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Barbados

Author(s):
International Monetary Fund
Published Date:
January 2012
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BACKGROUND

1. Barbados has been severely affected by the global economic crisis, which has curbed tourism and offshore activity with broader impact on other sectors. Economic activity is estimated to have contracted by a cumulative 5 percent between 2008 and 2010 with broad economic weakness also hurting the labor market. Depressed tourism receipts and high commodity prices have adversely affected the external sector putting pressure on reserves.

2. The government focused on social stability in the face of the economic crisis. The authorities responded to the economic slump by implementing a number of countercyclical measures to protect employment and minimize the impact of the crisis on vulnerable groups, while sustaining economic activity. A Tourism Investment Relief Fund was set up in 2009 to encourage the renovation of tourism related facilities and an employment stabilization scheme was introduced to allow employers to defer for one year their contribution to the National Insurance Scheme (NIS) contingent on the maintenance of employment levels. These measures combined with weak revenues to create a large fiscal deficit and worsened the debt-to-GDP ratio.

3. To stem the rising debt, the authorities developed a Medium Term Fiscal Strategy (MTFS) in early 2010. The strategy aims to reduce the fiscal deficit of the central government, balance the budget over the medium term, and reduce the debt-to-GDP ratio to 90.5 percent by 2014/15 while ensuring moderate growth. The framework proposes a number of revenue and expenditure measures to be pursued over the medium term. Based on these adjustments, the fiscal deficit to GDP ratio is projected to decline to 2.1 percent by 2013/14 and then to a balanced position by 2014/15. The MTFS went off track in the first year of implementation due to weaker global conditions and low revenues, and the authorities are currently revising the strategy. The MTFS is not binding however and no date has been established for the revised strategy to be in place.

Barbados: The Authorities’ Medium Term Fiscal Framework as of January 2010(Percent of GDP)
2010/112010/112011/122012/132013/142014/15
Act.Projections
Public debt116.8109.6108.1105.399.590.5
Domestic debt84.781.382.381.878.271.1
External debt32.128.325.823.521.319.4
Overall fiscal balance−8.3−7.3−5.2−4−2.10
Primary balance−2.6−1.112.13.75.4
Note: Central government only
Note: Central government only

4. Exchange system and statistics. The Barbados dollar has been pegged to the U.S. dollar at the rate of BD$2.00=US$1 since 1975. Barbados has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on current account transactions. Statistical data are broadly adequate for surveillance, though weaknesses remain.

RECENT DEVELOPMENTS AND OUTLOOK

5. The difficult global economic conditions continue to pummel Barbados with growth at anemic levels despite the rebound in tourism, while inflation is surging:

  • After two years of negative growth, real GDP growth in 2010 was a mere 0.2 percent. In the first nine months of 2011 GDP growth is estimated at around 1 percent due mainly to improved activity in the tourism and construction sectors.
  • Tourist arrivals increased by 8.7 percent y/y in August, 2011 (Box 1). However, real tourism expenditure declined by about 15 percent (y/y) in June 2011 as visitors cut their length of stay and looked for value, limiting the economic impact of the higher headcount, notably on reserve accumulation.
  • Pressures on prices have increased. Inflation is estimated to have reached 10.4 percent (y/y) in July 2011 due to high international oil and food prices. Non-core inflation—food, fuel and transportation—which constitutes about 57 percent of household consumption, increased by 14.4 percent. Inflation in Barbados consistently exceeds those in neighboring countries and trading partners, possibly reflecting a higher mark-up and wage-productivity gap in the domestic economy.
  • Money growth has eased, while credit to the private sector has dried up. Since 2008 broad money has grown marginally, rising only by 2.8 percent in 2010. Total deposit growth in the banking system decelerated after a peak in 2007, and is yet to fully recover. Growth of credit to the private sector has almost vanished, slipping further in September 2011 by 0.2 percent (y/y). At the same time, the spread between the average loan and deposit rates narrowed slightly as the average loan rate declined to 9 percent.

Barbados: Tourist arrivals and GDP growth

Box 1.Barbados: Recent Developments in the Tourism Sector

After a weakening in 2009 following the global financial crisis, tourism in Barbados has rebounded. Tourist arrivals grew by 2.6 per cent in 2010, although comparative destinations appear to be gaining more market share in the wake of the financial crisis. However, while the turnaround continues into the first eight months of 2011, it has yet to reflect on foreign exchange reserves due to declining tourism spending.

Tourist Arrivals in Barbados: Major Source Markets
200820092010Growth Rate (%)
20092010Jan-Aug.11
Canada57,33563,75172,35111.213.5−2.3
UK219,953190,632181,054-13−0.510.2
Germany6,0987,0207,26015.13.430.7
Other Europe25,72723,05223,962-103.914.5
United States131,795122,306134,969-7.210.47.8
Trinidad and Tobago28,38526,28927,259-7.43.726.9
Other CA RICOM72,25462,48258,923-14−5.79.7
Other Countries26,12023,03226,402-1214.64.1
Total567,667518,564532,180-8.62.68.7
Total Cruise Passenger Arrivals597,526635,212664,7476.34.64.6
Source: Caribbean Tourism Organisation
Source: Caribbean Tourism Organisation

Tourist arrivals from major source markets remain strong. Data from January to August 2011 show that arrivals from major source markets improved substantially, with Europe outpacing the others. Notably, the growth in regional arrivals, especially from Trinidad and Tobago, underscores the importance of the Caribbean market to Barbados. Overall, the growth in arrivals was enhanced by intensified marketing, air lift capacity expansion in source markets, due partly to the introduction of low-cost carriers, and a number of sporting events in Barbados. However, arrivals may weaken next year, as the UK Air Passenger Duty is re-introduced, airlines adopt the Emissions Trading Scheme (ETS), and London hosts the 2012 Summer Olympic Games.

Barbados continues to face fierce competition from emerging tourist destinations. Barbados is one of the most mature tourist destinations in the Caribbean offering beach-type products for exclusive clientele. Emerging tourist destinations in the region, particularly the Spanish-speaking countries, which account for 40-60 percent of the Caribbean market share, compete with Barbados for tourists from the same source markets, with the Canadian market being severely affected recently. Available data indicate that these rival destinations offer similar products at much lower prices.

Long Stay Tourist Arrivals: Regional Comparison
200820092010Growth Rate (%)
20092010Jan-May,
Barbados567,667518,564532,180−8.62.65.8
British Virgin Island345,934308,793330,343−117.03.5
Martinique481,226443,202476,492−7.97.53.8
St. Lucia295,761278,491305,937−5.89.82.1
St. Maarten475,410440,185443,136−7.40.7−2.9
Source: Caribbean Tourism Organisation

St. Maarten (Jan - Mar.)

Source: Caribbean Tourism Organisation

St. Maarten (Jan - Mar.)

Brand repositioning, further airlift capacity expansion and global recovery are critical to improve tourism activity. Barbados needs to continue to reinvent and expand its products, while engaging more in marketing. Relative to competitors, the destination enjoys a more balanced market penetration. Nevertheless, securing more airlift, especially from emerging markets, reduction in cost of access and global recovery are critical to enhancing growth in tourist arrivals in the near to medium term.

6. The prolonged adverse economic environment has negatively affected the labor market. The unemployment rate has almost doubled since 2007 from 6.7 percent to 12.1 percent in June 2011. Faced with declining profitability, private sector employers are no longer able to maintain employment levels despite government incentives (including postponement of national insurance contributions) to retain workers. The average unemployment rate in tourism, construction, and wholesale and retail trade sectors increased from 9.8 percent in June 2007 to 16 percent in June 2011.

7. The current account deficit has widened in recent times due to higher oil and food prices. The current account deficit rose to 9 percent of GDP for the first nine months of 2011, compared with 8.7 percent for the corresponding period of 2010, mainly due to higher oil and food prices. Even though oil imports volumes declined, price surges of up to 42 percent increased the fuel import bill by about one-third. International reserves, however, reached 4.5 months of imports at end-September 2011 having been boosted by public and private capital inflows.

8. Fiscal performance remains worrisome. The FY 2010/11 central government deficit widened to about 8½ percent of GDP from 8.2 percent of GDP in FY 2009/10. Expenditures increased by ½ percentage points of GDP, while revenue weakness, particularly in corporate taxes, implied an overall deficit in excess of the budget target. The overall fiscal deficit for the non-financial public sector (NFPS) reached 7.3 percent in FY 2010/11. Budget execution in the first half of FY 2011/12 appears to be on track to achieve an overall central government deficit target of 5.1 percent of GDP, and 4.1 percent of GDP for the NFPS.

9. Public debt continues to rise though rollover risks are limited. At the end of FY 2011, total public sector debt was 117 percent of GDP, up from about 91 percent two years earlier. Domestic debt accounts for about 70 percent of public debt, mostly at fixed rates. Its main holders are the NIS and the domestic banking system. Debt rollover risks are limited since the NIS will continue to buy government securities and hold them to maturity (Box 2). In addition, external debts are mostly long term and have a favorable amortization profile.

Box 2.Barbados: Sectoral Balance Sheet Mismatches and Macroeconomic Vulnerabilities

Macroeconomic vulnerabilities have increased in Barbados since 2006 due to the high public sector debt and the deterioration in the net financial position with nonresidents. Staff used the Balance Sheet Approach to analyze changes in macroeconomic vulnerabilities in Barbados between 2006 and 2009. The main finding of the analysis is that the balance sheet of the aggregate economy has weakened by the recent deterioration in the balance sheet of the non financial public sector. The private sector, however, seems to be healthy and resilient to shocks. A sensitivity analysis of the balance sheet impacts of a 30 percent devaluation shows that the economy would struggle to withstand large exchange rate devaluation with the public sector the most vulnerable.

Barbados: Net Foreign Currency Position

(Percent of GDP)

The Non-Financial Public Sector (NFPS)

The NFPS appears to be the most vulnerable sector in Barbados because of its negative net financial and net foreign currency positions. The recent high fiscal deficits have weakened the net financial position of the sector. Most of the NFPS’ liabilities are denominated in domestic currency but the limited foreign currency assets have generated a net negative foreign currency position making it less resilient to exchange rate shocks.

