Barbados: Staff Report for the 2000 Article IV Consultation

Barbados has a stable political system, and there is long-standing public consensus on key economic policies, including a fixed exchange rate with the U.S. dollar supported by prudent fiscal and wage policies. Owing to job creation mainly in the private sector, particularly construction, the unemployment rate continued to decline, reaching 9.8 percent at the end of 1999, 2 percentage points lower than a year before. The authorities' medium-term strategy aims at stabilizing and restructuring the economy to address ongoing trade liberalization.


Barbados has a stable political system, and there is long-standing public consensus on key economic policies, including a fixed exchange rate with the U.S. dollar supported by prudent fiscal and wage policies. Owing to job creation mainly in the private sector, particularly construction, the unemployment rate continued to decline, reaching 9.8 percent at the end of 1999, 2 percentage points lower than a year before. The authorities' medium-term strategy aims at stabilizing and restructuring the economy to address ongoing trade liberalization.

I. Introduction

1. The 2000 Article IV consultation discussions with Barbados were conducted in Bridgetown during July 18-August 1, 2000. The Barbados representatives included the Prime Minister (who is also the Minister of Finance and Economic Affairs), the Governor of the Central Bank of Barbados, senior government and central bank officials, and representatives of labor and business.1

2. In concluding the 1999 Article IV consultation on November 5, 1999, Executive Directors commended the authorities for the strong economic performance achieved through successful implementation of stabilization policies and structural reforms, and welcomed improvements in social indicators. Directors noted Barbados’ undiversified economic base and vulnerability to exogenous shocks. They pointed to the challenge posed by an aging population in the context of a generous social insurance system and the need to lower the public debt-to-GDP ratio, and supported comprehensive reform of the public pension system. Directors urged restraint in public sector wage policy to avoid weakening the fiscal position and to maintain external competitiveness. Relations with the Fund are summarized in Appendix I and with the Inter-American Development Bank (IDB) in Appendix II 2

3. The government reports statistics regularly in a wide range of areas. It is taking steps to improve the timeliness and consistency of data on the national income accounts, public enterprises, the financial system, and external accounts.

II. Recent Economic Developments

4. In 1999 real GDP grew by 2½ percent, down from 4½ percent in 1998 and an average of 3½ percent in the preceding five years (Figure 1 and Table 1). Growth came mainly from construction in the tourism sector and public infrastructure. Tourism declined by ¾ percent, attributable to the closing of some hotels for refurbishing and a slump at the end of the year because of concerns about the Y2K problem. Sugar production increased by over 11 percent in 1999 from a very low level in 1998 owing to drought in that year. Manufacturing output decreased by 2½ percent in 1999 in the face of continuing strong regional and extra-regional competition.

Figure 1.
Figure 1.

Barbados: Selected Economic Indicators, 1989-99

Citation: IMF Staff Country Reports 2000, 158; 10.5089/9781451805970.002.A001

Sources: Ministry of Finance; Barbados Statistical Services; and Central Bank of Barbados.
Table 1.

Barbados: Selected Economic and Financial Indicators

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

End of period.

Information Notice System; end of period.

Fiscal year (April-March).

In relation to money and quasi-money at the beginning of the period.

Refers to central government and government guaranteed debt.

5. Owing to job creation mainly in the private sector, particularly construction, the unemployment rate continued to decline, reaching 9.8 percent at the end of 1999, 2 percentage points lower than a year before. 12-month inflation rose from 1¾ percent to 3 percent during 1999 largely because of increases in energy and food prices. Barbados’ real3 effective exchange rate appreciated by 4 percent during 1999 mainly due to appreciation of the U.S. dollar, to which the Barbados dollar is pegged (Figure 2).

Figure 2.
Figure 2.

Barbados: Selected Price and Financial Indicators, 1988-2000

Citation: IMF Staff Country Reports 2000, 158; 10.5089/9781451805970.002.A001

Sources: Central Bank of Barbados; and IMF Information Notice System.Note: Retail Price Changes and Exchange Rate Development graphs are updated till June 2000. Nominal Interest Rates graph is updated till May 2000.

6. The overall balance of the public sector swung from a deficit of ½ of one percent of GDP in fiscal year 1998/99 to a surplus of ½ of 1 percent of GDP in fiscal year 1999/2000 (fiscal year is April-March) (Table 2). In relation to GDP, the central government budget deficit remained at about the same level in fiscal year 1999/2000 as in 1998/99—approximately 1¼ percent of GDP (Table 3). Tax revenue also remained unchanged as a percentage of GDP, although the value added tax (VAT) did not kept pace with the growth of the economy because of refunds accruing to the construction sector.4 Moreover, there was a build-up in arrears in the VAT and excise tax collections.5 The introduction in September 1999 of new incentives for agriculture, manufacturing, and tourism contributed to the decline in revenue from indirect taxes. On the expenditure side, wages increased with payment of the negotiated 4 percent salary increase and payment in the first quarter of 2000 of the first of three installments to compensate public sector workers for the salary cut in 1991.6 Certain capital expenditures were postponed to accommodate strong private sector activity, especially in construction.

Table 2.

Barbados: Public Sector Finances

(In percent of GDP)

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

Fiscal years (April-March).

Table 3.

Barbados: Central Government Operations 1/

(In millions of Barbados dollars)

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Table 3.

Barbados: Central Government Operations 1/

(In percent of GDP)

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

Fiscal years (April-March).

7. The central government covered its financing requirements through external borrowing, including commercial borrowing in the regional capital market of US$75 million (3 percent of GDP) in April 1999. Domestic financing of the central government was negligible, with a decline of 1½ percent of GDP in central bank financing largely offset by increased financing from the National Insurance Scheme (NIS) and other domestic holders of government paper.

8. In the rest of the public sector, the surplus of the National Insurance Scheme (NIS) rose from 2½ to 2¾ percent of GDP as the central government assumed the payment of new noncontributory pension benefits. The deficit of the public enterprises declined, with some institutions reporting improved revenue performance based on the adoption of more effective processes for collecting arrears and current billings, for example, enhanced metering by the Water Authority. The growth of current expenditure also slowed as the Transport Board was able to reduce maintenance costs substantially because of its new bus fleet.

9. The external current account deficit increased for the third consecutive year in 1999, rising above 5 percent of GDP (Table 4). This was mainly caused by a strong import demand for consumer and capital goods, combined with a decline in tourism and sugar receipts. The deficit was more than covered by the capital account surplus, which reflected the government’s external borrowing and private investment inflows. At the end of the year, official gross international reserves rose from the equivalent of 2.4 to 2.7 months of projected imports of goods and services for 2000, while public external debt increased from 16 percent of GDP to 19 percent of GDP (Table 5).

Table 4.

Barbados: Balance of Payments

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Sources: Central Bank of Barbados; Barbados Statistical Service; and Fund Staff estimates and projections.

Public sector debt.

Table 5.

Barbados: Summary of External Debt

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

Includes central government and government guaranteed debt.

10. Facing a strong expansion in domestic demand, imports, and credit in the first half of 1999, the authorities slowed the pace of its capital expenditures and tightened credit policy in May 1999.7 This tightening resulted in a slowdown in the growth of credit to the private sector and broad money in the second half of 1999 that continued into 2000 (Table 6).

Table 6.

Barbados: Summary Accounts of the Banking System

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

In relation to monetary base 12 months earlier.

In relation to broad money 12 months earlier.

11. Growth in the number of licensed active offshore businesses, appears to be tapering off, with a 10 percent increase in the number of firms in 1999 compared to an annual average of 21 percent in the previous five years. The offshore sector is second to tourism in foreign exchange earnings and estimated to contribute to the employment of 3,000 persons (Box 1).8

Offshore Financial Sector

The international business and financial services industry has played an increasingly important role as Barbados has tried to diversity its economy and make it less vulnerable to traditional exports. The number of licensed active offshore entities increased significantly in the mid-1990s, almost 25 percent per year, but growth has decelerated to 10 percent in 1999 (Table). Political stability, modern commercial legislation, good telecommunications, and a skilled work force support development of offshore activities in Barbados. Low taxation and tax exemptions also promote the offshore industry. Double taxation treaties with several countries1 and investment treaties favor certain activities. Onshore and offshore banks and insurance companies are not subject to the same legal framework, but the authorities have taken initiatives to achieve greater uniformity. Guidelines for prevention of money laundering have been in place since March 1995, and anti-money laundering legislation was adopted in 1998.2 Rigorous examination of applicants and harsh penalties help ensure a low incidence of money laundering. Recent international attention to offshore financial centers could, however, adversely affect Barbados’ economy by raising the perceived risk of doing business in this sector.3

The 45 active offshore banks, whose assets amounted to about eight times GDP at end-1999, mainly conduct business with nonresidents. The seven largest offshore banks account for about 90 percent of all assets. Most of the offshore banks are owned by: (1) internationally reputable banks subject to home-country supervision, and allowed to accept third-party deposits; (2) adequately capitalized, reputable and well-managed local companies with a proven track record, which can accept deposits of third parties; (3) international companies conducting treasury operations via its offshore bank, which are not allowed to take third-party deposits; and (4) wealthy individuals, who are not allowed to accept third-party deposits.

Number of Active Offshore Entitics, 1994–99

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Source: Central Bank of Barbados and Supervisor of Insurance.

Offshore banks are supervised by the central bank, although it is the Minister of Finance who issues and revokes licenses on the advice of the central bank. The central bank reportedly conducts extensive investigations of applicants (fit and proper test) with the assistance of local and overseas supervisory and law enforcement authorities. As a result, the number of active offshore banks has increased relatively slowly, in part reflecting the central bank’s rejection of 11 applicants during the last five years.

A new law on offshore banking is expected to be adopted by the end of 2000, with a view to achieving more uniform treatment of offshore and onshore banks. Currently, there are significant differences, particularly regarding minimum capital, large exposures, and on-site inspections. For instance, the central bank currently needs a court order to conduct an on-site inspection of an offshore bank, and the court must be satisfied that it is in the public interest to provide information about individual depositors to the examiner. The new law, and appropriately drafted regulations, when fully implemented and enforced, are expected to facilitate compliance with the Core Principles for Effective Banking Supervision.

1/ Barbados has entered into tax treaties with the Canada, Finland, Norway, Sweden, Switzerland, United Kingdom, and United States in addition to the CARICOM tax treaty. Treaties with Cuba and Venezuela have not yet been ratified, while a treaty with China has been initiated.2/ Barbados is a member of the Caribbean Financial Action Task Force (CFATF). The Financial Action Task Force’s (FATF) did not identify Barbados as a non-cooperative jurisdiction according to the list published in June 2000.3/ In May 2000, the Financial Stability Forum issued a report placing Barbados, along with many Caribbean countries, in the second of three groups of countries, ranking their quality of supervision and cooperation below the first group, comprised mainly of European countries and Singapore. In June 2000, the OECD issued a report, Progress in Identifying and Eliminating Harmful Tax Practices, listing Barbados as a tax haven.

12. In early 2000 tourism rebounded strongly and sugar production increased significantly, causing real GDP growth to approach an annual rate of 3 percent. The unemployment rate decreased further in the first quarter of 2000, to a historic low of 9.3 percent, but output growth is expected to moderate in the second half because of the slowdown in construction in the tourism sector and declines in manufacturing and other agriculture. During the first half of 2000, inflation eased to an annual rate of 2½ percent and the real effective exchange rate did not change significantly. Available information shows lower average public and private wage increases in 2000 than in 1999 (see text table).

Barbados: Average Wage Increases of Reported Wage Settlements

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Sources: Barbados Workers’ Union, 58th and 59th Annual Reports; and Fund staff estimates.

Weighted by number of employees covered by each settlement.

13. The external current account deficit is projected to decline as last year’s strong demand for consumer and capital goods recedes and tourism rebounds. To cover the deficit and continue building official international reserves, the government borrowed US$100 million (4 percent of GDP) in the international capital market in June 2000.9 This borrowing and strong private inflows should contribute to a projected record capital account surplus of over US$250 million in 2000. Official gross international reserves rose to about 4 months of projected imports at mid-2000, while the public external debt increased to nearly 23 percent of GDP (Table 7).

Table 7.

Barbados: Indicators of External Vulnerability

(In percent of GDP, unless otherwise indicated)

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

Average rate of discount (end of period).

T-bill rate adjusted for actual year-on-year inflation.

Refers to public sector debt.

14. Fiscal performance was strong in the first half of 2000 as personal income tax collections rose reflecting higher employment, corporate profits remained strong, and property taxes increased owing to rising property values. The central bank implemented measures to ease monetary policy in September 2000 in response to the slowdown in domestic demand in the latter part of 1999 and continuing into 2000, especially in the manufacturing and agricultural sectors as a consequence of trade liberalization. Specifically, commercial banks’ obligation to hold treasury bills was reduced from 12 percent to 11 percent of deposits and the minimum deposit rate was reduced by ½ percentage point to 4½ percent.

15. Aggregate prudential indicators indicate that commercial banks operate on a sound basis. As of March 2000, the average capital adequacy ratio of the four locally incorporated banks was 15 percent, almost twice the required 8 percent.10 Substandard loans, however, increased from 2.3 percent of total loans at end-1999 to 4 percent in the first quarter of 2000 based on a reclassification of loans at one bank after an on-site inspection, but this level is nonetheless about half that in 1995. Profits before tax are at a comfortable 2½ percent of total assets. The Barbados National Bank (BNB), the only fully state-owned commercial bank, was recapitalized in 1996 and now reports profits in line with the industry.

16. In the structural area, the government continues to focus public investment on projects in primary and secondary education and health, transportation infrastructure, and environmental protection. An Education Sector Enhancement Program (Edu Tech), a US$213 million project financed by the IDB and Caribbean Development Bank (CDB) to improve the physical facilities and curriculum of the national education system, began in August 1999. The Barbados Water Authority nearly completed its metering program and started operation of the desalination plant which will provide a reserve for future demand. The Transport Board replaced its entire fleet of buses. Management of the airport has been transferred to a private company while regulation remains under government control.

III. Policy Discussions

17. The authorities’ medium term strategy aims at stabilizing and restructuring the economy in the context of ongoing external liberalization given Barbados’ commitments under the WTO and the government’s desire to deepen integration in the Caribbean region. They saw tourism continuing to be the mainstay of the economy, but were aiming at attracting other foreign exchange earning activities outside tourism—in particular, offshore business and financial services. Their macroeconomic objectives are to have the economy continue growing at an annual real rate of 2½ to 3 percent, with the population growing at ¼—½ percent, while keeping inflation at or below 2 percent. In support of these objectives, fiscal policy will continue to be tight as the central government restrains spending and the nonfinancial public sector increases its overall surplus over the medium term.

A. Fiscal Policy

18. The authorities plan to pursue appropriately tight fiscal policies aimed at limiting public debt and reducing strain on the balance of payments. The medium-term fiscal plan seeks to hold the central government deficit to 1.1 percent of GDP in fiscal year 2000/01 based on the collection of tax arrears amounting to 0.3 percent of GDP. The deficit is projected to increase to 1.3 percent of GDP in fiscal year 2001/2002 when the third and final installment of the repayment of the 1991 public sector salary cut is paid. After completing this repayment, the deficit is expected to decline over the medium term on the strength of further improvements in tax administration and prudent spending policy.

19. Growth of public wages, after excluding restitution for the 1991 salary cut from the base, will be limited to 3 percent annually, which reduces the central government wage bill to 10 percent of GDP by 2005, a decline of over 1 percentage point of GDP over the medium term. The mission noted that actions should also be taken to restrain capital transfers to public enterprises (as discussed below) and external borrowing by such enterprises which represents a contingent liability of the government amounting to 4 percent of GDP and enhances the risk of the government’s own borrowing strategy. The authorities responded that, over the medium term, these transfers would be maintained at their current share of GDP in fiscal year 1999/00, or about 1 percent.

20. Public sector capital expenditures are to remain at about 5½ percent of GDP through fiscal year 2002/03 as the central government implements the public sector investment program (PSIP). The capital investment program consists of two categories: a component funded with long-term project finance mainly from the IDB and CDB, which focuses on the government’s core areas of education, health, infrastructure, and environmental protection; and a discretionary component funded from domestic sources, which focuses on strategic sectors, like tourism and transportation. The authorities plan to give priority to externally funded projects, while execution of domestically financed projects will be adjusted in light of budget developments. With interest payments on public debt exceeding 4½ percent of GDP, the authorities intend to rely less on external commercial borrowing than in the past and to concentrate on long-term multilateral funding.

21. The mission discussed the need for public enterprises to move toward economic rates for their services, thereby reducing their need for transfers from the central government and freeing resources to provide public assistance directly to persons in need. The authorities acknowledged the importance of restructuring transfers to individuals, noting the consideration presently being given to changing the current automatic allowance for students’ uniforms to one based on need.

22. Pension system reform is being considered by the authorities in light of the latest actuarial report on the NIS which projects a decline in the ratio of contributions to outlays and the depletion of reserves by 2022. This follows from the aging of the population, which poses challenges over the medium term not only for the finances of the public pension system, but for those of the health and welfare programs as well. A major report on comprehensive public pension reform was submitted to the government in the spring of 2000. The report addresses fundamental issues such as restracturing the current pay-as-you-go system and introducing defined contribution pension plans and funded private accounts. The authorities are considering a range of options, including changes in key parameters, such as the retirement age and qualifying period for benefits. The reform plan is to be put forward for public comment before a decision is taken. The government also recognizes that its own cost of providing pensions for public servants is expected to increase markedly and has commissioned a study of this issue, funded by the IDB. The authorities expressed strong interest in technical assistance on the issue of overall pension reform.

B. External and Financial Policies

23. The authorities viewed the large current account deficit in 1999 as a consequence of strong private and public investment, which had financed substantial imports of capital goods for refurbishing tourism facilities, while the temporary closure of some hotels had diverted tourists from the island. They believed that excess demand was appropriately addressed by the tightening of credit policy in 1999. The strong rebound in tourist arrivals in the first half of 2000 supports their view that this investment was contributing to a sustainable external performance.

24. Moreover, the authorities explain the government’s substantial external commercial borrowings in 1999 and 2000 as a precautionary build-up of international reserves. They said that such large borrowing would not be necessary in the future and noted the government’s prospective increased reliance on project financing in its investment program. The mission noted the authorities’ views but cautioned that the tourism base was becoming even more concentrated on a single market—the United Kingdom—and with the prospect of stiff competition from other tourist destinations, it was important to strengthen efforts to maintain the country’s competitiveness and diversify the economy. The authorities conveyed their strong commitment to maintaining wage discipline and preserving Barbados’ external competitiveness.

25. Barbados does not restrict current account transactions. On April 1, 2000, Barbados, honoring its World Trade Organization (WTO) commitments, eliminated nontariff barriers on prepared meats, detergent, and t-shirts and replaced them with tariffs ranging from 20 percent to over 200 percent.11 The authorities intend to reduce tariffs annually to reach WTO ceiling levels by 2004.12 The discussions addressed Barbados’ commitment to liberalizing the capital account in the context of the CARICOM countries’ intra-regional agreement on closer integration.13 Liberalization will be phased in consultation with individual CARICOM countries. The first step is to remove controls on transactions for OECS residents and the second step to liberalize transactions with non-OECS CARICOM countries. The mission supported this careful approach to external liberalization and suggested that consideration also be given to a measure of reserve adequacy based on projected imports of goods and services, and to alternative capital account-based measures, including the ratio of reserves to short-term debt and monetary aggregate-based measures (Table 7). The mission noted the envisaged gradual capital account liberalization would affect the effectiveness of the current set of monetary policy instruments and there would be a need to review certain prudential regulations, like regulations for open positions in foreign exchange.

26. The mission discussed the adequacy of regulation and supervision of banks, including offshore banks, credit unions, and insurance companies, and the central bank’s effort to promote uniformity in the regulation and supervision of onshore and offshore financial activities. A new offshore banking act has been drafted and is under review for adoption by the end of 2000. The new act is intended to ensure greater compliance with the Core Principles for Effective Banking Supervision and alleviate shortcomings of the current act. The mission viewed adoption of this new act as an important step in improving supervision of offshore banks, but further improvements will depend on regulations to be drafted and their implementation. The mission stressed that credit growth could have been facilitated by price increases of land and real estate, which would adversely affect the quality of the loan portfolio if these prices decline. The mission also noted that the envisaged strengthening of the regulation of credit unions should be accelerated to protect depositors’ interests.

27. The authorities expressed concerns about the recent reports of the Financial Stability Forum on OFCs and of the OECD on tax competition. The mission described the three options for assessing OFCs proposed by the Fund. The authorities conveyed the government’s interest in receiving technical assistance to support their efforts to improve regulation and supervision of OFCs.

28. Following the slowdown in domestic demand growth engineered in late 1999, and anticipating the possibility of a further slowdown in the second half of 2000, the mission was in broad agreement with the decision to ease monetary policy. Mindful of the potential benefits to sectors adversely affected by trade liberalization, the mission emphasized the broad countercyclical rationale for easing credit policy and cautioned about the risks of distortions in resource allocation entailed in assistance to specific sectors.

29. The authorities discussed the central bank’s reserve requirements for cash and government securities. They raised the issue of extending the cash reserve requirement to nonbank deposit-taking institutions to promote competition and equity, and discourage regulatory arbitrage. The mission supported such an extension and suggested inclusion of foreign exchange deposits in the base for required reserves, to avoid putting domestic currency deposits at a disadvantage. The authorities, however, noted that the major part of foreign currency deposits was held by nonresidents and felt that the imposition of a cash reserve on such deposits would be difficult and would discourage the holding of such deposits in the domestic banking system.

30. Discussion of the reserve requirement for government securities,14 originally introduced for public debt management and monetary policy purposes, centered on its possible reduction and eventual replacement by one liquid asset requirement designed for prudential purposes. This requirement would stipulate a single minimum ratio to deposits of the aggregate of cash, deposits at the central bank, and government securities, thereby supporting a market-determined yield curve. It was stressed that reduction of the securities requirement should be implemented gradually, allowing for sterilization operations if necessary. The authorities were in general agreement with the mission’s views and the central bank announced during the mission a 1 percentage point reduction in the government securities requirement, with effect from September 1, 2000.

