Press Release No. 18/203

IMF Executive Board Concludes 2017 Article IV Consultation with Barbados

May 30, 2018

On January 26, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1] with Barbados.

Following the economic recovery in 2016, GDP growth is slowing reflecting increased pace of fiscal consolidation. Real growth reached 1.6 percent in 2016, as a result of continued robust long-stay tourism arrival and spending. It is projected to slow to 0.9 percent in 2017 and 0.5 percent in 2018 due to the ongoing fiscal adjustment and policy uncertainty related to the forthcoming elections. Inflation is projected to rise by year end to 5.5 percent as a result of recent tax increases but return to its historical norm in the medium term.

The current account balance continues to narrow but international reserves are falling. The current account deficit declined to 4.4 percent of GDP in 2016, about of half that in 2014, due to lower energy prices and a recovery in export earnings. Notwithstanding, NIR continued to decline with lower official and private capital inflows, to about US$275 million at end-September (1.6 months of imports). The current account deficit is projected to continue to narrow to 3.7 percent in 2017, and to 2.9 percent of GDP in 2018 as a result of lower imports, but continued weakness in the financial account and delayed privatization will contribute to weak reserves.

There has been progress with fiscal consolidation but the deficit and debt remain high. The fiscal deficit is estimated to have declined to 5.5 percent of GDP in FY2016/17 reflecting stronger revenue performance, including the introduction of the National Social Responsibility Levy (NSRL) and one-off factors. The government also reduced total expenditure, despite a large increase in debt service, reflecting efforts to contain spending across the board. Staff project further progress in reducing the fiscal deficit, to 4.1 percent of GDP in FY2017/18 without divestment proceeds. However, this is less than planned as a result of shortfalls in NSRL revenues and higher transfers to SOEs. Central government debt at end-FY2016/17 was 137 percent of GDP or 101 percent of GDP excluding securities held by the National Insurance Scheme (NIS).

The larger than expected fiscal deficit is increasing funding challenges. While the central bank significantly reduced its funding of the government in the first half of FY2017/18, the commercial banks’ reserve requirements for holding government securities have been increased, increasing banks’ exposure to sovereign risk. The financial sector remains stable with banks well capitalized. Financial soundness indicators show further progress in reducing NPLs by commercial banks and credit unions. However, private sector credit growth continued to be subdued and banks’ profitability remains weak.

Executive Board Assessment^[2]

Executive Directors noted that after an improved economic performance in 2016, the Barbados economy is slowing down. Large fiscal deficits, high debt, and low reserves are posing challenges. Directors emphasized that a stronger macroeconomic framework and bolder structural reforms are needed to achieve fiscal and debt sustainability, address the large financing needs, build adequate international reserves, and boost growth.

Directors welcomed the authorities’ consolidation efforts over the past two fiscal years. They stressed that additional efforts will be necessary to balance the budget over the medium term, given the urgency in tackling the high debt, meeting the funding requirements, and addressing the balance of payment needs. They recommended that adjustment measures should focus on expenditure, primarily supported by reform of the State‑Owned Enterprises (SOEs). Efforts to contain the wage bill and reform of government pensions, while improving revenue administration and broadening the tax base, including by reducing exemptions, would also be important. Progress with these reforms could allow for a partial reversal of the increase in the National Social Responsibility Levy.

Directors emphasized that a comprehensive restructuring of SOE operations is critical to address the structural imbalance in the public sector, in particular by reducing government transfers. Priority should be given to defining clear objectives for SOE reform and implementing the Public Financial Management and Audit Act, as well as other measures. Directors also underscored the importance of making changes to the size and delivery of social programs to contain their cost and ensure their long‑term viability.

Directors encouraged the authorities to continue efforts to phase out direct financing of the government by the central bank and to reorient monetary policy towards supporting the fixed exchange rate regime. They also called for steps to ease the recent increase in statutory requirements for banks to hold government securities. Directors noted that banks remain well capitalized and that NPLs have been declining. They encouraged the authorities to enhance regulatory and supervisory frameworks, especially for non‑bank financial institutions, to strengthen the AML/CFT regime, and to proceed with legislative amendments to increase Central Bank independence. Directors also called for sustained action to bolster reserves.

Directors emphasized that stronger and deeper structural reforms are critical to unlock the economy’s growth potential and maintain macroeconomic stability. They underscored that reforms should focus on strengthening the business environment, facilitating economic diversification, and improving the efficiency and effectiveness of public service delivery.

Directors supported the authorities’ efforts in improving the timeliness and quality of economic data.

[1] Under Article IV of the IMF Articles of agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of the Executive Directors and this summary is transmitted to the country authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm