## _cr1452 ## Source details **Canonical URL:** [_cr1452](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1452.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1452.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1452.pdf.json) --- ### Introduction and recent developments - Last Article IV consultation concluded in December 2011; authorities requested a delay due to general elections held in February 2013. - Political outcome: Democratic Labor Party re-elected with a one-seat majority in the House of Assembly. - Country profile: - Per capita income: US$16,150. - Economy relies heavily on tourism and the offshore business sector. - Best human development indicators in the region. - Post-2008 performance: - Economy contracted on average by 0.6 percent a year since 2008. - Expansionary fiscal policies and weak revenues led to a surge in public debt and fiscal financing pressures. - Under the exchange rate peg with accommodative monetary policy, foreign reserves declined through 2013. - 2013 specific developments: - Output estimated to have fallen by about 0.7 percent in 2013. - Long stay tourist arrivals (January–November 2013) fell by 5.5 percent; cruise passengers increased by 12 percent. - Inflation dipped to 2 percent (y/y) at end-October 2013. - Unemployment: 11.7 percent in September 2013 versus 10.8 percent a year earlier. - Tax revenues fell by 6.5 percent in 2012/13 (fiscal year ending March) and by 11 percent in April–September 2013. - Evidence of public sector arrears accumulation, with estimates ranging between 2–7 percent of GDP. - Ratings: downgraded by Moody’s and S&P in 2012 and by two notches (to Ba3 and BB- respectively) late in 2013. - Operating deficit of public enterprises has not improved despite higher transfers. - Central government debt and financing: - Debt-to-GDP rose from under 60 percent in 2009 to 94 percent at end-September 2013. - Including government securities held by the NIS, it rose from about 80 percent to 128 percent. - Gross financing requirement in 2013/14: 15.4 percent of GDP, or 39 percent of GDP including the rollover of short term debt. - Financing mix in first six months of 2013/14: domestic financial institutions and the central bank provided bulk via T-bills; NIS provided about 11 percent in longer term debentures. - NIS holdings: estimated at about 67 percent of its portfolio (actuarial review guideline: no more than 57 percent). - NIS operating surplus declined to near balance, limiting capacity to absorb new government debt. - Monetary and external: - New 2013 interest rate policy made the 3-month Treasury-Bill rate the benchmark; CBB absorbed about 44 percent of T-bills issued in first 11 months of 2013. - Short term interest rates fell by about 50 basis points. - Credit to the private sector continued to fall. - Current account deficit expected: -11.4 percent of GDP in 2013 (from -10.1 percent in 2012). - Foreign reserves dipped to US$434 million by early December 2013; subsequently boosted by new commercial borrowing of US$150 million (3.2 months of imports at end-December 2013). New loan offers possibility of an additional US$75 million in 2014. - Competitiveness: - Real wages declined by about 12 percent since 2009 (CBB data). - Fund’s CGER analysis suggests moderate overvaluation of 2–8 percent (Annex II). - Barbados’ share of Caribbean tourism market fell from 3.0 percent in 2007 to 2.65 percent in 2012 (a 12 percent decline). - Real effective exchange rate (tourism weights) appreciated by about 7 percent since 2009. - Financial sector: - Banking system foreign-owned; assets of Canadian banks account for 75 percent of total. - Overall capital adequacy ratio (CAR): 21.5 percent. - Non-performing loan (NPL) ratio: 13.9 percent in June 2013; provisions declined to 36 percent of NPLs from 60 percent in 2008. - Claims on the government have risen to 20 percent of total domestic assets. - Credit unions’ NPLs increased from 5¼ percent of total loans in 2008 to over 8 percent in June 2013. - FSAP: large offshore financial sector does not appear to be a major source of risk given legal restrictions on domestic transactions. - Authorities’ policy response: - Announced consolidation proposals in August 2013 and more ambitious measures in December 2013. - Staff estimate combined adjustment of about 6 percent of GDP over the period, or improvement in the primary balance of about 4.8 percent of GDP from 2013/14–2014/15. - About three fourths of the adjustment will come from expenditure cuts. - December measures included reduction in civil service in 2014/15 by about 3,500 (15 percent of total), further downsizing by attrition of about 500 positions per year until 2018/19, wage cuts for elected and appointed officials and a two year nominal wage freeze. ### Outlook and key projections - Fiscal outlook: - Fiscal deficit projected to reach 9.6 percent of GDP in 2013/14, forecast to fall sharply to 5 percent of GDP in 2014/15 as budget measures take effect. - Central government debt expected to peak at 95 percent of GDP in 2015. - Interest expenses expected to be largest contributor to debt accumulation. - DSA highlights vulnerability to shocks in interest rates, GDP growth, the primary balance, and the real exchange rate; contingent liabilities are sizable and not well monitored. - Growth: - Output projected to fall by 1.2 percent in 2014 before recovering modestly in 2015. - Baseline assumes nominal wage restraint and a real depreciation of about 7 percentage points over the projection period. - Large capital investment projects exist (face value exceeds 10 percent of GDP), but staff project limited contribution to growth due to uncertainties. - External sector and reserves: - Current account deficit expected to narrow to -7.8 percent of GDP in 2014 but remain above -6 percent of GDP in the medium term. - Foreign reserves would remain below comfort levels; Barbados would require external financing in later years to maintain reserves above a notional threshold of 3 months of imports. - Recommendation: a much stronger reserve cushion to strengthen resilience. - Government financing challenge: - Total government financing requirement in 2013/14: 39 percent of GDP; forecast to rise to about 50 percent of GDP by 2018/19. - Short-term debt rollover projected to increase sharply, raising refinancing and interest rate risks. - Near-term rollover risks mitigated by liquidity in financial system, smooth debt service profile, and capital account controls requiring official approval of large capital flows. - Annex I DSA projected public debt-to-GDP: - 92 percent in 2013 → 95 percent in 2015 → 91 percent by 2018. - Debt-stabilizing primary balance after 2018: 3.5 per-cent of GDP excluding NIS; 1.4 percent of GDP including NIS. - Authorities’ projected primary balance: surplus of 3.3–3.4 percent of GDP by 2016–2018. - Selected indicators (as cited): - Population (2012 est., millions): 0.3 - Per capita GDP (2012 est., US$): 15,199 - Unemployment rate (2013Q3): 11.7 - Real GDP (annual percentage change): 2012: 0.0; 2013: -0.7; 2014: -1.2 - CPI inflation (average): 2012: 4.5; 2013: 2.3; 2014: 2.0 - Current account (percent of GDP): 2013: -11.4; 2014 (projection): -7.8 - Net international reserves (US$ millions): 2010: 718; 2011: 712; 2012: 729; 2013: 563; 2014 (proj.): 509 - Central government gross debt (excludes NIS, percent of GDP): 2012: 85.8; 2013: 92.0; 2014: 94.7 - Central government gross debt (includes NIS, percent of GDP): 2012: 118.2; 2013: 126.4; 2014: 129.8 ### Risks that could trigger a disorderly adjustment - Delays or failure to implement planned fiscal measures, including labor-union pressure to unwind layoff decisions, could lead to: - further monetization of the deficit, - drop in investor confidence, - further reserves losses, - pressure on the currency peg. - Heightened global financial market volatility, especially increases in non-investment grade sovereign risk premia, could: - impinge on Barbados’ access to market financing domestically and externally, - engender reserve losses, - put pressure on the currency peg. - Further decline in tourism receipts related to slower growth in main advanced country source markets. - Fiscal shocks in the U.S., the U.K., or Trinidad & Tobago could have significant spillovers. - Annex III risk matrix highlights: - Continuation of policy delays: Likelihood Medium; Impact High. - Further decline in tourism: Likelihood Medium-High; Impact High. - Acute fiscal financing pressures: Likelihood High; Impact High. - Side-effects from global financial conditions: Likelihood High; Impact High. - Other risks (weather, crime): Likelihood Low; Impact Low. ### Staff-recommended policy focus and immediate priorities - Immediate priorities: - Reduce the deficit in the short term, alleviate pressure on foreign reserves, and reduce gross financing needs. - Embed actions in a medium-term strategy anchored by a fiscal anchor and restraining wage policies while boosting productivity. - Specific fiscal recommendations: - Additional fiscal tightening of 1.1 percent of GDP over the next five years through: - returning tax revenues to about 25 percent of GDP (pre-global crisis level); - further cuts in transfers to public enterprises of around 0.3 percent of GDP. - Medium-term debt-to-GDP target suggested: 85 percent by 2018/19 (comprehensive coverage including public enterprises). - Immediate policy list: - Implement significant spending cuts and/or tariff increases in the coming weeks. - Cease central bank financing of the fiscal deficit. - Raise interest rates to align monetary policy with the exchange rate anchor and raise confidence. - Ensure regulations on capital outflows would be effective in an emergency. - Work with labor unions to develop wage arrangements that lower real labor costs over time. - Announce plans to design a credible medium-term fiscal strategy, anchored by a gross debt target. - Expenditure-side emphasis: - Short-term adjustment should fall largely on expenditures due to constrained near-term revenue growth. - Wage bill: central government wage bill rose to 10.3 percent of GDP in 2013 (highest in the Caribbean); authorities opted in December for major workforce reductions effective Q1 2014. - Social spending: recommend better targeting of social benefits (shift to cash transfers for low income housing, introduce means testing, raise tariffs for child care and transport). - Revenue-side and administration reforms: - Tax base erosion from waivers and exemptions estimated at over 5.5 percent of GDP in 2012/13. - Recommendation: comprehensive review of domestic taxation to broaden base, improve equity, and reduce distortions. Authorities requested Fund TA expected in 2014. - Strengthen revenue and customs administration; improve control and audit functions and management reporting. - Public financial management and arrears: - Audit and validate arrears and prioritize clearance to unblock cash flows. - Add an above-the-line provision in the 2014/15 budget for clearance of some arrears (pending more reliable data). - Produce regular quarterly budget execution reports and publish these on the Ministry website. - Public enterprise reform: - Establish a high-level committee reporting to cabinet, guided by the minister of finance, to enforce reporting requirements and monitor monthly expenditure commitments to PEs. - Provide the Accounting Unit resources and technical skills for oversight. - Prepare a financial summary annex of the aggregate PE sector in the 2014/15 budget. - Strengthen legislative framework covering reporting, audit and accounting provisions, management and board selection/removal, and sanctions for non-compliance. - Authorities have requested CARTAC TA beginning early 2014 and have initiated corporate governance reforms for PEs. - Privatization/divestment: - Consider divestment of commercial assets to help reduce the nation’s debt burden while enhancing productivity. ### Monetary policy recommendations and financial sector measures - Monetary policy and exchange rate anchor: - Staff recommend CBB clarify the monetary framework by reiterating that the primary objective is to safeguard the exchange rate anchor and making international reserves the operational target. - Allow short-term rates to reflect market conditions and credible sovereign risk premium; an increase in short term rates of at least 100 basis points could help raise confidence, contain capital flight incentives, and entice the domestic financial system to hold more government securities. - Ending direct central bank financing and T-bill intervention: - CBB should end direct financing of the government. - Scale of intervention in the T-bill market should be limited and interest rates allowed to rise in the short term. - Staff assessment: reduction in central bank financing can be absorbed without undermining government financing prospects given baseline reductions in gross financing needs in 2014/15. - Contingency: tighten capital controls if significant market turbulence/outflows occur; review existing regulations and their efficacy. - Financial sector vulnerabilities and supervision: - Stress test outcomes: - Bottom-up solvency test: severe shock would drive system CAR down to 13.7 percent. - Severe macro shock with second-round effects and deposit run: CAR decline to 8 percent, with two banks below regulatory minimum. - A large insurance company has exposure to sovereign bonds about 25 percent of its total assets. - Recommendations: - Strengthen CBB independence (remove Ministry powers to overrule CBB policies). - Strengthen loan loss provisioning and AML/CFT oversight in the offshore sector. - Strengthen supervisory function and specialized onsite examinations. - Improve group supervision, cross-border coordination, and crisis management, especially in insurance. - Clarify and improve mandate and tools of the Financial Oversight Management Committee (FOMC). - Upgrade financial safety nets, including a strategic plan for the deposit insurer and a policyholder protection scheme, extend safety nets to credit unions after prudential oversight is established. - FSAP findings: - Banking system appears well capitalized and supported by strong foreign parent banks but credit quality and profitability have weakened. - NPL ratio rose from 3.5 percent in 2008 to 13.9 percent in June 2013; CAR: 21.5 percent in June 2013. - Offshore sector is large (assets of 45 offshore banks amount to B$89 billion) but limited risk to the onshore system due to transaction restrictions to non-residents. ### Growth strategy and structural reforms - Growth strategy should focus on reducing the costs of doing business by: - relying less on spending initiatives and government incentives that create tax expenditures and contingent liabilities, - improving revenue administration, - addressing tax arrears, - streamlining customs processes, - reducing bureaucratic procedures at the port. - Tourism policy: revitalize the tourism sector but reassess target markets for the 21st century. - Labor market reforms: - Collective labor agreement rules and lengthy dismissal processes are rigidities that raise costs and discourage employment. - Authorities should urge labor representatives to reassess these regulations to improve employment growth and absorb surplus public sector workers. - Data shortcomings to resolve promptly: - inconsistencies in nominal and real GDP series, - expenditure-based GDP, - data on financial performance of public enterprises, - discrepancies in monetary statistics. - Article IV cycle: - Staff recommend next Article IV consultation be conducted on the standard 12-month cycle. ### Boxed program and multiplier evidence (summary) - Box 1: Fiscal Adjustment Measures in 2013 - Authorities presented a 19-month consolidation program in August 2013; complemented by more drastic measures in December 2013. - Staff estimate cumulative adjustment of about 6 percent of GDP by 2014/15, mainly from expenditure measures. - Authorities’ targets: reduce overall fiscal deficit from 8 percent of GDP in 2012/13 to less than 3 percent of GDP in 2014/15 and to less than 2 percent by 2020/21. - Staff project deficits to remain higher than authorities’ targets due to higher interest payments and weaker yield of announced measures. - Staff revenue measures cumulative contribution predicted: about 1.5 percent of GDP by 2015/16. - Staff expenditure measures cumulative contribution estimated: about 4.5 percent of GDP by 2015/16. - Table excerpts (selected, percent of GDP): - Revenue Measures (Authorities / IMF Staff across 2013/14, 2014/15, 2015/16): 0.6 0.4 1.8 1.1 0.4 0.0 - Proposed Expenditure Measures (Authorities / IMF Staff): 1.4 1.1 3.9 3.5 0.0 0.0 - Cumulated contribution to fiscal adjustment (Authorities / IMF Staff): 2.0 1.4 7.8 6.0 8.1 6.0 - Expenditure cuts targeted at personal emoluments (retrenchement of 2,000 employees and strict attrition with freeze on increments in 2014-2015), subsidies and transfers (including retrenchment of 1,000 employees in statutory entities), and goods and services. - Box 2: Fiscal Multipliers - Empirical estimates: cumulative fiscal multipliers for the Caribbean are less than 0.3 after 24 quarters; for Barbados reached a maximum of 0.20 after 24 quarters. - Explanations: high openness, high public debt, labor market rigidities, fixed exchange rate, low public expenditure/GDP relative to suggested thresholds. - Policy implication: consolidation focused on taxes may yield smaller real output effects than spending cuts; cuts in current expenditure are most growth-friendly in small states; focusing cuts on government consumption rather than investment will help lessen impact on real output. ### Financial assistance, implementation, and authorities’ stance - Authorities’ actions and views: - By January 31, 2014, 1,800 of the planned 3,000 layoffs were enacted (including 1,000 from public enterprises); remainder expected by March 31. - Parliament approved supplementary requests for budget transfers totaling BDS$146 million (1.7 percent of GDP). - Central bank holdings of Treasury-bills have not increased since end-November 2013; short-term interest rates rose from 3.2 to 3.3 percent since December. - Foreign reserves provisional at December 31, 2013: US$580 million (staff estimate US$565 million); reserves declined to US$545 million by January 28 (3.2 months of imports). - Authorities broadly agree with staff proposals, have begun implementing fiscal measures and structural changes, and are pursuing a Medium-Term Fiscal Strategy, Medium-Term Development Strategy, and Medium-Term Growth and Development Strategy. - Authorities target establishing a Barbados Central Revenue Authority on April 1, 2014; requested FAD review of domestic taxation and CARTAC assistance for PEs. - Authorities favor large up-front measures, are receptive to targeted social spending, less receptive to reducing tourism-related tax expenditures but willing to consider reductions in waivers not related to foreign exchange producing sectors. - Authorities are developing a formal medium-term debt management strategy prioritizing domestic borrowing, limiting international capital market borrowing, covering maturing international bond payments while building international reserves. *INTERNATIONAL MONETARY FUND — staff report content as provided in the supplied document excerpt.* ### INTRODUCTION __________________________________________________________________________________ 4 ### _cr1452 - INTRODUCTION __________________________________________________________________________________ 4 ### Introduction - Last Article IV consultation concluded in December 2011; authorities requested a delay due to general elections held in February 2013. - The Democratic Labor Party was re-elected with a one-seat majority in the House of Assembly. - Barbados profile: - Per capita income: US$16,150. - Relies heavily on tourism and the offshore business sector. - Has the best human development indicators in the region. - Post-2008 performance: - Economy contracted on average by 0.6 percent a year since 2008. - Expansionary fiscal policies and weak revenues led to a surge in public debt and fiscal financing pressures. - Under the exchange rate peg with accommodative monetary policy, foreign reserves declined through 2013. - Authorities announced fiscal consolidation proposals in August 2013 and more ambitious measures in December 2013. ### Recent Developments - 2013 output and labor: - Output estimated to have fallen by about 0.7 percent in 2013. - Long stay tourist arrivals (January–November 2013) fell by 5.5 percent; cruise passengers increased by 12 percent. - Inflation dipped to 2 percent (y/y) at end-October 2013. - Unemployment: 11.7 percent in September 2013 versus 10.8 percent a year earlier. - Fiscal trends and public enterprises: - Tax revenues fell by 6.5 percent in 2012/13 (fiscal year ending March) and by 11 percent in April–September 2013. - Evidence of public sector arrears accumulation, with estimates ranging between 2–7 percent of GDP. - Ratings: downgraded by Moody’s and S&P in 2012 and by two notches (to Ba3 and BB- respectively) late in 2013. - Operating deficit