Barbados: Staff Concluding Statement of the 2023 Article IV Consultation Mission and Staff Level Agreement for the Second Review under the Extended Fund Facility and the Resilience and Sustainability Facility
IMF News, November 13, 2023
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- Published: November 13, 2023
Economic performance and outlook
- Ten consecutive quarters of growth, driven by a rebound in tourism.
- After a 13.8 percent-rebound in 2022, real GDP is projected to expand by about 4.5 percent in 2023.
- The authorities are implementing the updated Economic Recovery and Transformation plan (BERT 2022) and an ambitious climate policy agenda.
- Policy focus: achieve inclusive and sustainable growth, increase resilience to climate change, maintain debt sustainability, and preserve social cohesion.
Inflation and labor market
- Inflation fell to 4.3 percent year-over-year as of mid-2023, from a peak of 6.7 percent recorded in May 2022.
- Contributing factors to lower inflation: lower international fuel prices and freight costs.
- Upward pressure on specific domestic prices from prolonged drought conditions and higher demand for restaurants and recreational activities due to tourism recovery.
- Economic recovery associated with higher job growth; unemployment claims and the unemployment rate have reverted to pre-pandemic levels.
External sector and reserves
- Gross international reserves rose to US$1.4 billion as of end-September, equivalent to almost 8 months of imports of goods and services.
- Reserve gains supported by improvement in the current account balance and loan disbursements from international financial institutions.
- The exchange rate peg remains a key anchor for macroeconomic stability.
- Staff’s external sector assessment: external position is broadly in line with the level consistent with medium-term fundamentals and desirable policies.
- The new Central Bank Act (2020) strengthened the policy framework for the peg by enhancing central bank autonomy, improving governance, and limiting monetary financing.
Fiscal outlook and public debt
- Authorities met the primary fiscal target set for the first half of FY2023/24.
- On track to raise the primary surplus to about 3½ percent of GDP by the end of the fiscal year.
- Public debt ratio has fallen to pre-pandemic levels and is projected to continue declining.
- Sovereign credit ratings are gradually improving.
- Authorities remain committed to reducing public debt to 60 percent of GDP by FY2035/36.
- Planned corporate income tax reform aligned with Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing; revenues expected to be primarily used to increase public investment.
- Authorities are gradually restarting domestic capital markets while maintaining adequate social spending and gradually increasing public investment.
Structural reforms and fiscal governance
- Ongoing measures to strengthen revenue administration and modernize the tax exemptions framework.
- Implementation of a new procurement framework and enhancements to public financial and investment management and fiscal governance, supported by IMF and development partner technical assistance.
- Policy and legislative framework for pension reform completed.
- Progress on state-owned enterprises (SOEs) reforms resumed after COVID-related interruption.
- Expected outcome: stronger fiscal balances, a more efficient public sector, and higher social and investment spending to support declining debt and sovereign risk, and to promote inclusive, climate-resilient growth.
Financial system stability and monetary toolkit
- Financial system has withstood recent shocks; banking system is well capitalized, has abundant liquidity, and is profitable.
- Banks’ non-performing loans have declined to the lowest levels in several years.
- High liquidity and long-standing capital controls have kept domestic interest rates broadly stable despite rising international interest rates.
- Financial soundness indicators and stress tests suggest the financial system is broadly sound and resilient.
- Central Bank of Barbados (CBB) conducted a comprehensive review to enhance its monetary policy toolkit under the fixed exchange rate regime (informed by IMF technical assistance).
- Objective of toolkit review: develop liquidity management instruments to enhance CBB capacity to manage monetary conditions and interest rate transmission while maintaining adequate international reserves to support the peg.
AML/CFT progress
- At its October 2023 Plenary, the Financial Action Task Force (FATF) made the initial determination that Barbados has substantially completed its action plan to strengthen the effectiveness of its AML/CFT regime and warrants an on-site assessment to verify implementation.
- Verification could allow Barbados to be removed from the FATF Grey List in 2024.
Growth agenda, digitalization, and private sector development
- To raise medium-term growth potential: enhance ease of doing business, boost economic efficiency, and stimulate private investment.
- Priority actions: improve trade and business facilitation, invest in skills and education, and promote digital technologies.
- The newly created Growth Council is intended to support BERT priorities to unlock growth potential.
- Digitalization benefits: increase public sector efficiency and service delivery, facilitate access to credit, enhance labor force participation, and support human capital.
Climate policy, resilience, and green transition
- Barbados highly vulnerable to climate change; authorities aim to make Barbados a green and fossil fuel-free country.
- Implementation involves policies and investments to adapt to climate change and adopt renewable energy sources; supported by the RSF arrangement and development partners.
- Renewables have gradually increased their share in the energy matrix; progress expected to continue as near-term impediments to adding renewables to the grid are addressed.
- Investments in climate-resilient infrastructure intended to reduce capital and output losses from natural disasters and contain adverse impacts on growth, public debt, and external accounts.
- Recent climate policy reforms and measures:
- Inclusion of a fiscal risk statement discussing climate change risks in the FY2023/24 budget.
- Approval of regulations to enhance efficiency and effectiveness of public procurement.
- Development of a sustainable/green public procurement framework and guidelines for green/climate budget tagging.
- Submission of a bill to Parliament to improve the disaster risk management framework.
- Actions to address regulatory gaps in battery storage to facilitate renewable energy investments.
- Climate reforms are expected to mobilize private sector resources for climate-related projects; efforts to mobilize and scale up climate financing are underway with development partner support.
Program review, financing, and IMF engagement
- IMF staff and the Barbadian authorities reached staff-level agreement on the completion of the second review of the EFF and the RSF.
- All quantitative program targets and structural benchmarks set for the second review under the EFF have been met.
- All reform measures set for the second review under the RSF have been implemented.
- The staff-level agreement is subject to approval by the IMF Executive Board, expected to consider the review in December.
- Completion of the review will make available:
- SDR 14.175 million (about US$19 million) under the EFF arrangement.
- SDR 42.525 million (about US$56 million) under the RSF arrangement.
Closing acknowledgement
- The mission team thanked the authorities and other counterparts for constructive and candid policy dialogue.
IMF Communications Department — November 13, 2023