However, the negative financial position does not seem to make the public sector particularly vulnerable to sudden shifts in investor sentiment. External debt is mostly long term and has a favorable amortization profile, while domestic debt is held by relatively stable investors, including the domestic financial system and the National Insurance Scheme.

The Public Sector: Net Financial Position

(Percent of GDP)

The Private Sector

The balance sheet of the private sector appears sound because of its positive net financial and net foreign currency positions. The financial sector does not appear vulnerable to the direct effects of exchange rate devaluation. Regulatory requirements on liquidity and foreign exchange exposures have induced banks to remain liquid and only modestly exposed to foreign currency risk. Declining profitability has affected the net financial position of the non financial corporate sector but net foreign currency position is still positive.

The analysis suggests the need to reduce macroeconomic vulnerabilities by reducing the level of public debt; accumulating foreign reserves; promoting market based hedging mechanisms, strengthening prudential oversights to limit foreign currency mismatches in the financial sector; and promoting the development of domestic securities markets to allow domestic residents to diversify their exposure from the non financial public sector.

Barbados: Central Government Debt by Creditor(Percent of GDP)
2008/092009/102010/11
External22.625.729.0
Multilateral5.96.77.8
Bilateral1.21.00.8
Commercial4.14.03.9
Bond placements11.414.016.5
Domestic53.561.168.1
Short Term10.813.615.4
Long term42.647.652.7
Domestic debt by creditor
Central bank1.01.21.1
Commercial banks13.415.616.0
National Insurance Scheme20.022.927.0
Insurance sector4.25.06.2
Private sector8.710.211.3
Others6.16.16.5
Source: Barbadian authorities and Fund staff estimates
Source: Barbadian authorities and Fund staff estimates

10. The banking system is stable and well capitalized but non-performing loans are on the rise and loan loss provisioning remains low. At the end of June 2011, bank capital averaged about 17.4 percent of risk-weighted assets. Non-performing loans increased from 7.9 percent in December 2009 to 10.3 percent in September 2011 due to two substandard loans to the hotel sector, while provisioning remained at around 3½ percent. The ratio of liquid assets to total assets increased sharply to 12.8 percent, pointing to ample liquidity in the banking system. Stress test results from the Central Bank show that commercial bank would, under reasonable additional stress, remain adequately capitalized.

Barbados: Financial Soundness Indicators, 2006-11 1/(In percent)
20062007200820092010Jun-11
Capital adequacy ratio 2/14.416.416.117.517.117.4
NPLs to total loans4.42.83.57.210.910.5
Provision for loan loss to total loans1.51.52.23.33.43.4
Return on equity14.313.511.59.911.77.5
Credit to the private sector, grow th yoy13.26.411.11.40.3−0.7
Liquid assets to total assets7.99.59.010.810.412.8
Sources: Central Bank of Barbados; and Fund staff estimates.

Onshore banking system; data for December unless otherwise indicated.

Does not include local branches of foreign banks;

Sources: Central Bank of Barbados; and Fund staff estimates.

Onshore banking system; data for December unless otherwise indicated.

Does not include local branches of foreign banks;

11. The economic outlook for the remainder of this year and 2012 is likely to remain weak, predicated on the tepid global recovery. While tourism is picking up, the rest of the economy is sluggish. Real GDP growth is expected to be just over 1 percent building on an anticipated further rebound in tourism. Higher international oil and food prices are expected to push inflation to slightly above 7 percent y/y in December 2011, with some easing in 2012. The external current account deficit is projected to widen to about 10% percent of GDP due in part to lower export receipts and high oil and food prices, this year and narrow in 2012. The reserve coverage would remain at around 4 months of imports by year-end supported by steady private and public capital inflows.

12. The medium term economic prospects are uncertain with risks tilted to the downside. The current tepid and uncertain pace of the global recovery is likely to weigh on growth in Barbados. Given the weak labor market conditions in the U.K. and U.S., Barbados’ major source markets, sustained increases in tourist arrivals appear challenging. Consequently, the output gap will only narrow in the medium term. Barbados’ high level of public debt severely constrains room for further government spending in areas such as capital projects which might boost growth prospects. A further slowdown in advanced economies will dampen the recovery and put additional pressures on the macroeconomic situation.

Output Gap and GDP Growth

13. Global economic developments will weigh heavily on the balance of payments in the medium term. Barbados’ reserves are projected to fall continuously in nominal terms due to weak external demand for tourism. Reserve coverage above three months of imports would be sustained over the medium term provided that strong net FDI inflows are observed with the revival in the main trading partners and tourism source markets. At the same time, the current account deficit is projected to decline to 5.6 percent of GDP in 2016.

Barbados: Medium Term Macroeconomic Framework (Current Policies)–Staff Projections(In percent of GDP, unless otherwise indicated)
Est.Projections
200820092010201120122013201420152016
Real GDP growth (percent)−0.2−4.20.20.91.21.52.02.52.8
Average inflation (percent)8.13.75.86.95.94.24.24.14.2
Fiscal deficit (central government)−4.6−8.2−8.3−5.1−4.0−3.2−2.4−1.6−1.5
Public debt90.9104.0116.8116.5116.3114.8112.6110.0107.2
Current account deficit−9.6−5.6−8.5−10.5−9.8−8.2−7.7−6.5−5.6
Gross reserves (millions of US$)680744786764741721683685692
Gross reserves (months of imports)3.44.44.44.13.83.63.33.23.1
Sources: Barbados authorities; and Fund staff estimates and projections.
Sources: Barbados authorities; and Fund staff estimates and projections.

14. The authorities stand ready to take additional actions if risks were to worsen in the near-term. Staff and the authorities discussed the need to develop fiscal contingency plans to reduce spending or increase revenues should global economic conditions worsen in order to achieve the budget targets and maintain external stability.

POLICY DISCUSSIONS

The main policy challenge is to implement a credible fiscal consolidation strategy without jeopardizing the still-fragile recovery. To this end, policy discussions focused on fiscal consolidation and external stability, financial sector stability and the regulation of the nonbank financial institutions, and the authorities’ efforts to improve competitiveness and promote growth.

A. Fiscal consolidation and debt reduction

15. Staff sees the main macroeconomic challenge as fiscal consolidation against the backdrop of the high level of public debt. With public debt on an unsustainable trajectory, the priority is to reduce the debt to below 100 percent of GDP in the medium term. Staff argued for the implementation of a comprehensive medium-term fiscal strategy, based on realistic macroeconomic assumptions as a lynchpin of a credible fiscal consolidation plan. In this context, the coverage of the authorities’ revised Medium Term Fiscal Strategy (MTFS) would have to be broadened to include public enterprises, a major source of rising debt. The revised MTFS needs to be supported by a long-term strategy to significantly reduce the debt level since debt levels of around 100 percent of GDP pose unsustainable debt servicing risks.

16. The 2010 Article IV mission recommended a number of revenue enhancing and expenditure reducing measures to consolidate fiscal imbalances and reduce the debt levels. On the revenue side, the mission suggested an increase in the VAT by 3 percentage points to 18 percent combined with the broadening of the tax base, elimination of exemptions and improvements in tax administration. On the expenditure side, the mission recommended bringing down public sector wages and spending on goods and services and adjusting tariffs in public utilities. The authorities implemented some of the recommendations including raising the VAT rate from 15 to 17.5 percent for a period of 18 months, an increase on excise taxes on gasoline by 50 percent, and the elimination of some tax free allowances for travel and entertainment. In addition, bus fares were raised and some fees and charges for dispensary services were adjusted. However, containing expenditure growth generally has proved more challenging.

17. Staff and the authorities agreed on the need to focus fiscal consolidation on expenditure reduction since room for further tax increases is limited. In particular, measures to reduce public wage spending and transfers to public enterprises should remain the focus of the expenditure reductions. In this direction, staff recommended the following measures:

  • Curb the public wage bill by freezing wages for at least two years and reduce the wage to GDP ratio to the level in the mid 2000s. This would require reducing the current ratio from 10 percent of GDP to 8.5 percent.
  • Similarly, lower the ratio of transfers to GDP to the level in the mid-2000s. This would require reducing the current ratio from 12 percent of GDP to 10 percent.
  • Raise tariffs in public enterprises and combine with efficiency improvements to limit losses. Consider privatization and outsourcing where feasible.
  • Make the recent increase in the VAT rate permanent, broaden the tax base and explore the scope for increasing the corporate tax rate particularly for offshore operations as activity recovers.
  • Develop a plan to reduce tax exemptions (currently estimated at BD$500 million annually, 5.6 percent of GDP) by at least 15 percent by 2015. Intensify monitoring of exemptions in order to minimize leakages and prevent abuses. Publish data on companies receiving concessions to enhance transparency.
  • Continue efforts to improve revenue administration and public financial management.

Barbados. Tax exemptions and fiscal deficits

(Percent of GDP)

18. Staff’s medium term active fiscal adjustment scenario would put public debt on a downward path thereby enhancing external stability without destabilizing social cohesion. The adjustment scenario is based on an aggressive fiscal effort similar to the one proposed in the medium term fiscal strategy. The cumulative impact of the recommended measures will be a reduction in the central government deficit from 8.3 percent in FY 2010/11 to a surplus of 3.2 percent in FY 2016/17. As a result, total public sector debt would gradually fall to about 92 percent of GDP by the end of FY 2016/17. Relative to the baseline scenario, public debt will be about 15 percentage points of GDP lower in FY 2016/17.1 Slower wage growth could have beneficial signaling effects on the private sector and would reduce imports’ growth and improve the current account balance in the medium term.

Central Government Balance (Percent of GDP)

Public Debt (Percent of GDP)

19. Barbados’ high level of public debt raises debt sustainability concerns. Debt sustainability analysis suggests that even under the adjustment scenario with the required aggressive fiscal efforts, the public debt would not follow a sustained downward path under most standardized shocks. Debt sustainability will remain vulnerable until debt ratios decline further in the long run.