of public enterprises has not improved despite higher transfers. - Public debt and financing (central government): - Debt-to-GDP rose from under 60 percent in 2009 to 94 percent at end-September 2013. - Including government securities held by the NIS, it rose from about 80 percent to 128 percent. - Gross financing requirement in 2013/14: 15.4 percent of GDP, or 39 percent of GDP including the rollover of short term debt. - Financing mix in first six months of 2013/14: domestic financial institutions and the central bank provided bulk via T-bills; NIS provided about 11 percent in longer term debentures. - NIS holdings: estimated at about 67 percent of its portfolio (actuarial review guideline: no more than 57 percent). - NIS operating surplus declined to near balance, limiting capacity to absorb new government debt. - Monetary policy and reserves: - New 2013 interest rate policy made the 3-month Treasury-Bill rate the benchmark; CBB absorbed about 44 percent of T-bills issued in first 11 months of 2013. - Short term interest rates fell by about 50 basis points. - Credit to the private sector continued to fall despite policy. - Monetization of the deficit created uncertainty about monetary policy objectives. - Current account deficit expected to have widened to 11.4 percent of GDP in 2013 (from 10.1 percent in 2012). - Foreign reserves: dipped to US$434 million by early December 2013; boosted subsequently by new commercial borrowing of US$150 million, representing 3.2 months of imports at end-December 2013. New loan offers possibility of an additional US$75 million in 2014. - Competitiveness and exports: - Real wages declined by about 12 percent since 2009 (CBB data). - Fund’s CGER analysis suggests moderate overvaluation of 2–8 percent (Annex II). - Barbados’ share of Caribbean tourism market fell from 3.0 percent in 2007 to 2.65 percent in 2012 (a 12 percent decline). - Real effective exchange rate (tourism weights) appreciated by about 7 percent since 2009. - Financial sector: - Banking system foreign-owned; assets of Canadian banks account for 75 percent of total. - Overall capital adequacy ratio (CAR): 21.5 percent. - Non-performing loan (NPL) ratio: 13.9 percent in June 2013. - Provisions declined to 36 percent of NPLs from 60 percent in 2008. - Claims on the government have risen to 20 percent of total domestic assets. - Credit unions’ NPLs increased from 5¼ percent of total loans in 2008 to over 8 percent in June 2013. - FSAP: large offshore financial sector does not appear to be a major source of risk given legal restrictions on domestic transactions. - Authorities’ policy response: - By May 2013 authorities announced consolidation measures in August and more drastic measures in December. - Staff estimate combined adjustment of about 6 percent of GDP over the period, or improvement in the primary balance of about 4.8 percent of GDP from 2013/14–2014/15. - About three fourths of the adjustment will come from expenditure cuts. - December measures included: - Reduction in civil service in 2014/15 by about 3,500 (15 percent of total). - Further downsizing by attrition of about 500 positions per year until 2018/19. - Wage cuts for elected and appointed officials and a two year nominal wage freeze. ### Outlook and Risks - Fiscal outlook: - Based on revenue and spending, fiscal deficit projected to reach 9.6 percent of GDP in 2013/14, forecast to fall sharply to 5 percent of GDP in 2014/15 as budget measures take effect (see Box 1). - Central government debt expected to peak at 95 percent of GDP in 2015. - Interest expenses expected to be largest contributor to debt accumulation; improvements in the primary balance crucial to reverse debt trajectory. - DSA highlights vulnerability to shocks in interest rates, GDP growth, the primary balance, and the real exchange rate; contingent liabilities are sizable and not well monitored (Annex I). - Growth outlook: - Output projected to fall by 1.2 percent in 2014 before recovering modestly in 2015. - Baseline incorporates nominal wage restraint and benign inflation outlook relative to trading partners, envisioning a real depreciation of about 7 percentage points over the projection period. - Large capital investment projects exist (face value exceeds 10 percent of GDP), but staff project limited contribution to growth due to uncertainties about timing, scale, and employment impact. - External sector and reserves: - Current account deficit expected to narrow to 7.8 percent of GDP in 2014 but remain above 6 percent of GDP in the medium term. - Capital account supported by specific investment project inflows, but foreign reserves would remain below comfort levels; Barbados would require external financing in later years to maintain reserves above a notional threshold of 3 months of imports (see “Unidentified Financing”, Table 4). - Recommendation: Barbados would benefit from a much stronger reserve cushion to strengthen resilience. - Government financing challenge: - Total government financing requirement in 2013/14: 39 percent of GDP; forecast to rise to about 50 percent of GDP by 2018/19 (Annex I). - Increase in short-term debt raises refinancing and interest rate risks, though partly mitigated by domestic holdings. - Near-term rollover risks mitigated by liquidity in financial system, smooth debt service profile, and capital account controls requiring official approval of large capital flows. - Constraints: banks unwilling to raise sovereign exposure much further; NIS balance-sheet constraints; central bank may need to sell government bonds to raise interest rates and tighten policy. - Overall, short-term risks appear manageable (¶32). - Regional spillovers: - Adverse materialization of risks could spread to the region, particularly ECCU, through trade (region absorbs about 26 percent of Barbados’ exports and accounts for 11 percent of tourist arrivals) and financial channels. - Two large Barbados-based financial conglomerates have significant regional linkages; sovereign instability could have financial implications for them and for widely dispersed policy holders and shareholders. *INTERNATIONAL MONETARY FUND — INTRODUCTION (Content unit: _cr1452)* ### 17. The following risks would aggravate vulnerabilities and could trigger a disorderly ### _cr1452 - 17. The following risks would aggravate vulnerabilities and could trigger a disorderly ### Risks that could trigger a disorderly adjustment - Delays or failure to implement planned fiscal measures (notable ongoing pressure from labor unions to unwind layoff decisions). Continuation of current policy trends could lead to: - further monetization of the deficit, - drop in investor confidence, - further reserves losses, - pressure on the currency peg. - Heightened global financial market volatility, with increases particularly in non-investment grade sovereign risk premia, which could: - impinge on Barbados’ access to market financing domestically and externally, - engender reserve losses, - put pressure on the currency peg. - A further decline in tourism receipts related to slower growth in main advanced country source markets, harming growth, revenues, and the balance of payments. - A fiscal shock in the U.S. or a shock in the U.K. or Trinidad & Tobago (Barbados’ three biggest trade partners). Note: one of the largest banks in Barbados is based in Trinidad. ### Policy context and constraints - Authorities face the task of raising foreign reserves and reducing the fiscal deficit in an environment of low growth, high debt, and a fixed exchange rate. - Broad stakeholder support exists for maintaining the exchange rate peg (including labor unions), even at the expense of job losses or wage cuts. - Historical precedent: early 1990s internal devaluation included a fiscal adjustment of 7 percent of GDP in one year, sizeable real wage reductions over several years, structural reforms to raise productivity, and sustained primary surpluses between 2–4 percent of GDP for about ten successive years. - Staff caution: Barbados in 2014 has a much higher debt burden, limited financing options, and a weaker growth environment; downside risks are considerable and insufficient action could lead to a costly and disorderly adjustment. ### Staff-recommended policy focus - Immediate priorities: reduce the deficit in the short term, alleviate pressure on foreign reserves, and reduce gross financing needs; embed these in a medium-term strategy anchored by a fiscal anchor, restraining wage policies and boosting productivity. - Staff recommended additional fiscal tightening of 1.1 percent of GDP over the next five years, achieved through: - returning tax revenues to about 25 percent of GDP (pre-global crisis level), - further cuts in transfers to public enterprises of around 0.3 percent of GDP. - Projected effect: puts debt-to-GDP ratio on a steeper downward trajectory, reaching about 85 percent by 2018/19. ### Immediate policy priorities (staff list) - Implement some significant spending cuts and/or tariff increases in the coming weeks. - Cease central bank financing of the fiscal deficit. - Raise interest rates to align monetary policy with the exchange rate anchor and raise confidence. - Ensure that regulations on capital outflows would be effective in the event of an emergency. - Work with labor unions to develop wage arrangements that lower real labor costs over time. - Announce plans to design a credible medium-term fiscal strategy, anchored by a gross debt target. ### Expenditure-side focus - Short-term adjustment should fall largely on expenditures due to constrained near-term revenue growth. - Key expenditure areas: - Wage bill: - Central government wage bill rose to 10.3 percent of GDP in 2013 (highest in the Caribbean). - Authorities opted in December for a major reduction in the public sector workforce (including employees at public enterprises) effective Q1 2014. - Alternative discussed: downsizing by attrition and a wage formula to freeze the average wage per worker to lower economy-wide labor costs. - Social spending: - Healthcare and education provided free of charge. - Unemployment benefits: payments equivalent to 60 percent of salary, with a nominal wage ceiling of B$4,200 per month, benefits lasting 26 weeks (or 52 at partial payment). - Additional benefits via the National Assistance Board (NAB): food vouchers and housing assistance. - Staff recommend better targeting of social benefits (e.g., shift to cash transfers for low income housing, introduce means testing, raise tariffs for child care and transport) to generate cost savings and protect the most