to near 70 percent, but time frame is under review given slower recovery. - Authorities argue vulnerabilities are mitigated by domestic currency concentration, mostly at fixed rates, limited roll-over risk, and external stock denominated in US dollars with smooth amortization. - National Insurance Scheme (NIS): - Staff assessed that public sector financing is too reliant on NIS and that NIS exposure exceeds a prudential portfolio limit of 51 percent. - Authorities note reducing NIS exposure would leave a void in investment opportunities; maintain NIS obligation to maximize returns while following prudent risk management. - As fiscal consolidation proceeds, opportunities to invest in public sector securities should decline, allowing greater scope for portfolio diversification into external investments when FX flows improve. *Statement by the Executive Board and Barbados authorities as summarized in IMF staff report and related documents.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1207.pdf_