20. While welcoming the fiscal adjustment proposed in the 2011/12 budget, staff pointed out that even more consolidation would be necessary to put Barbados’ debt on a sustainable path. The FY 2011/12 budget, presented to Parliament in early August, proposes to reduce the central government deficit further to 5.1 percent of GDP in line with the existing Medium Term Fiscal Strategy (MTFS). The budget narrows the deficit by about 1 percentage point of GDP over the budget estimates. Most of the savings are projected to come from improvements in the efficiency of government and cuts in spending on goods and services, wages, and transfers. The overall deficit for the nonfinancial public sector is projected at 4½ percent of GDP in 2011/12. Staff encouraged the authorities to develop contingency plans in the event uncertainties especially on growth, in the global and domestic environment materialize. Staff urged the authorities to identify concrete measures to help achieve the budget target as well as on a contingency basis. Even under the best implemented MTFS, Barbados’ debt remains very high, above 90 percent of GDP.

21. Staff urged the authorities to reduce reliance on the NIS to finance public sector borrowing, while recognizing that NIS has limited investment opportunities. Dependence on NIS surpluses to finance public borrowing has permitted delays in fiscal adjustment (the NIS exposure to the government increased from 54 percent in 2005 to 69 percent in 2011).2 At close to 70 percent, NIS’ current exposure to government is well above the prudential guideline of below 54 percent recommended in the 2005 actuarial report. Noting increasing liabilities as the population ages, staff also cautioned that NIS be allowed to better match its assets and liabilities by limiting further exposure to the public sector. To increase investment opportunities, it remains important for Barbados to intensify efforts to promote the development of domestic and regional capital markets.

Barbados: Portfolio Composition of the National Insurance Scheme (August 2011)

Authorities’ Views

22. The authorities indicated their commitment to strengthen fiscal performance and place the public debt on a sustainable path. While recognizing the urgency for fiscal adjustment, they highlighted the risks of a further decline in economic activity by cutting expenditures too fast. They noted that they are currently revising the Medium Term Fiscal Strategy and remain committed to its implementation to help put the debt on a sustainable path. They concurred with staff on the need to reduce the wage bill and transfers and plan to reduce the public work force by natural attrition. Staff and the authorities agreed on the need for engaging the social partnership to initiate a national discussion on the appropriate and affordable level of social spending, especially in light of the doubling in income per capita over the last two decades. The authorities also agreed with staff on the need to reduce tax exemptions since the level of exemptions is too high. They indicated that ad hoc waivers have already been cut by 10 percent and reiterated their commitment to further reducing exemptions by about 10 percent over the medium term.

23. The authorities disagreed with staff that reducing borrowing from the NIS would help NIS better match assets and liabilities. Reiterating limited domestic investment opportunities, they argued that no domestic investment, in the current environment, will yield returns comparable to government securities. Staff and the authorities, however, concurred that reducing the high fiscal deficits in pursuance of the medium term fiscal strategy will reduce the financing needs of the government and help reduce the reliance on the NIS. Staff and the authorities also agreed on the need to discourage direct lending to public corporations by the NIS and for NIS to pay attention to its capacity to monitor the wide range of projects currently being undertaken.

B. Monetary and Exchange Rate Policies

24. While the real effective exchange rate is broadly in line with fundamentals, concerns about external stability are increasing. Results from real exchange rate assessments do not provide any conclusive evidence of a significant misalignment of the exchange rate (Box 3). While results from the fundamental equilibrium exchange rate approach show the real effective exchange rate to be close to its equilibrium level, the macro balance and the external sustainability approaches show an overvaluation of between 7 and 11 percent. Further, declining reserves combined with a persistently higher inflation relative to peers, suggests a challenge to competitiveness. Staff shares the authorities’ view that the exchange rate peg has served the country and should be maintained. The sustainability of the peg, however, depends on the authorities’ ability to successfully address risks to external sustainability including related pressures on the current account from high fiscal deficits. The authorities stand ready to take additional actions if risks were to worsen including a strengthened fiscal effort.

Box 3.Barbados: Real Exchange Rate Assessments

Empirical analyses using the CGER methodologies do not provide any conclusive evidence of a significant misalignment of the real exchange rate. Specifically, the results from the fundamental equilibrium exchange rate approach suggest that the real exchange rate was close to equilibrium level at the end of 2010. Results from the macro balance and the external sustainability approaches suggest an overvaluation of between 7 and 11 percent.

The Fundamental Equilibrium Exchange Rate Approach

This standard approach specifies a relationship between the real exchange rate and a set of fundamentals: productivity differentials, terms of trade, government consumption, and net foreign assets. Estimating the equilibrium real exchange rate for Barbados may yield imprecise results given the limitation posed by the short sample size. Thus, the analysis is based on Pineda et al. (2009) specifying a panel consisting of 21 CARICOM and tourism-dependent economies, including Barbados. The results show that the REER was close to equilibrium at the end of 2010.

The Macro Balance Approach

In this analysis, the current account (CA) norm for Barbados is computed in a pooled panel setting based on estimates from Lee et al. (2008). WEO’s projections up to 2016 are used for the medium term fundamentals, which include: fiscal and oil balance relative to GDP, relative output and income, lagged CA, population growth and old age dependency ratio. The projected current account deficit of 5.6 per cent for 2016 is used as the underlying CA. The difference between the underlying CA and the CA norm (-3.8) is -1.8 percent. Using the export and import volume elasticities estimated by Lee et al (2008), the elasticity of the current account balance to the real exchange rate was computed as -0.3. As a result, the real exchange rate would be over-valued by 7 percent.

The External Sustainability (ES) Approach

The external sustainability approach computes the difference between the actual current account balance and the balance that would stabilize the net foreign asset (NFA) position at some benchmark level. Based on the assumption of an average medium term growth rate of 2 percent, and a medium term inflation rate for the US of 1.6 percent, stabilizing Barbados’ NFA at the 2010 benchmark level of -70 percent of GDP requires a current account deficit of 2.5 percent. Using the elasticity of CA to REER and underlying CA, as in the MB approach, the results point to and overvaluation of 11 percent.

25. Staff argued against further declines in interest rates due to potential pressure on reserves and the exchange rate, with uncertain impact on growth. The central bank’s response to the weak economy has been to ease monetary conditions, lowering the minimum deposit rate from 5 to 2½ percent. With inflation close to 7 percent, negative real deposit rates could create misalignment with policy rates in core economies, given usual country spreads, thus exacerbating pressures on foreign reserves and the exchange rate peg. Overtime, it is important to remove the floor on the deposit rates and move towards a market determined rate. Staff urged the authorities to avoid monetizing central government deficits to maintain credibility in the peg and curb inflation expectations.

26. The new foreign exchange regulation sends mixed signals to the financial sector and private investors about the credibility of the peg. In August 2011, the central bank introduced two changes to the foreign exchange regulation:

  • The introduction of a surrender requirement whereby authorized foreign exchange dealers are required to surrender 5 percent of their gross foreign exchange purchases to the central bank.
  • Reduction in the central bank’s selling rate on currency trades from BDS$2.035 per US dollar to BDS$2.015 per US dollar thereby lowering the margin for trades between authorized dealers and the general public. While the 5 percent surrender requirement may boost the supply of foreign exchange to the central bank, it is a backward step in the liberalization process. This change, while increasing the intermediary role of the central bank in foreign exchange transactions, could stymie the development of the interbank market. Staff therefore encouraged the authorities to review progress in the coming months to ensure that it is having the desired effect.

Authorities’ Views

27. The authorities reiterated their stance on retaining the floor on deposit rates and defended the new foreign exchange regulation. They noted that the minimum deposit rate acts primarily as a signal to banks concerning the prevailing economic conditions. They argued further that the expected benefits of the removal of the floor such as improved market efficiency and the development of capital markets would not materialize due to the oligopolistic structure of the banking sector in Barbados. On the foreign exchange regulation, the authorities’ intention is to boost competition in the foreign exchange market, while agreeing with staff on the need to monitor international reserves carefully.

C. Financial Stability and Regulation

28. The high level of non-performing loans may persist in the near term, while the banking system should remain resilient to adverse shocks in the real economy. Staff pointed out that the recent increase in non-performing loans requires closer supervision. The authorities argued that the recent sharp increase in NPLs is associated with two hotel loans concentrated in one bank. Excluding the two loans, the NPL ratio is estimated to be around 6.6 percent, which is slightly higher than the central bank’s prudential guideline of 5 percent. Recent stress tests results from the central bank suggest that in the near term, while loan delinquency is expected to remain high under various macroeconomic stresses, banks’ capital positions would remain sufficient to cover the potential losses. Staff stressed the need to make the financial sector more resilient to shocks through frequent monitoring and improved risk management. Staff commended the authorities on the progress made in implementing the recommendations of the 2008 FSAP Update (see Appendix II) and welcomed the fact that the money laundering and financing of terrorism (AML/CFT) bill was before Parliament. Staff looked forward to its final approval.

29. Efforts to resolve problems in the insurance sector are underway. Notably with respect to CLICO, a final report of the Judicial Manager has been submitted to the Supreme Court. With the options laid out by the Judicial Manager to the High Court ranging from outright liquidation to the formation of a new company, a decision by the authorities is needed to move ahead (Box 4). The preferred option of the Judicial Manager is unlikely to materialize due to the weak financial position of the Barbadian and ECCU governments. In the absence of fiscal space, it is important to seek a private sector solution to the resolution of CLICO. Meanwhile, the resolution of British American Insurance Company (BAICO) is near completion. The judicial managers for BAICO in Barbados had recommended that the company’s assets be liquidated.3 Staff stressed the importance of a coordinated regional approach to financial sector supervision and the need for providing a mechanism for establishing a framework for crisis resolution.

Box 4.The Resolution of CLICO-Barbados

The collapse of the Trinidad and Tobago-based CL Financial Group represented a major financial shock to the Caribbean region. The rapid expansion of the group prior to the crisis was financed mainly by deposit-like annuity products (called EFPA) sold by the group’s insurance subsidiaries – the Colonial Life Insurance Company (CLICO) and British American Insurance Company (BAICO). The returns offered on these annuities were substantially higher than bank deposits rates, while not being subject to stricter banking regulation and supervision. These resources were then channeled to finance real estate and other investments (mainly in U.S.). With the deterioration of global economy in 2008, many of CL Financial’s subsidiaries faced liquidity and solvency pressures. As news of difficulties spread, investors rushed to withdraw funds, triggering the collapse of its three financial subsidiaries in Trinidad and Tobago and related companies throughout the Caribbean, including Barbados.