needy. ### Revenue-side and administration reforms - Taxation: - Tax base erosion from waivers and exemptions; tax waivers by the Customs and Excise Department estimated at over 5.5 percent of GDP in 2012/13. - Revenue forgone from applying below-standard rates to some taxpayers; some 2013 measures and concessions to tourism projects in late 2013 further erode the base. - Recommendation: comprehensive review of domestic taxation to broaden base, improve equity, and reduce distortions. Authorities requested Fund technical assistance expected in 2014. - Revenue administration: - Weaknesses include low ratio of tax collected to tax payable at the Inland Revenue administration, weak control and audit functions, and lack of management reports for performance monitoring. - Recommendation: strengthen revenue and customs administration; Fund TA has provided guidance on customs administration and port activities. ### Public financial management, arrears, and reporting - Accumulation of arrears identified across central government tax refunds, statutory boards to the private sector, and inter-state entities; some arrears incurred years ago. - PEFA preliminary findings: problems with the budget process (participation and adherence to calendar), poor availability of data for monitoring expenditure payment arrears, insufficient reporting on government operations including liabilities, absence of a medium-term perspective in fiscal planning, and ineffective payroll controls. - Recommendations: - Audit and validate arrears and prioritize clearance to unblock cash flows and mitigate adverse adjustment consequences. - Add an above-the-line provision in the 2014/15 budget for clearance of some arrears (not incorporated into baseline pending more reliable data). - Ministry of Finance to produce regular quarterly budget execution reports (revenues, expenditures including statutory bodies, financing incurred) and regular reports on tax and customs administration performance; publish these on the ministry website. ### Medium-term fiscal anchor and debt target - Staff recommend establishing a medium-term fiscal anchor based on public sector debt as a pragmatic guide. - Suggested medium-term debt-to-GDP target: 85 percent. - Rationale: reducing central government debt (excluding NIS holdings) to below 85 percent of GDP by 2018/19 represents a reasonable pace that could be achieved without strangling growth while allowing time for fiscal structural reforms. Longer-term, a lower debt ratio would be desirable. - For effectiveness, coverage must be comprehensive (including public enterprises) and reporting must improve. ### Authorities’ views on fiscal measures and reforms - Authorities favor large up-front measures to signal commitment and reduce near-term cash needs and balance of payments pressures; included attrition and wage restraint in medium-term measures within constitutional constraints. - Receptive to targeted social spending but did not commit to measures prior to reform of statutory bodies; acknowledged arrears build-up and plan to outline strategy and timetable for clearance (stated total arrears lower than high-end estimates). - Working on establishing a central revenue authority; scheduled implementation April 1, 2014. - Less receptive to reducing tax expenditures related to tourism but willing to consider reductions in waivers not related to foreign exchange producing sectors (some reductions enacted in December measures). - Requested FAD review of domestic taxation and recognized need to reform tax expenditure administration and strengthen Ministry of Finance technical capacities. - Agreed in principle with a medium-term fiscal framework and an 85 percent debt target but were reluctant to adopt a fiscal rule without further analysis. - Developing a formal medium-term debt management strategy with Fund TA support; current strategy emphasizes maximizing domestic borrowing, limiting international capital market borrowing, covering maturing international bond payments while building international reserves. ### Reform of public enterprises (PEs) - Oversight and accountability for statutory bodies are lacking; most PEs have not submitted financial reports for several years, undermining fiscal planning and budget integrity. - Reducing transfers to PEs must be matched by reforms within PEs (new business plans, staffing, spin-offs of commercial activities, improved targeting of support, tariff adjustments). - Staff recommendations: - Establish a high-level committee reporting to cabinet, guided by the minister of finance, to enforce reporting requirements and monitor monthly expenditure commitments to PEs. - Provide the Accounting Unit with resources and technical skills to carry out oversight. - Prepare a financial summary annex of the aggregate PE sector in the 2014/15 budget. - Strengthen legislative framework covering reporting, audit and accounting provisions, management and board selection/removal, and sanctions for non-compliance. - Authorities welcomed recommendations, requested technical assistance from CARTAC beginning in early 2014, and have initiated corporate governance reforms for PEs. *Source: IMF staff report content as provided in the supplied document excerpt.* ### 32. Monetary policy should be consistent with the nominal exchange rate anchor. The ### 32. Monetary policy should be consistent with the nominal exchange rate anchor ### Monetary policy stance and exchange rate anchor - The authorities wish to retain the nominal exchange rate anchor, yet monetary policy has not been supportive of this aim. - Staff recommendation: the CBB could clarify the monetary framework by reiterating that the primary objective of monetary policy is to safeguard the exchange rate anchor and making international reserves the operational target. - Policy reorientation recommended: allow short-term rates to more closely reflect market conditions that embody a credible sovereign risk premium. - Specific operational recommendation: based on prior trends and recent developments in perceived credit risks, an increase in short term rates of at least 100 basis points could help to: - raise confidence; - contribute to containing incentives for capital flight; - entice the domestic financial system to hold more government securities. ### Ending direct central bank financing and T-bill market intervention - Staff recommendation: the CBB should end direct financing of the government. - The scale of intervention in the T-bill market should be limited and interest rates allowed to rise in the short term. - Rationale: this will provide reassurance that monetary policy is consistent with the currency peg and signal operational independence of the CBB. - Staff assessment: reduction in central bank financing can be absorbed without undermining government financing prospects, as the reduction in gross financing needs in 2014/15 under the baseline would roughly offset the decline in central bank financing. - Contingency: since adjustment policies will take time to restore external stability and rebuild buffers, authorities may need to tighten the implementation of existing capital controls in the event of significant market turbulence and outflows. - Staff recommended carefully reviewing existing regulations and their efficacy, while noting these tools can only help in the short term and must be complemented by measures to address fundamental fiscal imbalances. - Note: "Barbados has not introduced any measures that would give rise to exchange restrictions or multi-currency practices subject to Fund approval." ### Authorities’ views on monetary policy and risks - The CBB recognized the need to cease direct financing of the government and acknowledged that monetization of the deficit could be exacerbating pressures on reserves. - The central bank stated that interest rate decisions aim to follow the medium term trend in comparable U.S. rates, plus a CBB-determined country premium. - Monetary policy decisions are also driven by considerations about: - the level of liquidity in the financial system; - domestic demand conditions; - the government’s cash position. - The CBB’s concerns about higher interest rates: - could raise financing costs for the government; - could strengthen banks’ bias towards short term lending; - could increase the debt service burden of the private sector, which would hurt investment and raise NPLs. ### Financial sector vulnerabilities relevant to monetary stance - Stress test outcomes and exposure metrics cited by staff: - Under a bottom-up solvency test, the direct impact of a severe shock would drive the system’s CAR down to 13.7 percent. - Under a severe macro shock with second-round effects and an eventual deposit run, the banking system’s CAR would decline to 8 percent, with two banks falling below the regulatory minimum. - A large insurance company has exposure to sovereign bonds representing about 25 percent of its total assets. - Authorities noted elevated credit risk but project the NPL ratio to fall from 13.9 percent to 10–11 percent after recent loan developments. ### Related fiscal and macro context influencing monetary recommendations - Staff urged monetary measures be complemented by fiscal adjustment to restore external stability and rebuild buffers. - Staff recommended additional fiscal tightening of 1.1 percent of GDP over the next five years to reduce vulnerabilities and raise confidence sooner. - Under that scenario, the debt-to-GDP ratio would be on a steeper downward trajectory, reaching about 85 percent by 2018/19. *Source: IMF staff report excerpt.* ### 56. The growth strategy should focus on reducing the costs of doing business. The ### _cr1452 - 56. The growth strategy should focus on reducing the costs of doing business. The ### Growth strategy: reducing costs of doing business - Recommendation to rely less on spending initiatives and government incentives that: - create new tax expenditures and contingent liabilities for the state, and - promote unhelpful regional tax competition. - Recommended focus areas: - improving revenue administration, - addressing tax arrears, - streamlining customs processes, and - reducing bureaucratic procedures at the port. - Implementation note: TA recommendations in these areas should be implemented promptly. - Tourism sector policy: objective of revitalizing the tourism sector is appropriate, but further consideration may be warranted on the best “target market” for Barbados in the 21st century. ### Labor market reforms - Findings: - Rules under many collective labor agreements (e.g., on working hours permitted) and the lengthy legislative dismissal process are rigidities that raise costs and discourage employment. - Recommendation: - Authorities should urge labor representatives to reassess the impact of these regulations on employment growth and suggest options for their removal. - Role in macro adjustment: - Reforms would improve the supply response of the economy and help absorb surplus public sector workers. ### Divestment of state assets - Recommendation: - Consider divestment of commercial assets to help reduce the nation’s debt burden while enhancing productivity. ### Financial stability and supervision - Key risks: - Risk of a negative sovereign-financial feedback loop warrants close monitoring. - Recommendations (consistent with FSAP Update): - Align provisioning requirements with international norms. - Strengthen supervision of credit unions and insurance companies. - Finalize crisis management plans, including detailed plans to deal with a crisis in the non-bank sector. - Clarify and improve the mandate and tools of the Financial Oversight Management Committee (FOMC). ### Data shortcomings - Specific data issues to resolve promptly: - inconsistencies in the nominal and real GDP series, - expenditure-based GDP, - data on financial performance of public enterprises, - discrepancies in the monetary statistics. ### Article IV consultation timing - Staff recommendation: - The next Article IV consultation with Barbados be conducted on the standard 12-month cycle. ### Box 1 — Barbados: Fiscal Adjustment Measures in 2013 (summary) - Program: In August 2013 authorities presented a 19-month fiscal consolidation program; complemented by more drastic measures in December 2013. - Staff estimate: the two packages would yield a cumulative adjustment equivalent to about 6 percent of GDP by 2014/15, mainly from expenditure measures. - Authorities’ targets: - reduce the overall fiscal deficit from 8 percent of GDP in 2012/13 to less than 3 percent of GDP in 2014/15, - and to less than 2 percent of GDP by 2020/21. - Staff projection caveat: - Staff project fiscal deficits to remain somewhat higher than the authorities’ targets because of higher interest rates/payments and a weaker projected yield of announced measures (due in part to weaknesses in revenue administration, especially the control and audit functions) and the likelihood of some difficulties at achieving the targeted savings in the context of weak growth. - Revenue measures (aggregate potential contribution): - staff predict cumulative contribution to fiscal adjustment could amount to about 1.5 percent of GDP by 2015/16. - Expenditure measures (staff estimate): - if implemented as planned, measures could yield a cumulative contribution of about 4.5 percent of GDP by 2015/16. - Table excerpts (Barbados. Impact of the 2013 Fiscal Adjustment Programme (in percent of GDP)): preserved numbers as presented - Authorities / IMF Staff / Authorities / IMF Staff / Authorities / IMF Staff across 2013/14, 2014/15, 2015/16 - Revenue Measures: 0.6 0.4 1.8 1.1 0.4 0.0 - Taxes on income and profits: 0.4 0.2 0.6 0.5 0.0 0.0 - Taxes on property (waste/land tax): 0.0 0.0 0.6 0.4 0.0 0.0 - Import duties/waivers: 0.2 0.1 0.5 0.1 0.4 0.0 - Proposed Expenditure Measures: 1.4 1.1 3.9 3.5 0.0 0.0 - Wages and salaries: 0.5 0.4 1.4 1.1 0.0 0.0 - Goods and services: 0.1 0.1 0.1 0.1 0.0 0.0 - Transfers: 0.9 0.5 2.2 2.2 0.0 0.0 - Cumulated contribution to fiscal adjustment: 2.0 1.4 7.8 6.0 8.1 6.0 - Revenue: 0.6 0.4 2.4 1.5 2.8 1.5 - Expenditures: 1.4 1.1 5.3 4.5 5.3 4.5 - Source: Authorities and IMF Staff estimates - Years shown: 2013/14 2014/15 2015/16 - Expenditure measures detail: - Cuts targeted at: - personal emoluments (retrenchement of 2,000 employees and strict attrition across central government with a freeze on payment of increments in fiscal years 2014-2015), - subsidies and transfers (including retrenchment of 1,000 employees in statutory entities, reduction in number of statutory entities, and introducing tuition payment for tertiary education), - goods and services (through energy savings and better procurement practices). - Implementation challenges: legal and political challenges possible. - Staff projections include small allowances for retrenched workers in the form of departure grants (equivalent to about one month of salary). - Staff did not itemize potential retraining costs but note significant savings could finance such costs. ### Box 2 — Fiscal Multipliers, Fiscal Consolidation, and Growth - Empirical findings: - Multiplier values for the Caribbean countries are estimated to be below one and low. - Recent empirical estimates for the Caribbean found that cumulative fiscal multipliers are less than 0.3 after 24 quarters and for Barbados reached a maximum of 0.20 after 24 quarters. - Explanations for low multipliers in the Caribbean: - high degree of openness (domestic demand primarily satisfied through imports), - high current public debt level in Barbados likely to dampen impact of government spending, - spending multipliers are highly nonlinear and vary over the economic cycle. - Factors influencing multipliers in Barbados (as listed): - Trade openness: High degree of trade openness - Labor market rigidities: High degree of unionized labor - Automatic stabilizers: Public expenditures/GDP around 35 percent of GDP, below the threshold of 45% suggested by FAD. - F/X regime: Fixed exchange rate so no monetary policy offset - Low/safe debt levels: Approaching 100 percent of GDP and rising - Economic cycle: Real GDP growth close to zero - Policy implication on composition of adjustment: - If consolidation falls primarily on taxes, it may yield a smaller effect on real output than if it falls on spending. - Evidence that cuts in current expenditure have been the most growth friendly in small states, and the most durable (IMF, 2007). - If adjustment occurs on the expenditure side, focusing cuts on government consumption rather than investment will help lessen the impact on real output. - Adjustment scenario modeling: - Template in Bi, Qu and Roaf (2013) used. - Estimates derived on an assumed multiplier of between 0.3 and 1.0 and a fiscal consolidation program equivalent to an adjustment in the primary budget balance of 6.8 percent of GDP over the next five years, lowering the debt-to-GDP ratio to about 85 percent of GDP by 2018. - Short-term effect: output declines below potential and below the real growth path forecast in the baseline scenario. - Later-years effect: policies that stabilize the debt ratio are assumed to produce positive growth effects from lower borrowing costs and confidence effects, pushing real GDP growth towards potential at a quicker trajectory than the baseline GDP forecast. - Net: In the short-term, larger consolidation leads to a deeper downturn relative to the baseline, though the rebound in growth would be stronger in subsequent years. ### Box 3 — Competitiveness Indicators - Strengths: - Barbados ranks well regionally in broad-based indicators of overall competitiveness and in the tourism sector. - WEF 2013-14 global competitiveness rankings: Barbados 47th out of 148 countries (slightly below 2012-13 rank of 44). - WEF tourism competitiveness ranking: 27 out of 140 countries (top ranking of any Caribbean country). - International business sector/offshore financial center: more than 4,000 licensed entities in 2012, including 45 offshore banks. - Erosion signals and risks: - The Barbados dollar has been pegged to the U.S. dollar since 1975. The real effective exchange rate has appreciated by about 12 percent (INS weights) since 2009, but by about 22 percent since 2008. - CGER methodologies indicate a moderate overvaluation within a range of 2.5–8.0 percent from its equilibrium level. - Tourism market share declines: - Total tourist arrivals to Barbados fell to 2.7 percent of the Caribbean total (2012), down from 3.0 percent in 2007, and from about 4.5 percent in the early 1990s. - World Bank Doing Business ranking: Barbados slipped 7 spots from 84 in 2013 to 91 in 2014, out of 189 countries. - Doing Business weaknesses: protecting investors, registering property, paying taxes, resolving insolvency. - Note: Doing Business indicators should be interpreted with caution due to limited respondents, limited geographical coverage, and standardized assumptions. ### Box 4 — Public Enterprises (PEs) in Barbados - Scale and fiscal impact: - Operations of main PEs represent about 40 percent of total revenues and expenditures of the government. - With exception of BNOC and BWA, expenses exceed revenues even after receiving direct transfers from the central government. - Reporting and governance issues: - Many PEs have not reported financial results to the Ministry of Finance for several years, nor do they have recent audited financial statements. - Little in terms of sanctions if PEs fail to submit audited financial accounts in a timely manner. - These practices adversely affect budgeting and raise questions about management, governance, and accountability of PEs. - Recent financials and financing: - The most recent financial reports available from 2011 record an aggregate deficit of about 2.5 percent of GDP, after transfers from the central government. - Deficits after transfers financed with short-term debt, loans from the NIS, loans guaranteed by the government, or by arrears. - Lack of up-to-date financial information means significant elements of public finances are not reflected in fiscal planning (off-balance sheet activities, implicit loan guarantees, accumulation of arrears). - Reform rationale and potential: - PE reform essential to reduce public sector borrowing requirement, develop a sustainable fiscal position, and manage domestic demand in a small open economy with a fixed exchange rate. - Task force reportedly concluded up to 18 PEs could be closed or merged based on duplication and inefficiency. - Near-term measures announced: - August budget measures announced cuts in transfers to PEs by five percent. - December measures imposed a further 1,000 job redundancies from PEs and a two year nominal wage freeze. - PEs now spending less on goods and services and many have introduced attrition policies. - Near-term "low hanging fruit" and staff recommendations: - Observations: - Many PE services are heavily subsidized with prices declining in real terms (example: Child Care Board cost unchanged for 20 years and rationed). - Many services (e.g., Transport Board) are not means tested, potentially benefiting middle/higher income groups over the needy. - Average wages in PEs reportedly higher, as much as two times higher than comparable private sector jobs, supported by very low turnover. - Some PE activities have evolved into potentially commercially viable areas. - Staff recommend: - strengthen financial reporting, including possibly establishing an independent, high level committee to ensure follow through; - strengthen the budget process to make off-budget activities related to PEs more transparent; - undertake a management review of the largest PEs to align activities with stated mandates; - reduce duplication of services and rationalize operations, including outsourcing; - explore the scope for tariff reforms to improve the targeting of benefits in keeping with Barbados’ long tradition of social equity. - Technical assistance: authorities have requested TA from CARTAC towards reform of PEs, expected to start in early 2014. *International Monetary Fund — Barbados staff report content as provided.