Press Release No. 13/506

Press Release: Statement at the Conclusion of the IMF Article IV Consultation Mission to Barbados

December 13, 2013

A team from the International Monetary Fund (IMF) visited Barbados during December 3-13 to conduct discussions for the 2013 Article IV consultation. The team met with Minister of Finance Christopher Sinckler; Minister of Tourism and International Transport Richard Sealy; Minister of Industry, International Business, Commerce and Small Business Development Donville Inniss, Central Bank Governor DeLisle Worrell, members of the Legislature and representatives from the private sector, labor unions, and academia.

At the conclusion of the visit, Ms. Nicole Laframboise, the IMF mission chief, issued the following statement:

“The Barbados economy continues to face considerable economic challenges. The authorities agreed with staff on the need for urgent policy adjustments and deeper reforms over an extended period to restore fiscal and external sustainability. Weak exports and tourism arrivals, slow growth, and expansive fiscal policy have led to a sharp increase in public debt and fiscal financing pressures. Real output is projected to fall by 0.7 percent in 2013. Inflation has declined and is forecast to average 2.3 percent for 2013. In the external sector, tourism receipts have remained flat and the current account deficit is projected to widen to 11.4 percent of GDP this year. Together with a sharp drop in private capital inflows in 2013, international reserves have fallen this year to US$468 million at end-October.

“In this environment, the fiscal position has come under increasing strain. The central government deficit is expected to rise to 9.5 percent of GDP in 2013/14 and central government debt had risen to 94 percent of GDP by September 2013. Spending cuts under the authorities’ budget proposals announced in August are broadly on track, but tax revenues are falling short of projections. The authorities plan to take additional measures to strengthen adjustment and reduce pressures on the balance of payments.

“A strategic, comprehensive approach is needed to address the underlying weaknesses in public finances and to increase efficiency in the public sector. Policy formulation should be guided by a medium-term fiscal anchor to reduce central government debt to below 85 percent of GDP by 2018. A fundamental review of the tax system is warranted, and the authorities have requested technical assistance on this from the IMF. The goal would be to broaden the revenue base, which has been seriously eroded by statutory and discretionary waivers. In the interim, a number of measures could be taken to significantly improve the yield by strengthening compliance and efficiency in revenue and customs administration.

“The central government wage bill rose to 10.3 percent of GDP in 2012/13, the highest in the region, which together with interest payments limits room for investment spending. Staff takes note of the government’s decision to reduce the civil service up front. This will lower spending and send a strong signal about policy commitment, though these workers should have access to unemployment support and programs for re-employment. Alternatively, downsizing by attrition and implementing a wage formula that freezes the average wage per worker would also reduce the wage bill significantly over time and would contribute to lowering economy-wide labor costs. This is needed to raise Barbados’ external competitiveness, particularly given the nation’s deep commitment to its exchange rate peg, which the IMF recognises.

“There is scope to greatly improve the targeting of social spending and lower costs to ensure that Barbados retains its high standards of equity and social protection. There is some duplication across ministries, and some social programs, such as childcare and housing, are not well targeted and may be benefiting middle and higher income groups at the expense of the most needy.

“It will be critical to address weaknesses in the oversight and operations of the statutory bodies, whose financial performance in many instances is not available. In the near term, the authorities could establish an independent oversight mechanism tasked with enforcing compliance and accountability. Equally urgent, the operations of the main state entities should be reviewed with a view to identifying their strategic purpose, reducing losses and raising efficiency. Fund technical assistance in support of reform of statutory bodies is expected to start in early 2014.

“Under a new interest rate policy framework in place since April, the Central Bank of Barbados (CBB) has increased its holdings of Treasury bills in 2013, resulting in a decline in short-term yields. Direct financing of the government, which is exacerbating pressures on the balance of payments, should be reversed and short-term interest rates allowed to rise to levels more consistent with safeguarding the exchange rate anchor. This would demonstrate that monetary policy is supportive of the currency peg.

“The financial sector, particularly banks, has remained strong, although deteriorating macroeconomic conditions have had a significant impact on asset quality and profitability. Vigilance and strong regulation and supervision will be important in the period ahead, as continued economic weaknesses could further weaken asset quality. The oversight of commercial banks should be strengthened by better monitoring of credit risks and collateral values, as well as aligning the provisioning schedule more closely with international norms. Prudential oversight of credit unions should also be strengthened and a two-tier supervisory framework considered. In the insurance sector, liability valuations and capital adequacy standards should be introduced, and cross-border group supervision and information-sharing enhanced.

“A number of large scale private investment and public works projects are expected to come on stream in the coming months, supporting a rebound in capital inflows and offsetting the drag on growth from fiscal adjustment. While these projects should enhance competitiveness, the role of the state should be carefully considered, particularly in the productive sectors, and contingent liabilities of the state minimized.

“The IMF remains committed to supporting the government of Barbados in its pursuit of macro stability and stronger growth. The team would like to thank the Barbados’ authorities and officials for their hospitality and constructive, candid discussions.”