While the resolution of CLICO/BAICO in jurisdictions with small exposures is nearly complete, the resolution in Barbados is under judicial management. On April 14, 2011, the Supreme Court of Barbados appointed Deloitte Consulting Ltd. as Judicial Manager (JM) of CLICO International Life Insurance Ltd. (CIL). At that time, the unaudited figures for CIL indicated a shortfall of the life insurance company of about US$196 million (4.4 percent of GDP). The July 28 CIL restructuring plan filed by the JM in the Barbados Court proposed that a new company be incorporated to hold the business of CIL and that on a proportionate basis 60% of policyholder value be transferred to the new company. Both traditional and EFPA policyholders would be issued with common shares in the company in exchange for the 40 percent write off in their policy values. These shares would be issued at little value but based on the company’s future growth the shareholders may recover some or all of the amounts lost.

The revised restructuring plan tabled in the Court of Barbados by the JM in September provided four restructuring options with funding implications between US$28 million and US$76 million. Under all restructuring approaches, there would be no financial impact on traditional policyholders, while effects would differ for EFPA policyholders:

  • Under US$76 million financing, individual and quasi government EFPA holders would receive full value for their policies in the form of annuities, while corporate EFPA holders would get full value of their policies in equity in the new company.
  • With US$52 million injection, individual policyholders would be 100% refunded in the form of annuities, whereas corporate and quasi government EFPA holders would get shares in the new company.
  • Under US$47 million funding, individual and quasi government EFPA holders would be entitled to annuities for the principal balance and shares for the interest on their policies, while corporate EFPA holders would get full value of their policies in equity in the new company.
  • With US$28 million financing, individual policyholders would receive the principal in the form of annuities and the value of the interest in shares, while corporate and quasi government EFPA holders would receive the full value of their investments in shares in the new company.

The government is in the process of deciding which option is best. Following the four options outlined by the JM the authorities are considering a fifth option, which may involve a sale of the traditional insurance business and or liquidation. The time frame for CLICO resolution is end of 2012.

The supervisory/regulatory needs in the non-bank sector calls for urgency to bring the Financial Services Commission (FSC) into operation. The collapse of CLICO and BAICO bring to the forefront the weakness of the insurance supervisory system, also responsible for supervising offshore companies. Barbados faces urgent needs to address weaknesses in the insurance regulatory environment.

30. Staff supported the authorities’ ongoing efforts to reform the supervisory framework. A new regulatory body—the Financial Services Commission—started work in April 2011 to bring under one umbrella the supervision of insurance, pensions and securities. The BAICO/CLICO affairs have exposed the fragility of insurance supervision in the country and staff urged the authorities to prioritize insurance supervision. Staff encouraged the authorities to continue strengthening the supervisory capacity of the FSC including through technical assistance from CARTAC and other international agencies.

Authorities’ Views

31. The authorities affirmed their commitment to minimizing fiscal costs in the resolution of CLICO. They indicated that they are considering a fifth option which may involve a sale of the traditional insurance business and/or liquidation, with the end of 2012 as the timeline for the conclusion of the resolution. The authorities also noted that the resolution of BAICO is near completion with a minimal level of exposure to the government. They concurred with staff on the need for regional frameworks to address financial sector problems and are actively involved in initiatives in this regard.

D. Growth Enhancing Structural Reforms

32. Raising total factor productivity is important to raising medium term growth prospects. Barbados has a relatively good business environment as attested by the World Economic Forum’s Global Competitiveness Index and the Travel and Tourism Competitiveness Index (TCI). The TCI ranks Barbados at the top of CARICOM and 3rd in the Americas behind the US and Canada (Box 5). However, total factor productivity in the country has been declining with important welfare consequences. Staff encouraged the authorities to continue their efforts to raise productivity. To this end, it is essential to improve the efficiency of government services including by consolidating agencies with complementary mandates and reducing the bureaucratic burden on the private sector. Staff supported the authorities’ efforts to reform public financial management, tax administration and debt management and to improve the energy mix by investing in renewable energy.

Box 5.Barbados: Structural Competitiveness

Barbados has a good business environment as attested by the World Competitiveness Index and the Travel and Tourism Competitiveness Index. Recent assessments by the World Economic Forum (WEF) show that Barbados has consolidated its global competitiveness position driven by excellent institutional environment, a first-class educational system, a well developed infrastructure, and technological readiness. Ranked 43rd among 139 countries in the 2011 Global Competitiveness Report, Barbados is more competitive than many countries in the Latin America and Caribbean region. Beyond its small market size, Barbados’ high deficit and debt levels and to a lesser degree the sophistication and innovation of its business sector affected its overall standing. Trade barriers and tariffs, crime and violence, HIV prevalence, inflexibility of wages, hiring and firing practices, low degree of customer orientation, restriction on capital flows, and low financing through the domestic equity market are factors that negatively affected the country’s ranking.

The tourism sector in Barbados is probably the most competitive in the Caribbean. The World Economic Forum’s 2010 Travel and Tourism Competitiveness Index ranked Barbados 28th, up two places from 2009. In the Americas, the country is ranked 3rd behind the US and Canada. The country’s two key strengths are its affinity for tourism and the priority given to the sector. High government expenditure, strong destination marketing campaigns, presence at key international tourism fairs and hosting of sport events attest to the importance of the sector to the economy.

However, Barbados displayed weaknesses into two measures: price competitiveness and policy rules and regulations. High energy cost, relatively high ticket taxes and airport fees, and high accommodation rates drive up the overall cost of stay. Although regulations on property rights, Visa requirements and openness of bilateral Air Service Agreements are commendable, the country appears uncommitted to the General Agreement on Trade in Services (GATS). Overall, to improve the policy environment, it may need to reassess its rules and regulations concerning foreign ownership of investments, capital controls, and the general ease and cost of setting up businesses.

Authorities’ Views

33. The authorities have embarked on a number of reforms to improve the business environment and make the public sector more efficient. First, they have launched a major IADB sponsored competitiveness project with four main pillars—incentives and regulations, business development architecture, improving trade logistics and trade facilitation, and strengthening the public-private dialogue on competitiveness. Second, they described ongoing efforts to modernize public procurement practices with the objective of improving the transparency and integrity of the system as well as lowering costs.

E. Statistical Issues

34. Given Barbados’ level of economic development, more needs to be done to improve the quality and periodicity of statistics. While data coverage is relatively good, serious weaknesses persist in the timely delivery of most macroeconomic data, including national accounts, prices, external, and debt data. Staff recommended the use of CARTAC technical assistance to help improve both the quality and timeliness of data and their release to the public.

STAFF APPRAISAL

35. Barbados continues its struggle out of the global economic crisis and a slow recovery is underway. Real GDP growth will be tepid at less than 1 percent this year despite higher tourist arrivals, as overall economic activity is subdued. Weak external demand for tourism will limit international reserves accumulation. The medium term prospects are uncertain with risks tilted to the downside. The current weak and uncertain pace of the global recovery is likely to weigh on growth in Barbados in the near term.

36. The main policy challenge is to implement a credible fiscal consolidation strategy without jeopardizing the still-fragile recovery, To put Barbados’ debt on a sustainable path while supporting the peg, the medium-term fiscal strategy (MTFS) needs urgent implementation, beginning with concrete expenditure cutting measures. While the recent temporary hike in the VAT rate is commendable, it should be made permanent. More effort is also needed to curb spending and rationalize government services, while the coverage of the MTFS should be broadened to include public enterprises.

37. Fiscal consolidation should have an expenditure focus since room for further tax increases is limited. Measures to reduce public wage spending and transfers to public enterprises should remain the focus of the expenditure reductions. Staff recommends reducing the wage bill (including a wage freeze) and transfers to public enterprises to trim spending. Tariffs in public enterprises need to be raised to limit losses and tax exemptions minimized.

38. Staff supports the fiscal adjustment pursued in the 2011/12 budget while highlighting the need for more concrete measures to achieve budget targets and bring the debt to a sustainable level. It is essential to develop contingency plans to ensure that budget execution is above and beyond targets in view of uncertainties in the global and domestic environment. Staff urges the authorities to intensify efforts to rein in government spending particularly on wages and non-essential services, better prioritize new government projects and broaden the tax base to bring the debt on a firm downward trajectory.

39. While the exchange rate peg has served the country well, it needs to be reinforced by a credible fiscal consolidation effort to lower deficits and support external stability. The sustainability of the peg will depend on the authorities’ ability to successfully address risks to external sustainability related to ongoing fiscal deficits and high public debt. While the exchange rate is close to equilibrium, efforts should be intensified to address the risks to external stability from large fiscal imbalances. Given the weakening in reserve coverage and the authorities’ commitment to the exchange rate peg, it is important to monitor net foreign reserves closely. Staff sees the need to maintain a positive interest rate differential vis-à-vis the United States to encourage capital inflows.

40. The banking system is stable and healthy but regulation needs to be strengthened. The recent increase in nonperforming loans coupled with low loan loss provisioning poses risks to the financial system, although banks have adequate capital buffers. It is essential to make the financial sector more resilient to shocks through frequent monitoring and improved risk management. Financial sector resilience would be enhanced through better risk management and upgrading of provisioning requirements to international standards. Further, monitoring should be stepped up, including through better information from banks on their loan portfolio.

41. Staff encourages the authorities to minimize fiscal costs in any plan to resolve CLICO and to seek a private sector solution. The CLICO failure underlines the importance of a coordinated regional approach to financial sector supervision and the need for providing a mechanism for establishing a framework for crisis resolution. Staff supports the authorities’ ongoing efforts to reform the supervisory framework, including through the newly operational Financial Services Commission (FSC). Staff encourages them to continue strengthening the supervisory capacity of the FSC including through technical assistance from CARTAC and other international agencies.

42. Measures to improve productivity should remain high on the agenda. While indicators of non-price competitiveness do not point to serious competitiveness problems, total factor productivity growth has been disappointing. Improving the efficiency of government services including consolidating agencies with complementary mandates and reducing the bureaucratic burden on the private sector will help boost productivity growth. Staff welcomes the authorities’ efforts to improve the energy mix by investing in renewable energy.