C. Labor Market Issues and Poverty Reduction

31. Representatives of the government, labor unions, and business community stressed that the “prices and incomes protocols” had contributed substantially to a broad understanding of the need for wage restraint in supporting the fixed exchange rate regime and promoting good labor relations.15 The third protocol, which maintained the link between productivity gains and wages and emphasized issues of job security and training, initially covered the period 1998-2000, and last May was extended to 2001. Proposals are currently being put forward for a successor protocol.16 The construction boom over the past two years initially led to a substantial bidding up of wages in this sector, particularly for skilled workers; more recently, however, these wage increases have been moderated by the inflow of workers from other Caribbean territories.

32. The mission discussed the imperative for continued wage restraint in light of growing international competition in tourism and other areas. Given the public sector’s dominance in employment and its leadership role in economy-wide wage setting behavior, the authorities viewed public sector wage discipline as not only critical for ensuring a tight fiscal stance but also for strengthening Barbados’ external competitiveness. In addition, the duplication of benefits across unemployment insurance and severance pay arrangements, which raises nonwage labor costs and impedes mobility, was discussed with representatives of labor and employers. The latter, however, saw little prospect for consolidating these arrangements in the near future.

33. The mission discussed and supported the work plan of the National Productivity Council (NPC) to continue development of productivity measures, expand their use for international comparisons in key sectors, and promote performance-based compensation plans. The mission suggested that the NPC try to institutionalize to the extent possible the link between wages and productivity. The IDB’s program of assistance for strengthening the NPC’s technical and operational capability should enhance and expedite its work plan.

34. The authorities see the fiscal system as more progressive since the VAT was introduced, as the tax serves as an efficient source of revenue to fund assistance to low-income households, especially individuals below the income tax threshold. They intend to target social assistance more closely to need. In that context, the Ministry of Social Transformation was established in 1999 in an effort to consolidate and rationalize social assistance efforts. It has initiated programs to target public assistance to the persons in need, such as the elderly, disabled, and disadvantaged youth.

D. Structural Issues

35. The authorities will take steps to have the main public enterprises operate more efficiently and thus limit the public enterprises’ overall deficit to 1 percent of GDP or lower. Options under consideration include moving toward economic rates for services of the Transport Board and Water Authority and increasing rents charged by the Barbados Industrial Development Corporation. The authorities acknowledged that the Transport Board’s obligation to provide services at uneconomical rates for special subgroups posed a challenge to its efficient operation, but explained that it was an important priority to provide low-cost public transportation. The new Fair Trading Commission (FTC) will set utility rates and examine financial statements of all public enterprises with a view to moving them toward operating on a self-sustaining basis. The newly established Commission on Competitiveness will address how government regulations and services provided by public enterprises affect the cost of private business with a view to identifying where improvements can be made.

36. The commercial operations of the Barbados Agricultural Development and Marketing Company (BADMC), the state enterprise in agriculture excluding sugar, have been threatened by termination of its status as sole importer of certain agricultural products. By including BADMC in a comprehensive restructuring of the ministry of agriculture, the government has the opportunity to address its entire role in agriculture, with a view to improving efficiency.

37. Reform in the sugar industry awaits the findings of a task force appointed by the Ministry of Agriculture to address the restructuring of the Barbados Agricultural Management Company (BAMC), the state sugar enterprise. Two options have been identified for improving BAMC’s operation, which are to close one of its three factories and upgrade the other two or to replace all three with a new factory. The authorities acknowledged the importance of Barbados’ quota to sell at the preferential price in the European market and the uncertainty of these arrangements in the future.

38. The BNB is to be privatized in 2000 after reincorporation under the Companies Act. Privatization is expected to be launched through the sale of shares to be listed with the Securities Exchange of Barbados in late 2000. The state-owned Insurance Corporation of Barbados (ICB) is also slated for privatization. The government is expected to divest 51 percent of the share ownership of BNB and ICB.

IV. Medium-Term Outlook

39. Based on the mission’s policy discussions and the developments and information available for 2000, the staff prepared projections for economic performance over the medium term (Table 8). The projections assume continued structural reforms and financial and wage restraint, thereby preserving Barbados’ external competitiveness and making the longstanding exchange rate parity with the U.S. dollar, which has served the economy well in keeping inflation in check, sustainable.

Table 8.

Barbados: Medium-Term Outlook

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

Fiscal year (April-March).