* ### Box 5. Barbados 2013 FSAP Update: Findings and Recommendations ### Box 5. Barbados 2013 FSAP Update: Findings and Recommendations ### Banking system: capitalization, credit quality, and macro-financial risks - Banking system appears well capitalized and supported by strong foreign parent banks. - Credit quality and profitability have weakened considerably and could be worse than reported due to unrecognized collateral weaknesses. - Banks’ non-performing loan (NPL) ratio rose from 3.5 percent in 2008 to 13.9 percent in June 2013 and provisions have declined. - Capital may be viewed as overstated in view of the higher share of assets in government securities (with a zero risk weighting). - Overall, the interaction of the financial system with the weakening sovereign and the protracted slowdown risks an adverse sovereign-financial-real economy feedback loop. ### Stress-testing results and resilience - FSAP analysis indicates the onshore financial system could withstand considerable shocks. - Under the stress-testing exercise, domestic banks are resilient to large shocks, although vulnerabilities arise under severe scenarios. - With large capital buffers (CAR: 21.5 percent in June 2013) and adequate liquidity, banks can withstand large to severe shocks without breaching regulatory requirements. - Vulnerabilities are concentrated in a branch of a foreign bank, and in the credit union sector, which does not benefit from foreign parents or have access to safety nets. - The largest credit unions can withstand moderate shocks. ### Offshore sector - The offshore sector is large, but its risk to the financial system appears limited. - Assets of the 45 offshore banks licensed in Barbados amount to B$89 billion, in excess of 1,000 percent of GDP. - Offshore banks are mostly non-deposit takers and dedicated to treasury and trust management. - Their financial transactions are restricted exclusively to non-residents, segregating the sector from the onshore financial system. ### Regulatory and supervisory framework improvements - Barbados has improved its regulatory and supervisory frameworks in recent years. - Consolidated risk-based supervision was introduced in the banking sector. - Established in April 2011, the Financial Services Commission (FSC) took over supervisory responsibilities for all non-bank financial institutions. - The FSC has been active in upgrading supervisory independence and effectiveness, as evidenced by the issuance of key guidelines and methodologies and the hiring and training of staff. ### Insurance sector: emerging vulnerabilities - Potential vulnerabilities in the insurance sector are emerging. - Inadequate liability valuation standards and lack of data on foreign affiliates prevent an effective assessment by the FSAP team. - The presence of a major regional holding based in Barbados and significant expansion of its non-insurance financial operations create the potential for vulnerabilities. *Box 5. Barbados 2013 FSAP Update: Findings and Recommendations* ### Box 5. Barbados 2013 FSAP Update: Findings and Recommendations (continued) ### Box 5. Barbados 2013 FSAP Update: Findings and Recommendations (continued) ### Recommendations (financial sector governance, supervision, and safety nets) - 1) CBB independence should be strengthened significantly. Current provisions contained in the CBB Act empower the Ministry of Finance to overrule policies or corrective measures taken by the CBB. While these powers have never been used, they should be removed. - 2) On regulation, concerns remain regarding the adequacy of enforcement actions and loan loss provisioning, and the intensity of AML/CFT oversight in the offshore banking sector. - 3) The supervisory function needs strengthening, particularly specialized onsite examinations. - 4) There is a need to strengthen group supervision, cross-border coordination, and crisis management, particularly in the insurance sector. The CBB carries out group supervision for banks, and the FSC is responsible for insurance groups. Priority should be given to improving data on cross-border linkages and enhancing supervisory colleges. - 5) While there is a solid legal basis and good cross-border communication among Caribbean countries, crisis management plans should include detailed plans to deal with a crisis in the non-bank sector. The mandate and tools of the Financial Oversight Management Committee (FOMC) should be clarified and improved. - 6) Financial safety nets should also be upgraded, including strategic plan for the deposit insurer, which would include setting a target funding ratio and improved payout procedures, and a policyholder protection scheme (PPS) for the insurance sector. Safety nets should be extended to credit unions, but only after establishing adequate prudential oversight. ### Select economic and financial indicators cited in the content - Population (2012 est., millions): 0.3 - Per capita GDP (2012 est., US$): 15,199 - Unemployment rate (2013Q3): 11.7 - Real GDP (annual percentage change): 2012: 0.0; 2013: -0.7; 2014: -1.2 - CPI inflation (average): 2012: 4.5; 2013: 2.3; 2014: 2.0 - Current account (percent of GDP): 2013: -11.4; 2014 (projection): -7.8 - Net international reserves (US$ millions): 2010: 718; 2011: 712; 2012: 729; 2013: 563; 2014 (proj.): 509 - Central government gross debt (excludes NIS, percent of GDP): 2012: 85.8; 2013: 92.0; 2014: 94.7 - Central government gross debt (includes NIS, percent of GDP): 2012: 118.2; 2013: 126.4; 2014: 129.8 *International Monetary Fund staff compilation from "Box 5. Barbados 2013 FSAP Update: Findings and Recommendations (continued)" in the referenced document.* ### Annex I. Barbados MAC-DSA Summary ### Annex I. Barbados MAC-DSA Summary ### Overall assessment and classification - Barbados’ public debt sustainability risks are significant, even after incorporating the 2013 fiscal adjustment measures. - Definition of public debt used: central government gross debt, excluding government securities held by the NIS. - Classification: “High Scrutiny” case. ### Baseline debt trajectory and drivers - Public debt-to-GDP ratio: - 92 percent in 2013 - 95 percent in 2015 (projected) - 91 percent by 2018 (projected) - Public debt has risen rapidly in recent years and is projected to continue accumulating until 2016 under the baseline. - Key driver: impact of the real interest rate in an environment of low inflation and increasing reliance on short-term funding. - Primary balance is projected to improve and drives debt dynamics favorably, underscoring the importance of the authorities’ fiscal consolidation program. ### Financing needs and debt composition - Gross financing needs (excluding rollover of short-term debt) are forecast to remain between 10–16 percent over the medium term. - Short-term debt rollover is projected to sharply increase from 23 percent of GDP in 2013 to almost 40 percent of GDP by 2018. - Financing needs, comprised mostly of short-term debt rollover, would increase from 39 percent of GDP in 2013/14 to more than 50 percent of GDP by 2018. - The NIS and CBB would continue to provide an important share of domestic financing. - Composition notes: rapid increase in short-term debt and its share in total debt; most of this debt is held domestically, which partly mitigates external shock exposure. ### Debt-stabilizing primary balance and fiscal targets - Estimated debt-stabilizing primary balance after 2018: - 3.5 per-cent of GDP excluding debt-reducing resources (NIS) - 1.4 percent of GDP including the NIS - Authorities’ fiscal adjustment plans are projected to raise the primary balance to a surplus of 3.3–3.4 percent of GDP by 2016–2018. - Alternative scenario: if the primary balance remained constant at its 2013 level, the debt path and financing needs would be worse. ### Stress tests and vulnerability analysis - Stress tests confirm vulnerability to shocks to real interest rates, real GDP growth, the primary balance, and the real exchange rate. - Greatest sensitivity: real interest rates and real GDP growth shocks. - Stress-test outcomes (selected): - With the exception of the real exchange rate shock, all other stress tests would push the debt-to-GDP ratio above 94 percent by 2018. - Shock to real interest rates alone: debt-to-GDP ratio to about 100 percent by 2018. - Shock to real GDP growth: debt-to-GDP ratio to 103 percent by 2015. - Financing needs would rise to about 60 percent of GDP under the real interest rate and real GDP growth shocks. - Shocks to the primary balance and exchange rate would moderately worsen the debt path and financing needs. ### External debt and external DSA - External public debt is relatively low but moderately sensitive to shocks to the non-interest current account and the exchange rate. - Recent external borrowing by the state warrants close monitoring given overall debt vulnerabilities. - External DSA was limited to external public debt (absent data on private external debt). ### Realism of baseline assumptions and forecast track record - Past IMF staff projections of GDP growth and the primary balance have been slightly optimistic; forecast errors are in line with the median IMF staff forecast errors. Current projections have taken this bias into account. - Projections of inflation have been more realistic on average. - The fiscal adjustment projected is ambitious as illustrated by: - 3-year adjustment in the cyclically-adjusted primary balance (CAPB) has a percentile rank of 7 percent. - 3-year average level of the CAPB has a percentile rank of 18 percent. - Conclusion: the adjustment can be achieved if measures taken by the authorities are well implemented. ### Key numeric highlights (selected) - Public debt-to-GDP: 92 percent (2013) → 95 percent (2015) → 91 percent (2018). - Gross financing needs (excluding short-term rollover): between 10–16 percent (medium term). - Short-term debt rollover: 23 percent of GDP in 2013 → almost 40 percent of GDP by 2018. - Financing needs (including short-term rollover): 39 percent of GDP in 2013/14 → more than 50 percent of GDP by 2018. - Debt-stabilizing primary balance after 2018: 3.5 per-cent of GDP (excluding NIS), 1.4 percent of GDP (including NIS). - Authorities’ projected primary balance: surplus of 3.3–3.4 percent of GDP by 2016–2018. - Stress-test peaks: ~100 percent debt-to-GDP from real interest rate shock by 2018; 103 percent debt-to-GDP from real GDP growth shock by 2015; financing needs ~60 percent of GDP under these shocks. - Percentile ranks for realism metrics: 3-year CAPB adjustment rank 7 percent; 3-year average CAPB level rank 18 percent. *Source: IMF staff.