43. It is recommended that the next Article IV consultation with Barbados be held on the standard 12-month cycle.

Figure 1.Barbados: Macroeconomic Developments, 2000-11

Sources: Central Bank of Barbados; and Fund staff projections.

1/ Includes errors and omissions.

Figure 2.Barbados: Economic Performance in a Regional Context

Sources: Central Bank of Barbados; Caribbean Tourism Organization; and Fund staff estimates.

Figure 3.Barbados: External Stability

Sources: Caribbean Tourism Organization; country authorities; and Fund staff estimates.

1/ Estimation of ERER based on panel data of 21 tourism-dependent countries defined as those where tourism exports exceed 20 percent of total exports: Antigua and Barbuda, The Bahamas, Barbados, Belize, Cyprus, Dominica, Dominican Republic, Egypt, Fiji, Greece, Grenada, Jamaica, Jordan, St. Kitts and Nevis, Malta, St. Lucia, St. Vincent and the Grenadines, Mauritius, Samoa, Seychelles, and Vanuatu.

Figure 4.Barbados: Financial Sector Indicators Compared to its Peers in the Region

Sources: International Financial Statistics; National authorities; and Fund staff estimates.

Figure 5.Barbados: Fiscal Sector Developments and Financing

Table 1.Barbados: Selected Economic, Financial, and Social Indicators
I. Social and Demographic Indicators (most recent year)
Population (2009 in millions)0.3Adult literacy rate99.4
Per capita GDP (2009 in US$)14,050Population below poverty line13.0
Life expectancy at birth in years77.2Gini coefficient42.0
Rank in UNDP Development Index (2010)42Unemployment rate12.1
Main products, services and exports: tourism, financial services, rum, sugar, and chemicals.
II. Economic Indicators
Est.Proj.
200720082009201020112012
(Annual percentage change)
National accounts and prices
Real GDP3.8−0.2−4.20.20.91.2
Nominal GDP6.8−3.11.1−2.95.05.1
CPI inflation (average)4.08.13.75.86.95.9
CPI inflation (end of period)4.87.24.36.67.24.6
External sector
Exports of goods and services5.42.1−11.01.40.22.3
Imports of goods and services3.98.9−15.45.25.12.8
Real effective exchange rate (average)−2.43.92.64.6
Terms of trade−1.3−5.17.3−5.3−4.71.0
Money and credit
Net domestic assets9.411.33.10.51.85.1
Of which: private sector credit6.411.11.40.31.73.3
Broad money13.22.82.82.83.34.9
Velocity (GDP relative to broad money)1.41.31.31.21.31.3
(In percent of GDP, unless otherwise indicated)
Public finances (fiscal year)1
Nonfinancial public sector overall balance−7.8−6.5−7.1−7.3−4.1−2.9
Central government
Revenue and grants28.530.025.926.626.928.5
Expenditure28.832.032.333.730.630.7
Interests4.44.55.05.85.76.1
Balance−4.5−4.6−8.2−8.3−5.1−4.0
NIS2.92.93.23.42.82.6
Public enterprises−1.7−1.8−2.3−2.3−1.9−1.5
Off-budget activities−4.5−3.00.10.00.00.0
Primary balance−4.2−2.9−3.2−3.60.52.1
Debt
Public sector (fiscal year)81.890.9104.0116.8116.6116.4
External25.625.528.832.130.728.9
Domestic56.265.475.384.785.987.5
Savings and investment
Gross domestic investment20.817.315.114.114.415.8
Public7.25.95.14.82.62.8
Private13.511.29.79.111.813.0
National savings16.87.79.45.63.96.0
Public−0.4−0.6−4.1−4.8−1.40.0
Private17.28.313.610.45.46.0
External savings4.09.65.68.510.59.8
Balance of payments
Current account−4.0−9.6−5.6−8.5−10.5−9.8
Capital and financial account7.59.25.75.510.09.3
Official capital0.3−1.44.73.21.30.0
Private capital 2/9.95.3−0.17.66.88.3
Of which: long-term flows8.65.00.43.26.27.8
Overall balance3.9−2.2−0.51.0−0.5−0.5
Memorandum items:
Exchange rate (Barbados dollars per U.S. dollar)2.02.02.02.0
Gross international reserves (millions of US dollars)774.0679.6743.9785.7764.2741.2
Gross international reserves (months of imports)4.23.44.44.44.13.8
Nominal GDP (Millions of Barbados dollars)3/8,9718,6918,7868,5298,9559,412
Sources: Barbados authorities; and Fund staff estimates and projections.

Fiscal year is from April to March. Fiscal coverage is the non-financial public sector

Includes short-term and long-term flows, and errors and omissions.

The nominal GDP data series was revised in 2010.

Sources: Barbados authorities; and Fund staff estimates and projections.

Fiscal year is from April to March. Fiscal coverage is the non-financial public sector

Includes short-term and long-term flows, and errors and omissions.

The nominal GDP data series was revised in 2010.

Table 2A.Barbados: Nonfinancial Public Sector Operations 1/(Percent of GDP, unless otherwise indicated)
Act.Act.Act.Est.Proj.Proj.
2007/082008/092009/102010/112011/122012/13
Public sector
Current revenue33.334.629.830.631.733.7
Current expenditure33.436.836.939.036.036.4
Interest to the private sector4.44.64.95.75.45.8
External1.81.91.82.12.22.2
Domestic2.62.63.13.63.23.6
Capital revenue2.22.42.94.33.63.5
Of which : interest from the private sector0.90.90.92.00.80.7
Capital expenditure5.43.73.03.23.53.7
Balance-3.3-3.5-7.2-7.3-4.1-2.9
Off-budget activity balance-4.5-3.00.10.00.00.0
Off-budget investment−3.8−2.40.00.00.00.0
PPPs−0.8−0.70.00.00.00.0
Funds0.20.10.10.00.00.0
Overall balance-7.8-6.5-7.1-7.3-4.1-2.9
Of which : primary balance-4.2-2.9-3.2-3.60.52.1
National Insurance Scheme (NIS)
Current revenue5.76.06.06.06.36.3
Current expenditure4.54.84.65.35.45.7
Capital revenue1.91.82.03.32.42.4
Of which: interest from central government0.90.91.11.21.61.6
Capital expenditure0.10.20.20.50.50.5
NIS Balance2.92.93.23.42.82.6
Public sector balance, excluding NIS-10.7-9.4-10.4-10.7-7.0-5.5
Central Government
Current revenue28.530.025.926.626.928.5
Current expenditure28.832.032.333.730.630.7
Of which : interest payments4.44.55.05.85.76.1
External1.61.71.61.82.02.0
Domestic2.82.83.44.03.74.1
Capital revenue and grants0.00.10.40.00.20.1
Capital expenditure and net lending4.32.72.21.31.61.8
Balance-4.5-4.6-8.2-8.3-5.1-4.0
Public enterprises balance-1.7-1.8-2.3-2.3-1.9-1.5
Total financing7.86.57.17.34.12.9
Foreign financing4.6-0.32.52.90.8-0.3
Central Government3.9−0.12.52.90.8−0.3
Disbursements4.30.93.68.72.21.0
Amortization−1.2−1.4−1.1−5.8−1.4−1.4
Other, including privatization (net)0.00.00.00.00.00.0
Public enterprises0.7−0.20.00.00.00.0
Domestic financing3.26.84.64.33.33.2
Central government5.37.75.75.44.34.3
Public enterprises0.92.02.32.31.91.5
National Insurance Scheme−2.9−2.9−3.2−3.4−2.8−2.6
Funds−0.2−0.1−0.10.00.00.0
Memorandum item:
Nominal fiscal year GDP (millions of Barbados dollars)8,9018,7158,7228,6359,0699,537
Sources: Ministry of Finance; and Fund staff estimates.

Fiscal year (April—March). Ratios expressed relative to fiscal-year GDP.

Sources: Ministry of Finance; and Fund staff estimates.

Fiscal year (April—March). Ratios expressed relative to fiscal-year GDP.

Table 2B.Barbados: Central Government Operations 1/

(Percent of GDP) 2/

Act.Act.Act.Est.Proj.
2007/082008/092009/102010/112011/122012/13
Central government balance-4.5-4.6-8.2-8.3-5.1-4.0
Total revenue28.530.126.326.627.128.5
Current revenue28.530.025.926.626.928.5
Tax revenue27.428.524.725.525.827.4
Nontax revenue1.11.51.21.11.11.1
Capital revenue and grants0.00.10.40.00.20.1
Total expenditure33.134.634.535.032.232.5
Current expenditure28.832.032.333.730.630.7
Wages, salaries and NIS contributions9.19.69.910.09.69.5
Goods and services4.04.84.74.44.44.2
Interest4.44.55.05.85.76.1
Transfers11.313.112.613.611.010.9
Capital expenditure and net lending4.32.72.21.31.61.8
Off-budget activity balance-4.5-3.00.10.00.00.0
Overall balance 3/-9.0-7.6-8.1-8.3-5.1-4.0
Of which: Primary balance−4.6−3.1−3.1−2.60.62.1
Financing9.07.68.18.35.14.0
Memorandum item:
Total public sector debt (percent of GDP)81.890.9104.0116.8116.6116.4
Primary balance excluding off-budget activities−0.10.0−3.2−2.60.62.1
Nominal fiscal year GDP8,9018,7158,7228,6359,0699,537
Sources: Ministry of Finance; and Fund staff estimates.

Fiscal years (April-March).

Ratios expressed relative to fiscal-year GDP.

Includes off-budget activity.

Sources: Ministry of Finance; and Fund staff estimates.

Fiscal years (April-March).

Ratios expressed relative to fiscal-year GDP.

Includes off-budget activity.