In relation to broad money at the beginning of the period.

40. Real GDP growth is projected to increase steadily to 3 percent by 2004, led by the tourism sector whose growth improves in line with growth in partner countries. Growth in offshore business is expected to continue but at a slower pace than in the 1990s. Inflation is expected to remain at 2½ percent through 2001 owing to higher projected oil prices, and then to decline to 2 percent by 2004. The medium-term outlook reflects the tight fiscal position outlined by the authorities. The central government overall deficit declines to less than ½ of 1 percent of GDP in fiscal year 2004/05 and public saving is projected to increase to over 7½ percent of GDP by 2004, with public enterprises moving toward operating on a self-sustaining basis and pension reform preserving the NIS’s surplus and strengthening the finances of the public pension system.

41. The external current account deficit is expected to widen slightly to 3.7 percent of GDP in 2001 and then decline steadily to 3 percent of GDP in 2004. The initial widening follows from moderation in growth of the tourism sector following its strong performance in 2000, expected higher capital goods imports owing to the scheduled renovation of two hotels, and higher oil import prices. After 2001 external current account performance improves as service exports are expected to show strong sustainable growth and imports grow in line with nominal GDP. After 2000 the current account deficit is covered principally by long-term project finance and foreign direct investment. External financing encompasses modest declines in official international reserves over 2001-03, with gross reserves declining steadily to three months of projected imports by 2004 when accumulation of reserves resumes. Public external debt is projected to be a sustainable 2½GVfc percent of GDP in 2004.

42. Barbados’ favorable medium-term outlook depends on strong performance in the tourism and offshore business sectors, both of which are vulnerable to external developments, and continuation of the country’s external competitiveness based on fiscal and wage discipline. Criticism by the OECD of Barbados’ tax structure and by the FSF of its regulation and supervision of the offshore sector could significantly dampen growth prospects. If government borrowing and wages are not appropriately restrained, the balance of payments could weaken and the public external debt ratio may not decline nor official international reserves increase as projected by 2004, creating a potentially unstable economic situation.

V. Staff Appraisal

43. Since the foreign exchange crisis of the early 1990s, output growth has been sustained by wage and fiscal restraint and the implementation of structural reforms, which have underpinned confidence and strong private investment, and contributed substantially to preserving Barbados’ external competitiveness in the context of the long-standing (since 1975) exchange rate peg with the U.S. dollar. However, the economy remains vulnerable to external shocks as it continues to rely heavily on a few export commodities, tourism, and financial services. The challenge facing the authorities in the period ahead is to maintain the competitiveness of the economy to ensure continued growth of tourism and facilitate economic diversification. This requires wage restraint, fiscal discipline, and structural reforms with steps to reduce the cost of doing business, In addition, Barbados faces the task of dealing with an aging population whose impact on the retirement pension system presents a fiscal challenge over the medium term.

44. The authorities have maintained prudent macroeconomic and fiscal management and pursued their structural reform agenda in 1999—2000, which supported non-inflationary growth based on high savings and investment, and the transition to a liberal external trade environment. High public sector savings supported investment in the government’s core areas of responsibility—education, health, transportation infrastructure, and environmental protection. Credit policy was prudent, consistent with the maintenance of low inflation and with achieving the authorities’ balance of payments objectives.

45. Wage restraint has been an essential element in Barbados’ strong economic performance. Available information indicates that wage increases are not adversely affecting external competitiveness, but the decline in unemployment and labor shortages in some sectors point to the possibility of wage pressures. Accordingly, efforts to preserve wage discipline need to be kept up. The cooperation among labor, business, and government, as stipulated in formal protocols, should continue with the aim of keeping wage increases in line with productivity growth and inflation objectives. Improving the operation of the labor market is essential through the consolidation of the unemployment insurance and severance pay arrangements so as to promote labor market flexibility and contain nonwage labor costs.

46. The staff supports the authorities’ intention to maintain fiscal discipline through public sector wage restraint and improvements in the efficiency of government spending and the operation of public enterprises to reduce their need for transfers from the central government budget. This would allow for investment in infrastructure, thereby creating a favorable environment for continued strong private investment. The PSDP remains appropriately focused on projects in the social sectors (primary and secondary education and health), infrastructure maintenance (improvement of roads, airport, and port), and environmental protection (sewerage and waste management). The implementation of such projects with support from the IDB and CDB should be accelerated to enhance Barbados’ growth prospects.

