Public Information Notice No. 11/153

Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Barbados

December 7, 2011

On December 05, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Barbados.¹

Background

The difficult global economic conditions continue to pummel Barbados with growth at anemic levels and inflation and unemployment rates moving up sharply. After two years of decline, real Gross Domestic Product (GDP) growth was only 0.2 percent in 2010, while estimates for the first nine months of 2011 show an expansion of 1 percent due mainly to improved tourism and construction activities. With overall economic activity remaining subdued, the unemployment rate almost doubled from 6.7 percent in 2007 to 12.1 percent in June 2011. Pressures on prices have increased with inflation estimated to have reached 10.6 percent (year-over-year) in August 2011, as commodity prices surged.

Fiscal performance remains under stress especially in the light of the high public debt. The Fiscal Year (FY) 2010/11 central government deficit rose to about 8.5 percent of GDP from 8.2 percent of GDP in FY 2009/10. Expenditures increased by 0.5 percentage points of GDP, while revenue weakness, particularly in corporate taxes, implied an overall deficit in excess of the budget target. However, budget execution for the first half of 2011/12 fiscal year appears to be on track to achieve an overall central government deficit target of 5.1 percent of GDP. Public debt continues to rise. At the end of FY2011, total public sector debt was 117 percent of GDP, up from about 90 percent of GDP two years earlier.

The current account deficit has widened in recent times due to higher oil and food prices. The deficit widened from 5.6 percent of GDP in 2009 to 8.5 percent in 2010. While import volumes contracted in the first nine months of 2011, higher commodity prices pushed up the import bill, further worsening the current account deficit to around an estimated 10.5 percent of GDP in 2011. International reserves, however, reached a comfortable 4.5 months of imports at end-September 2011 having been boosted by public and private capital inflows.

The economic outlook for 2011 is weak with growth expected to remain soft. While tourism is recovering, the rest of the economy is sluggish. Real GDP growth is therefore expected to turnout at less than 1 percent this year despite higher tourist arrivals. The medium term prospects are uncertain with risks tilted to the downside. A strong pick-up in economic activity depends heavily on improvements in labor market conditions in the U.K. and the U.S. International reserves are projected to come under pressure in the near to medium term.

Executive Board Assessment

Executive Directors noted that Barbados was hit hard by the global crisis and has yet to fully recover. Growth remains tepid despite a rebound in tourism, and risks persist from the weak and uncertain global economic environment. While cushioning the impact of the crisis, the authorities’ policy response has put pressure on public finances and further raised the public debt. Directors saw as the main challenge the need to undertake a credible fiscal consolidation without jeopardizing the fragile recovery and social cohesion.

Directors commended the authorities for adopting a revised Medium Term Fiscal Strategy aimed at generating a balanced budget and reducing the high public debt-to-GDP ratio. They emphasized that fiscal consolidation should focus on expenditure reduction, including lowering the wage bill, reducing transfers to public enterprises, and minimizing tax exemptions. To bring the debt on a firm downward trajectory, Directors encouraged the authorities to make further sustained efforts to curtail and prioritize government spending, and enhance revenue, including by broadening the tax base and making permanent the temporary hike in the Value-Added Tax. They also recommended expanding the coverage of the fiscal strategy to include public enterprises. In view of uncertainties in the global and domestic environment, Directors encouraged the authorities to develop contingency plans to ensure achievement of the fiscal targets. Directors welcomed the authorities’ plan to engage social partners in a national debate on the level of social spending.

Directors observed that the exchange rate peg has served the country well. They emphasized that a credible fiscal consolidation, together with efforts to enhance competitiveness, would be crucial to support the peg and external stability. With the projected medium-term decline in international reserves, Directors recommended close monitoring of net foreign reserves levels.

Directors noted that the banking system is stable and healthy. Nonetheless, the recent increase in nonperforming loans, coupled with low loan-loss provisioning, requires close monitoring and improved risk management. They welcomed the consolidation of supervision of the nonbank financial sector under the newly operational Financial Services Commission, and recommended strengthening its supervisory capacity. Directors encouraged the authorities to minimize fiscal costs in any plan to resolve CLICO and to seek a private sector solution. They noted that the CLICO failure underlines the importance of a coordinated regional approach to financial sector supervision and a mechanism for establishing a framework for crisis resolution.

Directors welcomed the relatively good business environment in Barbados. They emphasized the need to address the structural impediments to growth and improved competitiveness. They saw scope for raising the efficiency of government services and reducing the bureaucratic burden on the private sector.