Table 2C.Barbados: Statement of Government Operations—Central Government(Millions of Barbados dollars)
2008/92009/102010/112011/122012/13
Revenue26222296230124582722
Taxes24842152220323392612
Goods and services1079977105311751263
Income and profits893801743771887
Property158115150146172
International trade220178191207238
other taxes1914121424
Other revenue13814497119110
Grant income7353228
Non tax receipts1311089497102
Expense28992895299028302995
Compensation of employess833866860869904
Use of goods and services421414378395403
Interest396437500514578
Social benefits1137109711749961043
Other expense11281775667
Gross operating balance−278−599−690−373−274
Transactions in nonfinancial assets
Net acquisition of nonfinancial assets3851083186106
Net lending/borrowing−663−708−721−459−380
Transactions in financial assets and liabilities−663−708−721−459−380
Net acquisition of financial assets00011
Net incurrence of liabilities663708721459381
Domestic668488466386410
Foreign−521925473−29
Memorandum item:
Nominal GDP (in millions of BDS$)8,7158,7228,6359,0699,537
Source: Barbadian authorities and Fund staff estimates and projectionsNote: Data limitation does not allow a full production of non-financial public sector accounts in GFSM 2001 format.
Source: Barbadian authorities and Fund staff estimates and projectionsNote: Data limitation does not allow a full production of non-financial public sector accounts in GFSM 2001 format.
Table 3.Barbados: Public Sector Debt 1/
Act.Act.Act.Est.Proj.
2007/082008/092009/102010/112011/122012/13
(Millions of Barbados dollars)
Public sector7,2787,9199,07310,08610,57311,096
External2,2782,2242,5092,7722,7842,755
Domestic5,0005,6956,5647,3147,7898,341
Central government6,0846,6317,5748,3858,7019,082
External 2/2,0051,9712,2432,5052,5182,489
Domestic4,0804,6615,3315,8806,1846,593
Short Term8309441,1821,3321,1791,240
Long term3,2493,7174,1494,5485,0055,354
Government guaranteed1,1931,2881,5001,7011,8722,014
External 2/273253267267267267
Domestic9201,0351,2331,4341,6061,748
(Percent of GDP)
Public sector81.890.9104.0116.8116.6116.4
External25.625.528.832.130.728.9
Domestic56.265.475.384.785.987.5
Central government68.476.186.897.195.995.2
External 2/22.522.625.729.027.826.1
Domestic45.853.561.168.168.269.1
Short Term9.310.813.615.413.013.0
Long term36.542.647.652.755.256.1
Government guaranteed13.414.817.219.720.621.1
External 2/3.12.93.13.12.92.8
Domestic10.311.914.116.617.718.3
Memorandum items:
NIS financial assets30.834.335.537.737.737.6
NIS holdings of central government debt15.220.022.426.427.528.5
Public sector debt less NIS assets51.056.668.579.178.978.7
Public sector debt less NIS holdings66.570.981.790.489.187.9
Assets held in earmarked sinking funds6.27.58.69.79.79.7
Public debt, excl. sinking funds75.683.395.4107.1106.9106.7
Public debt, excl. sinking funds, and NIS holdings60.463.473.080.779.478.2
Sources: Ministry of Finance; Central Bank of Barbados; and Fund staff estimates and projections.

Fiscal year (April—March). Ratios expressed relative to fiscal-year GDP. Coverage is the non-financial public sector

External debt is all medium- and long-term debt.

Sources: Ministry of Finance; Central Bank of Barbados; and Fund staff estimates and projections.

Fiscal year (April—March). Ratios expressed relative to fiscal-year GDP. Coverage is the non-financial public sector

External debt is all medium- and long-term debt.

Table 4.Barbados: Balance of Payments(Millions of U.S. dollars)
Act.Est.Est.Proj.
200820092010201120122013201420152016
Current account-418-247-361-471-462-408-401-355-324
Exports2,0881,8591,8861,8901,9332,0282,1152,2392,364
Imports2,4122,0392,1452,2562,3192,3932,4752,5662,664
Exports of goods488379422449467491519554594
Of which: re-exports1206898106112120130142156
Imports of goods1,7101,2941,3901,4631,4851,5151,5491,5931,641
Of which : oil366255287303282268254258263
Services (net)899735709648632660670712745
Credit1,6011,4811,4641,4411,4661,5381,5961,6851,769
Of which: travel (credit)1,1941,0681,0521,0081,0141,0661,0981,1621,197
Debit7027467557938348789269731,024
Investment income (net)−121−87−121−127−131−127−128−120−119
Credit178233228249261275290305321
Debit300320350376392402419425440
Of which: interest on public debt838086100104110112105105
Current transfers (net)272020225582879196
Credit1219495104141173183192202
Debit94737682869196101106
Capital and financial account400251233450439388364357331
Long-term155223270335365328356319290
Public sector−6120413459−2−152−271
Private sector21619136276367343354346289
Of which: FDI flows21619136276367343354346289
Short-term92319292435333840
Public sector000000000
Private sector92319292435333840
Change in commercial banks assets15425−57855025−2500
Errors and omissions-76-28170000000
Overall balance (deficit -)-94-2342-21-23-21-3727
Reserve movements (- increase)94-64-4221232137-2-7
Memorandum items:
Current account (percent of GDP)−9.6−5.6−8.5−10.5−9.8−8.2−7.7−6.5−5.6
Current account after FDI (percent of GDP)−4.6−5.2−5.3−4.4−2.0−1.3−0.9−0.2−0.6
Exports of G&S (annual growth rate)2.1−11.01.40.22.34.94.35.95.5
Imports of G&S (annual growth rate)8.9−15.45.25.12.83.23.43.73.8
Gross international reserves (US $ million)680744786764741721683685692
In months of imports3.44.44.44.13.83.63.33.23.1
In percent of short-term liabilities 1/48.965.073.274.472.171.365.771.271.9
In percent of short-term liabilities, excluding nonresidents deposits98.4135.3162.6174.8169.3171.2151.8183.8185.6
Sources: Central Bank of Barbados; and Fund staff estimates and projections.

Short term liabilities include commercial banks foreign liabilities excluding foreign currency deposits, nonresident deposits of commercial banks, and public sector amortization falling due the following year

Sources: Central Bank of Barbados; and Fund staff estimates and projections.

Short term liabilities include commercial banks foreign liabilities excluding foreign currency deposits, nonresident deposits of commercial banks, and public sector amortization falling due the following year

Table 5.Barbados: Summary Monetary Survey
Prel.Proj.
20082009201020112012
(End-of-period stocks)
Net foreign assets9981,0081,1661,2931,347
Net domestic assets5,4655,6335,6635,7646,057
Net credit to the public sector514599439514637
Central government641721628710809
Rest of public sector388279177138138
Of which: NIS−515−401−366−335−310
Credit to the private sector4,9595,0275,0405,1265,295
Other items (net)−77184125125
Broad money (M2, liabilities to the private sector)6,4636,6416,8297,0577,404
Narrow money2,4582,3782,3332,4502,575
Currency480493499517548
Demand deposits1,9781,8851,8341,9332,027
Quasi-money4,0054,2634,4964,6074,829
Time deposits692627817847814
Saving deposits3,3133,6363,6793,7614,015
(Changes in percent of beginning-of-period liabilities to the private sector)
Net foreign assets−6.00.22.41.90.8
Net domestic assets8.82.60.51.54.1
Net credit to public sector1.01.3−2.41.11.8
Of which: central government3.21.2−1.41.21.4
Credit to private sector7.91.10.21.32.4
Other items (net)0.00.22.7−0.90.0
(Growth rates)
Net domestic assets11.33.10.51.85.1
Of which
Private sector credit11.11.40.31.73.3
Public sector credit13.616.6−26.616.924.1
Broad money2.82.82.83.34.9
Velocity (GDP relative to broad money)1.31.31.21.31.3
Interest rate on deposits (in percent per annum)4.12.72.7
Interest rate on loans (in percent per annum)10.39.79.4
Sources: Central Bank of Barbados; and Fund staff estimates and projections.
Sources: Central Bank of Barbados; and Fund staff estimates and projections.
Table 6.Barbados: Selected Vulnerability Indicators(Percent of GDP, unless otherwise indicated)
Act.Act.Prel.Proj.Proj.
20082009201020112012
Real sector indicators
Travel receipts27.524.324.722.521.5
Fiscal indicators1/
Public sector debt90.9104.0116.8116.6116.4
External25.528.832.130.728.9
Domestic65.475.384.785.987.5
Public sector external debt service3.23.06.74.73.6
Public sector external debt service, in percent of revenues8.89.119.213.39.6
Interest5.25.65.86.36.0
Amortization3.63.613.47.03.7
External indicators
Gross international reserves (in millions of US dollars)679.6743.9785.7764.2741.2
In months of imports3.44.44.44.13.8
In percent of short-term liabilities 2/48.965.073.274.472.1
In percent of short-term liabilities excluding nonresidents deposits98.4135.3162.6174.8169.3
In percent of narrow money55.362.667.462.457.6
External debt 3/34.737.939.637.935.9
External interest payments, in percent of exports 4/6.05.86.16.66.6
External amortization payments on public debt, in percent of exports2.82.810.65.83.3
Sources: Central Bank of Barbados; and Fund staff estimates and projections.

On a fiscal-year basis, including central government, public enterprises, and National Insurance Scheme.

Short-term liabilities include commercial banks’ short-term foreign liabilities and public sector debt amortizations falling due the following year.

Includes public sector and private debt.

Includes interest payments on public and private external debt.

Sources: Central Bank of Barbados; and Fund staff estimates and projections.

On a fiscal-year basis, including central government, public enterprises, and National Insurance Scheme.

Short-term liabilities include commercial banks’ short-term foreign liabilities and public sector debt amortizations falling due the following year.

Includes public sector and private debt.

Includes interest payments on public and private external debt.

APPENDIX I: DEBT SUSTAINABILITY ANALYSIS

1. The results of the debt sustainability analyses are broadly similar to those of the 2010 Article IV consultation. This section updates the debt sustainability analysis from the last Article IV consultation. While this assessment projects slightly lower public debt ratio over the medium term under the baseline scenario due to a somewhat stronger fiscal effort this fiscal year, debt remains high and vulnerable to shocks.

2. Staff conducted debt sustainability analyses based on baseline and adjustment scenarios. The baseline scenario assumes some fiscal adjustment based on the 2012 budget and continuation of current policies. The alternative scenario is based on the premise that the current fiscal adjustment would not be enough to bring about the desired reduction in the debt level. It assumes a number of additional policy measures to be implemented beginning in the FY 2012/13 and continuing in the medium term.