47. The government’s substantial external borrowings contributed to building a cushion of official international reserves to address any balance of payments pressure that may arise. With the achievement of a comfortable reserve position at the central bank, the government should curtail its external commercial borrowing and rely on official long-term project finance to support its PSIP. The productivity of investment, both public and private, is critical to Barbados’ capacity to repay debt.

48. The recent easing of credit policy may be necessary for encouraging private investment and growth, and helping the manufacturing and agriculture sectors adjust to trade liberalization by financing their restractiuing to become more competitive. However, the authorities should be prepared to tighten credit if domestic demand expands too rapidly and the external current account deficit widens.

49. The authorities’ continued implementation of prudent fiscal and credit policies, together with wage restraints and efforts to raise productivity, should ensure the sustainability of the fixed exchange rate system. Given their demonstrated willingness to implement policies consistent with the peg, the staff believes that Barbados exchange rate policy remains appropriate and should continue to serve the country well.

50. The staff strongly supports the authorities’ efforts to improve prudential regulations and the supervision of the financial sector, in line with the Core Principles for Effective Banking Supervision and supporting the envisaged capital account liberalization. The staff urges adoption of a new offshore banking act, an important step in strengthening supervision, and welcomes the authorities’ interest in receiving technical assistance from the Fund in this area. In the domestic banking system, the staff encourages efforts to even out requirements on banks and nonbanks to reduce opportunities for regulatory arbitrage. The staff recommends gradually replacing the current requirement to hold a percentage of bank deposits in government securities with a liquid assets requirement for prudential purposes. This would improve the efficiency of financial intermediation.

51. In structural areas, the staff strongly supports the recent steps taken to enhance economic efficiency, in particular, the establishment of the FTC with the mandate to reform utility prices and prices of services provided by public enterprises, and initiatives to reduce red tape affecting private investment. All of these should help improve the competitiveness of the economy. In this context, the staff encourages the authorities to move public enterprises toward operating on a self-sustaining basis by charging economic rates for their services, thereby reducing their need for continued government transfers and government-guaranteed borrowing. Serious consideration also needs to be given to new price structures for the use of public property and services. The staff urges an acceleration of ongoing efforts to privatize state enterprises, including the state-owned commercial bank.

52. Steps should also be taken to continue enhancing the efficiency of government. The authorities’ effort to increase the effectiveness of its social safety net by consolidating programs in the Ministry of Social Transformation is appropriate. Efforts to improve tax administration also should continue to provide resources for investment in (and maintenance of) social infrastructure and direct assistance to persons in need. The staff shares the authorities’ concerns about the projected weakening of the finances of the public pension system, and urges its timely reform to secure workers’ old age incomes and support the maintenance of adequate levels of public savings.

53. Improvements in the timely availability of statistics are needed to enhance surveillance of economic developments and policies. Barbados participates in the General Data Dissemination System and its metadata and plans for improvement of its national statistical system are posted on the Fund’s website. This system provides an appropriate framework for improving statistical reporting. The government should develop a work program, including the need for technical assistance, for improving statistics. Particular emphasis needs to be placed on expanding the coverage of accounts of the offshore banks.

54. As in 1999, the authorities have indicated their intention to release the staff report for the 2000 Article IV consultation. It is recommended that Barbados remain on the standard 12-month Article IV consultation cycle.

APPENDIX I Barbados: Fund Relations

(As of September 30, 2000)

I. Membership Status: Joined 12/29/1970; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

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VI. Projected Obligations to Fund:(SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Rate Arrangements:

The Barbados dollar has been pegged to the U.S. dollar since mid-1975 at BDS$2.00=US$1.00. On July 31, 1995 the official buying and selling rates for the U.S. dollar were BDS$1.9975 and BDS $2.0350, respectively, per US$1.

There are no restrictions on the making of payments and transfers for current international transactions subject to approval under Article VIII. There are exchange controls on invisibles, but bona fide transactions are approved. All capital outflows and certain capital inflows require approval. The authorities accepted the obligations of Article VIII sections 2, 3, and 4 on November 3, 1993.

VIII. Last Article IV Consultation:

The 1999 Article IV consultation discussion was concluded by the Executive Board on November 5, 1999 (EBM/99/123); the documents were (staff report) SM/99/256 and (recent economic developments) SM/99/257. Barbados is on the standard 12-month consultation cycle.

IX. Technical Assistance:

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X. Resident Representative:

The resident representative post was closed in January 1995.

APPENDIX II Barbados: Relations with the Inter-American Development Bank

I. Active Loans to Barbados as of July 6, 2000

(In millions of U.S. dollars)
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II. Net Cash Flow of IDB Convertible Resources

(In millions of U.S. dollars)
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