* ### Annex I. DSA Table 1. Barbados: External Debt Sustainability Framework, 2008-2018 ### Annex I. DSA Table 1. Barbados: External Debt Sustainability Framework, 2008-2018 ### External debt dynamics and bound tests - Annex I. Figure 6 presents Barbados External Debt Sustainability: Bound Tests (External debt in percent of GDP). - Sources: International Monetary Fund, Country desk data, and staff estimates. - Shocks and scenarios shown: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2014. - Historical, baseline, and scenario trajectories are displayed for 2008–2018 with shaded areas representing actual data. - 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. - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. ### Specific shocks and outcomes (as displayed) - Interest rate shock (in percent): baseline 33; i-rate shock 34. - Growth shock (in percent per year): - Baseline: 5.5 - Scenario: 6.1 - Historical: 6.7 - Growth shock (alternative box): - Baseline: 1.1 - Scenario: -0.2 - Historical: 1.2 - Non-interest current account shock (in percent of GDP): - Baseline: -4.5 - Scenario: -5.9 - Historical: -5.6 - Combined shock outcomes: - Combined shock: 37 (compared to Baseline 33) - Combined shock 3/ with 30% depreciation: 48 (compared to Baseline 33) - Gross financing need under baseline shown on right axis in figure. - Other baseline numeric markers shown on graphs: 20, 30, 40, 50, 60, 70, 80, 90, 100 (percent of GDP scale on x-axis/time). ### Exchange rate assessment — CGER methodologies - Three standard CGER methodologies used: Macroeconomic Balance (MB), External Stability (ES), and Equilibrium Real Exchange Rate (ER). - Overall finding: indicate a moderate overvaluation, within a range of about 2.5–8 percent from its equilibrium level. - Estimates subject to considerable uncertainty and data shortcomings, including lack of consistent data on net foreign assets. - Assessment consistent with lackluster export and tourism performance relative to most Caribbean competitors. Macroeconomic Balance (MB) approach - MB indicates the REER would need to depreciate by about 2.5 percent to bring the 2018 current account (CA) balance into line with the estimated equilibrium CA. - Method: difference between CA balance projected over the medium term (2018) at prevailing exchange rates and an estimated equilibrium CA “norm” based on fundamentals (fiscal and oil balances relative to GDP, demographic variables, relative income and output variables). - Estimated baseline CA deficit in 2018: -6.3 percent of GDP. - Estimated equilibrium CA balance: -5.6 percent of GDP. - Implied overvaluation (using elasticity of -0.3): 2.4 percent. External Stability (ES) approach - ES points to overvaluation of about 6 percent. - Method: difference between actual CA balance and balance that would stabilize the NFA position at a benchmark level. - Based on assumed growth rate of 2.3 percent and inflation of 2.6 percent, stabilizing Barbados’ NFA at the estimated 2012 level of -92 percent of GDP requires a CA deficit of 4.4 percent, or roughly 2 percentage points lower than projected in 2018. - Note: owing to lack of consistent data on net foreign assets (NFA), cumulative Current Account deficits are used as a proxy for NFA. Fundamental Equilibrium Exchange Rate (ER) approach - ER approach indicates an overvaluation of about 8 percent. - Method: directly estimates equilibrium REER level based on fundamentals including productivity differentials, terms of trade, government consumption, and net foreign assets. Table-based assessment excerpts (as presented) - Underlying CA balance (baseline 2018 level): -6.3 - Equilibrium external current account (CA) (corresponding to fundamentals): -5.6 - Stabilizing NFA at end-2012 level CA requirement: -4.4 - CA elasticity to REER: -0.3 - Implied REER adjustment (in percent, "+" appreciation): 2.4 (MB); 6.4 (ES) ### Reserve adequacy assessment - Loss of reserves in 2013 puts Barbados’ reserve position below “bench-mark” measures, including 3 months of import cover. - Based on the Fund template, reserves would need to reach about US$800 million to hit a “comfortable” level. - Gross international reserves and adequacy metrics are shown (US$ millions) against benchmarks: - 3 Months Imports - 20% of Broad Money - Short Term Debt - Risk-Weighted Measure - SIDS Measure - Time series shown for Gross international reserves and benchmarks for 2000–2018 with levels ranging up to 1,800 (US$ millions) on the chart. *Source: Annex I. DSA Table 1. Barbados: External Debt Sustainability Framework, 2008-2018* ### Annex III. Barbados: Risk Assessment Matrix ### Annex III. Barbados: Risk Assessment Matrix ### Continuation of policy trends, or delays/failure to implement fiscal consolidation - Likelihood of Realization: Medium - Expected Impact if Threat is Realized: - "The authorities are committed to fiscal consolidation, but vigilance will be needed. Full efforts should be deployed to secure timely implementation." - High: "This could lead to a bigger drop in confidence, forex shortages, capital flight and reserves losses and pressure on the exchange rate peg; a forced devaluation or disorderly adjustment process would be likely." ### Further decline in tourism and exports related to a protracted period of slower growth in advanced economies - Likelihood of Realization: Medium-High - Expected Impact if Threat is Realized: - "A protracted period of weak demand could take a toll on productive capacity across advanced economies. In Europe in particular, the risk of deflation has increased and the risk of a protracted period of slower growth is high." - "Tourism trends are worrisome but strongly affected by UK growth, which is expected to recover this year." - High: "Europeans comprise about 40 percent of Barbados’ tourism market; Europe, the U.S, and Canada make up 80 percent of the total." - "This would also lead to reserve losses, pressure on the peg, and possibly a devaluation." ### Acute fiscal financing pressures - Likelihood of Realization: High - Expected Impact if Threat is Realized: - "Government borrowing requirement was about 16 percent of GDP in 2013/14 (39 percent including short term rollover). It is forecast to fall to 34.6 percent of GDP in 2014/15." - "Domestic financial sector has little appetite for additional government paper." - High: "Would lead to further financial repression and/or monetization of the deficit, pressure on the exchange rate peg." ### Side-effects from global financial conditions: surges in global financial market volatility (related to UMP exit) - Likelihood of Realization: High - Expected Impact if Threat is Realized: - "Higher-than-expected increases in long-term rates, a reversal of capital flows into risk assets, the unwinding of overvaluations in some countries, and an intensification of liquidity strains on sovereigns are high risks." - "Government borrowing requirement is high and financing of deficit by domestic sources may be reaching its limit." - High: "Could exclude Barbados from access to market financing; lead to further financial repression and/or monetization of the deficit, pressure on the exchange rate peg." ### United States: protracted failure to agree on a credible plan to ensure fiscal sustainability (medium-term) - Likelihood of Realization: Low - Expected Impact if Threat is Realized: - "Signs are that the US economy continues to recover, but setbacks, possibly arising from domestic fiscal policy errors, cannot be ruled out." - Medium: "A fiscal shock in the U.S., accounting for 25% of tourism arrivals, could have substantial adverse effects, weakening tourism. This would pressure the balance of payments, causing reserve coverage to fall." ### Shock caused by adverse development in the U.K., or Trinidad & Tobago - Likelihood of Realization: Low - Expected Impact if Threat is Realized: - "Growth outlook for the U.K. and T&T has improved in recent months. Aside from the U.S., these are the biggest sources of tourism flows and biggest goods export markets. Also, one of the biggest banks in Barbados is Trinidad-based, and there are other financial sector ties (insurance)." - Medium: "Could have adverse effects on Barbados through both trade and capital flows, financial instability. This would put pressure on the balance of payments. Fiscal deficits would remain elevated as the revenue base narrows." ### Protracted period of slower growth in emerging economies - Likelihood of Realization: Medium - Expected Impact if Threat is Realized: - "Trend growth would be lower as a result of weaker than expected productive capacity and human capital, in addition to cyclical forces." - Low: "Tourism relies on advanced country market and the Caribbean region." - "However, forward looking strategy aims to expand arrivals from EM countries. Also, the negative impact could be tempered by an accompanying decline in fuel prices." ### Risk from the financial system - Likelihood of Realization: Medium - Expected Impact if Threat is Realized: - "The non-performing loan (NPL) ratio remains high. Commercial banks’ exposure to the government has increased, suggesting that deteriorating fiscal performance could pose risks to the financial system." - Low: "NPLs that have remained on banks’ balance sheets for prolonged periods could gradually result in higher provisioning and write-offs, dragging down future profitability. Higher sovereign risk premiums would depress the economic value of government bonds and adversely affect banks’ capital positions." ### Other risks, including weather-related natural disasters and a possible increase in crime - Likelihood of Realization: Low - Expected Impact if Threat is Realized: - "Weather related disasters are limited in Barbados because of its latitude; and the country has always been considered one of the safest destinations in the Caribbean." - Low: "Weather related disasters are limited in Barbados but strong storms can cause damage. Crime is relatively low, but, this could change if the recession persists and social tensions rise." *Source: Annex III. Barbados: Risk Assessment Matrix (IMF staff report materials).* ### 1. This statement summarizes economic developments in Barbados since the ### _cr1452 - 1. This statement summarizes economic developments in Barbados since the ### Economic developments update - The additional information does not change the thrust of the staff appraisal. - Public service reduction: Of the 3000 layoffs planned, 1,800 were enacted by January 31, including 1,000 from public enterprises; the remainder are expected to take place before March 31. - Central government wage bill for 2013/14 is likely to be higher than predicted in the staff report because staff understood retrenchments would occur in January; government approved severance payments to retrenched workers with over two years of service. - Central government deficit for 2013/14 could be higher than projected; Parliament approved “supplementary” requests for budget transfers totaling BDS$146 million (1.7 percent of GDP), although the extent to which these reflect “new” extra-budgetary spending is unclear. - Central bank holdings of Treasury-bills have not increased since end-November. Short-term interest rates have risen from 3.2 to 3.3 percent since December. - Foreign reserves: provisional figure at December 31, 2013 is US$580 million (staff’s estimate was US$565 million); reserves declined by about US$35 million in January to US$545 million by January 28 (3.2 months of imports), owing mainly to large fuel-related payments and external debt service. - Real GDP growth: authorities estimate a decline of 0.2 percent in 2013; staff retain their estimate of a 0.7 percent contraction due to statistical discrepancies (see paragraph 46, and Supplement 1, page 10). Staff will update projections upon receiving more detailed information. - Banking sector indicators: NPLs as a share of total loans fell to 11.3 percent in September 2013 from 13.9 percent in June 2013, largely due to repayment of one large corporate loan in the hotel sector. CAR rose to 22.6 percent in September 2013 from 21.5 percent in June 2013. ### Authorities' perspective and growth strategy - Authorities appreciate Fund dialogue and broadly agree with staff proposals; they have begun implementing fiscal measures and structural changes to restore fiscal balance and economic growth. - Recovery since 2008: real output contracted by an estimated 0.2 percent in 2013 and real GDP remains 3 percent below the 2008 level. - Unemployment rate is 11.2 percent and inflation rate is 2 percent. - Competitiveness: In the Global Competitiveness Report 2013-14, Barbados outperforms the region in institutional strength, infrastructure, health, education, labor market efficiency, financial market development, and technological readiness; on par in business sophistication and innovation; weaker on market size and the macroeconomic environment. Barbados has become more competitive on price than the average Caribbean and Central American country. - Focus sectors: tourism, international business and finance, agro-processing, and green energy. About US$1.5 billion of already known investment is projected over the next three years. - Government support: fiscal incentives, catalyst actions for private investment, improving infrastructure, jump-starting priority projects, and improving business facilitation. ### Fiscal policy and recent measures - Authorities dispute characterization of earlier policies as countercyclical; note reserves increased in 2009 and remained above 2008 levels until April 2013. - Immediate fiscal objective: contain aggregate spending so import demand does not exceed foreign exchange inflows. - Reserve cover: equivalent of 19 weeks of imports at end-2012 (compared to 16 weeks at onset of crisis in 2008); reserve cover at December 2013 was 15 weeks. - 19-month austerity program introduced in August with further measures in December; measures include restraint in the wage bill and other current outlays, particularly to public enterprises. - Measures instituted since Minister of Finance’s December announcement: - Layoffs in the public sector commenced from the beginning of January 2014 and are targeted at reducing employment in the public sector by 10 percent; - The consolidation tax was implemented and is projected to yield about BDS$24.0 million for a fiscal year; - The tax on commercial bank assets has begun to accrue, with the first payment due on February 15, 2014; - The Municipal Solid Waste tax became effective in January 2014, with the first payment due in June 2014; - A freeze on all non-statutory discretionary waivers unrelated to the earning and/or direct saving of foreign exchange for the next three years. - Social partnership: national consultation held in July 2013; social partners meet regularly; economic strategy monitored monthly by a committee of top technocrats in the Ministry of Finance and Economic Affairs and the Central Bank of Barbados. ### Structural reforms and institutional measures - Since 2010: Medium-Term Fiscal Strategy (MTFS) and Medium-Term Development Strategy (MTDS); in 2013 government started implementing the Medium-Term Growth and Development Strategy (MGDS). - Recent initiatives: reduction in the VAT for tourism services; additional financing for small and medium-sized hotels; plans to enhance and modernize the business climate with a “one-stop shop”; establishment of an island-wide open wireless internet network to encourage ICT use. - Public sector reform efforts focus on tax system reform and management of state-owned entities. - CARTAC-led technical assistance: first phase completed; assistance sought for monitoring state-owned entities, improving financial management practices, addressing tax administration challenges, and forming a central revenue authority. - Barbados Central Revenue Authority is targeted to be established on April 1, 2014. ### Debt outlook - Outstanding debt balance of government and state corporations: BDS$9.1 billion, of which 35 percent (US$1.6 billion) is foreign debt. - Government and statutory bodies hold deposits, sinking funds, foreign reserves, and other liquid assets of BDS$3.5 billion. - Net public sector debt: BDS$5.6 billion, equivalent of 67 percent of GDP. - Servicing of foreign debt absorbs about 6 percent of current account inflows; foreign debt servicing projected to remain below 10 percent for the next 5 years. - Government interest payments for domestic and foreign debt are projected at 27 percent of revenue for the 2013/14 Fiscal Year (ends in March). - Barbados maintains a record of servicing domestic and foreign debt fully and on schedule. ### Monetary policy and liquidity - Since April 2013, Central Bank of Barbados has provided guidance on interest rates through intervention in the Treasury Bill tender. - External financial accounts are open to non-portfolio flows de facto; domestic interest rate trends follow comparable US interest rates but may deviate with domestic liquidity conditions. - At policy introduction, domestic liquidity was ample and short-term rate declined by a few basis points; despite excess liquidity, the domestic Treasury bill rate has risen more recently. - Temporary increase in Central Bank credit to the government due to decline in foreign exchange reserves and constriction of domestic financing; banks used funds that might otherwise have financed the government to purchase foreign exchange from the Central Bank. - This temporary switch between domestic and foreign assets in the Central Bank's balance sheet is expected in a fixed exchange rate regime; balance will decline with achievement of the 2014/15 fiscal target. ### External sector developments - In October the government tested the market for a US$500 million international bond issue (emerging market bond index eligible); needed only US$250 million of new money and planned exchange of US$250 million of outstanding issues. - After investor meetings, market costs were deemed too high and required funds were borrowed through private placement. - Authorities believe staff exaggerates Barbados' vulnerability to global financial market volatility; by staff calculations Barbados does not need to access international capital markets during the forecast period to maintain foreign reserves at the equivalent of 3 months' cover, provided private capital flows return to normal levels. - Authorities contend link between Barbados' tourism receipts and growth in main tourist markets is not immutable and that sophisticated marketing and diversification strategies are being implemented to break these links. ### Financial sector assessment - Authorities generally agree with FSSA recommendations and are adopting many recommendations, including legislative revisions (Financial Institutional Act, Central Bank of Barbados Act) and support establishing a credit bureau. - Financial system assessment: credit quality and profitability issues exist, but sector remains stable and liquid with well-capitalized institutions. - Banks’ NPL ratio rose to 13.8 percent in mid-2013, but fell to 11.3 percent as at end-September with resolution of a large corporate NPL (hotel sector). - Given the banking system is totally foreign-owned, authorities have maintained a good regulatory relationship with Canada, which holds majority interest in the banking sector. ### Summary and risks - Authorities have put in place an economic strategy for growth and adjustment focused on private sector-led growth in foreign exchange earning sectors, improving product quality and offerings, raising factor productivity, developing new products and services, targeted marketing, developing nontraditional markets, and improving business facilitation. - Fiscal policy is being used aggressively to protect the peg while supporting foreign exchange earning sectors. - A medium-term program of structural adjustment is underway to improve government efficiency. - Downside risks exist but are mitigated by the resilience of the Barbadian economy and its institutional strength. *Statement by Mr. Hockin, Executive Director for Barbados and Mr. Dalrymple, Advisor to Executive Director — February 10, 2014* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1452.pdf_