IMF Executive Board Concludes 2016 Article IV Consultation with Barbados

The economy appears to have turned the corner but a disappointing fiscal outcome has not eased concerns about debt sustainability. After protracted stagnation following the 2008 financial crisis, there was a moderate recovery in 2015 and growth is set to pick up. Notwithstanding adjustment efforts, the budget deficit remained high, mainly reflecting delayed implementation of reforms. The large funding requirements were mostly met by the central bank, the National Insurance Scheme, and growing arrears. Continued large deficits pose risks to the fixed exchange rate.

Abstract

The economy appears to have turned the corner but a disappointing fiscal outcome has not eased concerns about debt sustainability. After protracted stagnation following the 2008 financial crisis, there was a moderate recovery in 2015 and growth is set to pick up. Notwithstanding adjustment efforts, the budget deficit remained high, mainly reflecting delayed implementation of reforms. The large funding requirements were mostly met by the central bank, the National Insurance Scheme, and growing arrears. Continued large deficits pose risks to the fixed exchange rate.

On August 22, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Barbados.

The economy appears to have turned the corner with activity picking up. Real GDP grew by 0.8 percent in 2015, underpinned by an increase in private investment and surge in tourism arrivals, which increased by 14 percent, among the highest in the Caribbean. This boosted employment by 2 percent, while the unemployment rate fell to 11.3 percent. Inflation eased owing to lower import prices, with end-period prices falling by 2.5 percent, compared with an increase of 2.3 percent in 2014. The external current account position improved significantly, reflecting improved terms of trade, as the deficit narrowed from 9.9 percent of GDP in 2014 to 6.7 percent in 2015, primarily reflecting lower oil and other prices. Exports of goods and services rose mainly due to higher tourism receipts. Net inflows in the capital and financial account fell, driven by large official amortization payments and lower FDI. As a result, net international reserves dropped to US$469 million at end-April 2016 (2.8 months of imports).

The fiscal situation remains challenging despite ongoing government adjustment efforts. The FY 2015/16 budget deficit was broadly unchanged at about 7 percent of GDP. Revenue measures, though raising revenue by 1 percent of GDP, fell short of target due to implementation delays. On the expenditure side progress on reducing transfers to State Owned Enterprises was also slower than anticipated, partially attributable to the unbudgeted debt service of one enterprise and transfers to support infrastructure investment financed by external sources. At end-FY2015/16, central government debt excluding (including) securities held by the National Insurance Scheme (NIS) reached the equivalent of 105.5 (141.6) percent of GDP, from 98.0 (132.3) percent in FY2014/15. The large funding requirements, totaling about 45 percent of GDP, have been mostly met by the Central Bank of Barbados (CBB), the NIS, and growing arrears.

The financial sector remains stable while commercial bank liquidity continues to rise. Private sector credit growth turned modestly positive in 2015, following two years of decline while NPLs declined further. Withdrawal of Correspondent Banking Relationships has directly affected a small number of entities in the International Business and Financial Services (IBFS) sector, whose growth has stagnated since the global financial crisis. Monetary policy has been driven by fiscal considerations, as the CBB continued to fund the government through money creation and with commercial banks’ excess reserves. Interest rates have begun to rise, with reduced direct intervention by the central bank in the Treasury Bill auctions.

Executive Board Assessment2

The Executive Directors welcomed the pickup in economic growth led by the tourism sector and the improvement in the external position. At the same time, notwithstanding the authorities’ consolidation efforts, they noted that the large fiscal deficit and a further increase in public debt remain a challenge. They stressed that continued fiscal adjustment and public sector reforms are necessary to bring public debt on a downward path, preserve external sustainability, and improve investor sentiment. They also underscored the need to eliminate impediments to stronger long-term growth and bolster competitiveness.

Directors commended the authorities’ commitment to fiscal adjustment and reforms. They noted that further efforts are needed to put the high and growing public debt on a sustainable path, while minimizing the negative impact on growth and preserving social cohesion. They welcomed the new measures in the August 2016 budget, including reductions in current expenditure and new revenue measures, although they cautioned that a further increase in tax exemptions could erode revenues. Directors underscored the importance of completing the reform of the revenue authority to improve tax administration and increase compliance. They stressed that stronger efforts are also needed to reform state-owned enterprises through better governance, consideration of user fees, and potential divestment and consolidation of public entities. They also called for swift action to eliminate government arrears.

Directors emphasized that the continued financing of the fiscal deficit by the Central Bank of Barbados (CBB) is inconsistent with maintenance of the exchange rate anchor. They encouraged the CBB to allow domestic interest rates to rise in line with increases in U.S. interest rates and ensure adequate international reserve buffers.

Directors welcomed the recent improvement in the non-performing loan ratio and banks’ liquid and well-capitalized balance sheets. They encouraged continued close supervision of the financial sector, particularly of non-bank institutions, including credit unions and insurance companies. Directors noted that domestic banks have not experienced a decline in correspondent banking relationships and welcomed the authorities’ efforts with regional partners to understand the issue. They recommended taking quick action on any shortcomings that might be identified by the upcoming AML/CFT evaluation.

Directors agreed that a comprehensive growth strategy is needed to lift the country’s long-term competitiveness in the key tourism sectors. Priorities for raising growth include timely implementation of tourism investment and infrastructure projects, improving public service efficiency and streamlining business regulation, increasing labor market flexibility, and unlocking agriculture’s growth potential.

Directors encouraged continued efforts, with Fund technical assistance, to resolve outstanding data issues and improve the dissemination of statistics.

Barbados: Selected Economic Indicators

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Sources: Barbados' authorities and Fund staff calculations.

Staff have identified inconsistencies in the constant and current price GDP series. The Barbados Statistics Service is working to address these issues.

Fiscal year is from April to March.

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

1

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

2

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