A. Main Assumptions and Scenarios

3. The baseline and adjustment scenarios share some common underlying assumptions:

  • Economic growth remains subdued and a recovery in the demand for Barbados’ goods and services commences in 2013.
  • There is no fiscal cost to the budget from the resolution of CLICO.
  • The recent increase in the VAT rate is made permanent and the fiscal balance improves in the medium term.
  • The exchange rate remains stable and capital inflows increases to finance tourism related investments.

The Baseline Scenario

4. The baseline scenario assumes some fiscal adjustment based on the 2012 budget and reflects continuation of current policies. Under this scenario, the non-financial public sector deficit is projected to decline from 7.3 percent in FY 2010/11 to 0.1 percent in FY 2016/17 as the country recovers from the economic recession and some of the fiscal measures implemented starts bearing fruit. Consequently, the public debt would decline from 117 percent to 107 percent in FY 2016/17. Externally, the current account is expected to adjust gradually to about 5.6 percent of GDP by 2016. Capital inflows will not be enough to cover the current account, resulting in a decline of reserve coverage from 4.1 months of imports in 2011 to 3.1 in 2016.

Barbados: Illustrative Scenarios (Percent of GDP)
Act.Est.Projection
20092010201120122013201420152016
Baseline scenario
Fiscal (Fiscal year)/1
Non-Financial Public sector balance−7.2−7.3−4.1−2.9−1.9−1.1−0.2−0.1
Primary balance−3.2−3.60.52.13.54.35.05.0
Revenues32.735.035.337.138.238.739.339.3
Expenditures39.942.239.440.040.139.839.639.3
Public debt104.0116.8116.6116.4115.0112.8110.3107.6
External
Current account (percent of GDP)−5.6−8.5−10.5−9.8−8.2−7.7−6.5−5.6
Current account balance after FDI (percent of GDP)−5.2−5.3−4.4−2.0−1.3−0.9−0.2−0.6
FDI inflows (percent of GDP)0.43.26.27.86.96.86.35.0
Gross international reserves (millions of US $)744786764741721683685692
Gross international reserves (months of imports)4.44.44.13.83.63.33.23.1
Adjustment scenario
Fiscal (Fiscal year)
Non-Financial Public sector balance−7.2−7.3−4.1−1.40.62.44.04.6
Primary balance−3.2−3.60.53.66.07.79.29.6
Revenues32.735.035.338.240.041.142.142.2
Expenditures39.942.239.439.739.438.738.137.5
Public debt104.0116.8116.6114.9111.1105.698.891.8
External
Current account (percent of GDP)−5.6−8.5−10.5−9.8−8.0−7.1−5.8−4.9
Current account balance after FDI (percent of GDP)−5.2−5.3−4.3−1.2−0.50.61.00.7
FDI inflows (percent of GDP)0.43.26.28.67.57.76.85.6
Gross international reserves (in US $ million)744786766782803844908993
Gross international reserves (months of imports)4.44.44.14.04.04.14.34.5
Sources: Ministry of Finance; Central Bank of Barbados; and Staff estimates and projections

Fiscal coverage is the non-financial public sector

Sources: Ministry of Finance; Central Bank of Barbados; and Staff estimates and projections

Fiscal coverage is the non-financial public sector

The Adjustment Scenario

5. The adjustment scenario is based on an aggressive fiscal efforts similar to those proposed in the Medium Term Fiscal Strategy (MTFS). The scenario assumes that additional fiscal measures will be undertaken starting in FY 2012/13 encompassing mainly expenditure reduction measures (see main report for details) and increased efforts to reduce tax exemptions and improve tax administration.

6. Most of the fiscal savings resulting from the expenditure reduction measures are expected to accrue in the medium term. Consequently, the NFPS balance will improve from a deficit of 7.3 percent of GDP to a surplus of 4.6 percent of GDP in 2016/17. Relative to the baseline, this represents a cumulative improvement in the public debt to GDP ratio of about 16 percentage points over the medium term. The scenario also assumes changes in the composition of spending in favor of capital spending and better targeting of social spending since they are critical to boosting growth.

7. The implementation of corrective fiscal measures would put public debt on a downwards path. After peaking in 2010/11 at 117 percent of GDP, public debt will reduce significantly to 92 percent of GDP by the end of FY 2016/17. Stronger investor confidence in the government’s fiscal policies will help increase capital inflows including for tourism related activities and thereby generate growth higher than under the baseline scenario.

8. The strengthened fiscal policy will help improve the current account and increase reserve coverage. Import growth will moderate as fiscal policy tightens domestic demand thereby improving the current account balance. The healthier pace of private capital inflows resulting from improved investor confidence would help international reserves to recover around 4.5 months of imports by 2016.

B. Assessment of Debt Sustainability Analysis

Baseline Scenario

9. Bound tests show that the public debt trajectory is vulnerable to standards shocks. Under baseline scenario, fiscal and growth shocks adversely and significantly affect the debt ratio. For instance, a permanent shock to growth of about a ¼ standard deviation from its historic levels will raise public debt to GDP ratio to 150 percent. In like manner, public debt will reach 120 percent of GDP if primary balance were to follow historic trends. A growth slow down in the UK and the US (Barbados’ main tourism markets) would raise the public debt to GDP ratio under the baseline scenario.

10. External debt is less sensitive to standard shocks mainly due to the comparatively low share of external debt in total debt. Under baseline scenario, total external debt after peaking at about 43 percent of GDP in 2010 will decline to 32 percent of GDP in 2016. Bound tests show that external debt is mostly sensitive to exchange rate devaluation. In particular, a 30 percent real depreciation would increase external debt to 48 percent of GDP by 2016.

Adjustment Scenario

11. Under the adjustment scenario, public debt is more resilient to standard shocks. The debt profile improves significantly under this scenario due to sustained fiscal adjustment and higher overall growth. Bound tests show that public debt will not continue to decline in the presence of most standard shocks and the fiscal account will remain vulnerable to shocks until debt ratios decline further in the long run External debt also improves and is more resilient under standard stress tests.

Appendix Table 1.Barbados: Public Sector Debt Sustainability Framework, 2005-2015 (Baseline Scenario)(In percent of GDP, unless otherwise indicated)
ActualProjections
200520062007200820092010201120122013201420152016Debt-stabilizing
primary
balance 9/
Baseline: Public sector debt 1/75.073.281.890.9104.0116.8116.5116.3114.8112.6110.0107.22.3
o/w foreign-currency denominated23.122.525.625.528.831.430.629.328.026.625.424.3
Change in public sector debt−0.1−1.98.69.113.212.8−0.3−0.3−1.4−2.2−2.6−2.7
Identified debt-creating flows (4+7+12)−1.6−1.37.711.110.311.71.3−0.3−1.3−2.1−2.6−2.6
Primary deficit3.32.15.33.94.43.7−0.1−2.0−3.5−4.2−4.9−4.9
Revenue and grants41.538.541.044.538.942.343.244.745.345.846.446.4
Primary (noninterest) expenditure44.840.646.348.443.246.043.142.741.841.641.541.5
Automatic debt dynamics 2/−4.9−3.32.47.25.98.01.41.72.32.22.42.3
Contribution from interest rate/growth differential 3/−4.9−3.32.47.25.98.01.41.72.32.22.42.3
Of which contribution from real interest rate−8.4−0.94.46.23.28.42.53.13.94.35.04.9
Of which contribution from real GDP growth3.5−2.4−1.91.02.8−0.4−1.1−1.4−1.7−2.2−2.7−2.6
Contribution from exchange rate depreciation 4/0.00.00.00.00.0
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2-3) 5/1.6−0.60.9−2.02.81.1−1.60.0−0.2−0.1−0.10.0
Public sector debt-to-revenue ratio 1/180.6189.9199.5204.1267.8276.1269.6260.3253.5245.8236.8231.1
Gross financing need 6/18.215.519.020.322.330.219.718.217.316.415.515.3
in billions of U.S. dollars0.70.70.80.91.01.30.90.90.90.90.90.9
Scenario with key variables at their historical averages 7/116.8118.6122.1125.4128.8132.3135.91.4
Scenario with no policy change (constant primary balance) in 2010-2016116.8120.4125.9131.9138.0144.5144.53.0
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)−5.33.62.8−1.2−3.10.41.01.31.52.02.52.5
Average nominal interest rate on public debt (in percent) 8/7.27.07.76.66.66.66.36.77.37.27.27.2
Average real interest rate (nominal rate minus change in GDP deflator, in percent)−14.0−1.0637.03.08.02.02.03.04.04.04.0
Nominal appreciation (increase in US dollar value of local currency, in percent)0.00.00.00.00.0
Inflation rate (GDP deflator, in percent)21.28.11.4−0.93.2−1.44.03.83.73.22.52.5
Growth of real primary spending (deflated by GDP deflator, in percent)0.4−6.217.13.4−13.46.9−5.40.2−0.51.72.42.7
Primary deficit3.32.15.33.94.43.7−0.1−2.0−3.5−4.2−4.9−4.9

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Appendix Figure 1.Barbados: Public Debt Sustainability: Bound Tests 1/

(Baseline Scenario, public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. 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.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2011, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Appendix Table 2.Barbados: External Debt Sustainbaility Framework, 2005-2016 (Baseline Scenario)(In percent of GDP, unless otherwise indicated)
ActualProjections
200520062007200820092010201120122013201420152016Debt-stabilizing
non-interest
current account 6/
Baseline: External debt36.235.837.036.037.041.340.238.035.834.031.830.3-3.3
Change in external debt−6.7−0.41.2−1.01.04.3−1.1−2.1−2.2−1.8−2.2−1.5
Identified external debt-creating flows (4+8+9)−1.8−1.0−3.55.84.85.24.01.60.80.2−0.6−0.2
Current account deficit, excluding interest payments7.83.81.36.83.25.77.67.05.45.04.03.3
Deficit in balance of goods and services8.34.53.87.44.16.18.28.27.36.95.95.2
Exports46.446.245.648.142.344.242.241.140.940.540.840.9
Imports54.750.849.455.546.450.350.449.348.347.346.746.1
Net non-debt creating capital inflows (negative)−1.7−2.5−5.2−5.0−0.4−3.2−6.2−7.8−6.9−6.8−6.3−5.0
Automatic debt dynamics 1/−7.9−2.30.44.12.12.62.52.42.32.01.61.5
Contribution from nominal interest rate2.22.22.72.92.42.72.92.82.82.72.42.3
Contribution from real GDP growth−1.3−1.1−1.30.11.5−0.1−0.4−0.5−0.5−0.7−0.8−0.8
Contribution from price and exchange rate changes 2/−8.8−3.3−1.01.1−1.9
Residual, incl. change in gross foreign assets (2-3) 3/−4.90.54.8−6.9−3.8−0.9−5.1−3.7−3.0−2.0−1.5−1.3
External debt-to-exports ratio (in percent)78.077.381.274.987.493.395.192.687.584.078.174.0
Gross external financing need (in billions of US dollars) 4/0.40.30.20.50.30.60.60.50.50.40.40.3
in percent of GDP11.57.55.311.06.813.113.011.29.68.67.95.6
Scenario with key variables at their historical averages 5/41.340.741.342.644.746.949.9-1.3
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)3.93.63.8−0.2−4.20.20.91.21.52.02.52.5
GDP deflator in US dollars (change in percent)25.910.02.9−2.95.5−3.24.13.93.73.42.52.5
Nominal external interest rate (in percent)6.96.88.17.56.97.17.47.47.88.07.57.5
Growth of exports (US dollar terms, in percent)20.813.55.42.1−11.01.40.22.34.94.35.95.5
Growth of imports (US dollar terms, in percent)11.45.73.98.9−15.45.25.12.83.23.43.73.8
Current account balance, excluding interest payments−7.8−3.8−1.3−6.8−3.2−5.7−7.6−7.0−5.4−5.0−4.0−3.3
Net non-debt creating capital inflows1.72.55.25.00.43.26.27.86.96.86.35.0

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Appendix Figure 2.Barbados: External Debt Sustainability: Bound Tests 1/

(Baseline Scenario; external debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. 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.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2011.

Appendix Table 3.Barbados: Public Sector Debt Sustainability Framework, 2005-2016 (Adjustment Scenario)(Percent of GDP, unless otherwise indicated)
ActualProjections
200520062007200820092010201120122013201420152016Debt-stabilizing
primary
balance 9/
1Baseline: Public sector debt 1/75.073.281.890.9104.0116.8116.6114.9111.1105.698.891.82.1
o/w foreign-currency denominated23.122.525.625.528.831.430.629.328.026.625.324.1
2Change in public sector debt−0.1−1.98.69.113.212.8−0.2−1.7−3.8−5.5−6.9−7.0
3Identified debt-creating flows (4+7+12)−1.6−1.37.711.110.311.71.4−1.7−3.6−5.4−6.8−7.4
4Primary deficit3.32.15.33.94.43.70.0−3.4−5.9−7.6−9.1−9.5
5Revenue and grants41.538.541.044.538.942.343.245.747.148.249.349.3
6Primary (noninterest) expenditure44.840.646.348.443.246.043.242.341.140.640.239.8
7Automatic debt dynamics 2/−4.9−3.32.47.25.98.01.41.72.32.32.32.1
8Contribution from interest rate/growth differential 3/−4.9−3.32.47.25.98.01.41.72.32.32.32.1
9Of which contribution from real interest rate−8.4−0.94.46.23.28.42.53.34.54.95.34.9
10Of which contribution from real GDP growth3.5−2.4−1.91.02.8−0.4−1.1−1.6−2.2−2.6−3.0−2.8
11Contribution from exchange rate depreciation 4/0.00.00.00.00.0
12Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.00.0
13Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.00.0
14Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.00.0
15Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.00.0
16 Residual, including asset changes (2-3) 5/1.6−0.60.9−2.02.81.1−1.60.0−0.1−0.1−0.10.0
Public sector debt-to-revenue ratio 1/180.6189.9199.5204.1267.8276.1269.7251.2236.0219.0200.4186.1
Gross financing need 6/18.215.519.020.322.330.219.716.814.913.111.310.6
in billions of U.S. dollars0.70.70.80.91.01.30.90.80.70.70.60.6
Scenario with key variables at their historical averages 7/116.8118.6122.1125.4128.8132.4136.01.4
Scenario with no policy change (constant primary balance) in 2010-2016116.8120.4125.9132.0138.3145.0145.03.1
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)−5.33.62.8−1.2−3.10.41.01.42.02.53.03.0
Average nominal interest rate on public debt (in percent) 8/7.27.07.76.66.66.66.36.77.47.57.77.7
Average real interest rate (nominal rate minus change in GDP deflator, in percent)−14.0−1.16.37.53.48.02.33.04.24.75.45.4
Nominal appreciation (increase in US dollar value of local currency, in percent)0.00.00.00.00.0
Inflation rate (GDP deflator, in percent)21.28.11.4−0.93.2−1.44.03.73.22.82.42.4
Growth of real primary spending (deflated by GDP deflator, in percent)0.4−6.217.13.4−13.46.9−5.3−0.6−0.71.31.92.2
Primary deficit3.32.15.33.94.43.70.0−3.4−5.9−7.6−9.1−9.5

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Appendix Figure 3.Barbados: Public Debt Sustainability: Bound Tests 1/

(Adjustment Scenario, public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. 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.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2011, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Appendix Table 4.Barbados: External Debt Sustainbaility Framework, 2005-2016 (Adjustment Scenario)(In percent of GDP, unless otherwise indicated)
ActualProjections
200520062007200820092010201120122013201420152016Debt-stabilizing
non-interest
current account 6/
Baseline: External debt36.235.837.036.037.041.340.238.035.834.031.730.1-2.6
Change in external debt−6.7−0.41.2−1.01.04.3−1.1−2.1−2.2−1.8−2.3−1.6
Identified external debt-creating flows (4+8+9)−1.8−1.0−3.55.84.85.24.00.7−0.2−1.4−1.9−1.7
Current account deficit, excluding interest payments7.83.81.36.83.25.77.77.05.24.43.42.6
Deficit in balance of goods and services8.34.53.87.44.16.18.28.27.16.35.34.5
Exports46.446.245.648.142.344.242.241.140.940.540.640.7
Imports54.750.849.455.546.450.350.449.348.146.846.045.2
Net non-debt creating capital inflows (negative)−1.7−2.5−5.2−5.0−0.4−3.2−6.2−8.6−7.5−7.7−6.8−5.6
Automatic debt dynamics 1/−7.9−2.30.44.12.12.62.52.32.11.91.51.3
Contribution from nominal interest rate2.22.22.72.92.42.72.82.82.82.72.42.3
Contribution from real GDP growth−1.3−1.1−1.30.11.5−0.1−0.4−0.5−0.7−0.8−1.0−1.0
Contribution from price and exchange rate changes 2/−8.8−3.3−1.01.1−1.9
Residual, incl. change in gross foreign assets (2-3) 3/−4.90.54.8−6.9−3.8−0.9−5.1−2.9−2.0−0.4−0.30.1
External debt-to-exports ratio (in percent)78.077.381.274.987.493.395.192.687.584.078.073.9
Gross external financing need (in billions of US dollars) 4/0.40.30.20.50.30.60.60.50.50.40.40.3
in percent of GDP11.57.55.311.06.813.112.911.29.38.07.24.9
Scenario with key variables at their historical averages 5/41.340.742.244.347.851.254.2-1.3
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)3.93.63.8−0.2−4.20.20.91.22.02.53.03.0
GDP deflator in US dollars (change in percent)25.910.02.9−2.95.5−3.24.13.93.22.92.42.4
Nominal external interest rate (in percent)6.96.88.17.56.97.17.27.37.88.07.57.5
Growth of exports (US dollar terms, in percent)20.813.55.42.1−11.01.40.22.34.94.36.05.7
Growth of imports (US dollar terms, in percent)11.45.73.98.9−15.45.25.22.82.62.73.63.7
Current account balance, excluding interest payments−7.8−3.8−1.3−6.8−3.2−5.7−7.7−7.0−5.2−4.4−3.4−2.6
Net non-debt creating capital inflows1.72.55.25.00.43.26.28.67.57.76.85.6

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Appendix Figure 4.Barbados: External Debt Sustainability: Bound Tests 1/

(Adjustment Scenario; external debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. 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.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2011.

APPENDIX II. STATUS OF THE IMPLEMENTATION OF THE 2008 FSAP UPDATE RECOMMENDATIONS

Discussions with the Authorities at the time of the Article IV Consultations reveal progress in the following areas:

  • Amendments are being considered regarding asset classification and provisioning. Phase 1 is a research project for delivery in 2012, while Phase II is part of the Basel II project to be finalized in 2015. Industry practices and international accounting standards are under review.
  • Capital adequacy regulations to be adjusted to include requirement to support the Market Risk Amendment. Internal training and preliminary discussions with banks have commenced.
  • Approach to Basel II implementation updated, focusing on Pillar 2 of the New Accord. The Bank has identified several projects, which will strengthen compliance and lay foundation for its readiness towards full implementation of the requirements in the future. Plans are underway to conduct an in-depth Basel II quantitative impact study.
  • Amendments to legislation have been drafted in relation to third party transactions and an aggregate limit for large exposures.
  • Revised consolidated returns are being devised as part of efforts to strengthen supervision.
  • All amendments to legislation, which are expected to be passed into law in 2012, would also address issues concerning consolidated supervision, the enforceability of the Bank’s guidelines and intervention measures, and powers to impose sanctions.
1

Under this scenario, nominal central government spending grows cumulatively by 16 percent between 2011 and 2016 compared with a cumulative 21 percent growth under the baseline scenario. Nominal revenues grow by a cumulative 56 percent over the same period compared with 45 percent under the baseline scenario. The revenue gains accrue mainly from reduction in exemptions and improvements in tax administration.

2

In addition, the share of NIS assets held locally increased from 90 percent to 96 percent over the same period.

3

Negligible costs to the government are expected.

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