Barbados: First Review Under the Extended Arrangement and Request for the Completion of the Financing Assurances Review and Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for Barbados
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
26 Jun 2019
eISBN:
9781498321648
ISBN:
9781498321648
Language:
English
Keywords:
ISCR; CR; authority; debt; EFF arrangement amount equivalent; Barbadian authorities; debt restructuring; SOE debt; revenue enhancement; exchange operation; debt forgiveness
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First Review under the Extended Arrangement and Request for the Completion of the Financing Assurances Review and Modification of Performance Criteria

Abstract

First Review under the Extended Arrangement and Request for the Completion of the Financing Assurances Review and Modification of Performance Criteria

Recent Developments and Outlook

A. Recent Developments

1. Barbados has embarked on a comprehensive Economic Recovery and Transformation (BERT) plan aimed at restoring fiscal and debt sustainability, addressing falling reserves, and increasing growth. Since the 2008–09 global financial crisis, Barbados has been caught in a vicious cycle of low or negative growth and increasing debt, with public debt doubling to almost 160 percent of GDP. By end-May 2018, international reserves had dropped to about US$220 million, or 5–6 weeks of import coverage. The authorities have since then made swift progress in addressing economic vulnerabilities, in close consultation with social partners. The IMF Executive Board approved a four-year extended arrangement under the Extended Fund Facility (EFF) to support Barbados’ stabilization program on October 1, 2018.

2. Output contracted by 0.6 percent in 2018, in line with program projections. Although long-stay tourism arrivals increased by 3 percent, the average length of stay declined due to a larger share of short-stay arrivals from the United States. The moderate gains in tourism were offset by a decline in other services. Average inflation slowed to 3.7 percent in 2018 as the impact of higher oil prices in the first part of the year was offset by the removal of a temporary emergency tax on consumption.1

3. A primary surplus of around 3½ percent of GDP was maintained in FY2018/19. (Table 2). Overperformance of VAT and CIT was offset by larger than anticipated tax refunds, lower excises due to lower imports, and lower than expected performance of newly introduced taxes (an airline travel fee, room levies, a new fuel tax, and a new health service contribution). The ongoing debt restructuring reduced the Government’s interest bill from 7½ percent of GDP in FY2017/18 to 3.8 percent of GDP in FY2018/19, with debt service on external commercial debt suspended since June 2018, and a lower interest expenditure on restructured domestic debt securities. The overall balance is hence estimated at a deficit of about 0.3 percent of GDP.

4. In December 2018, Parliament adopted a comprehensive CIT reform to comply with EU and OECD requirements that is expected to be revenue neutral. The new regime establishes a single incorporation regime and a single tax rate structure for all corporates registered in Barbados. For domestic companies, CIT rates have been sharply reduced, while rates payable by companies operating in the international business sector were increased slightly (but four-fold in the top bracket—from 0.25 percent to 1 percent).2 The reform is expected to be revenue neutral even after a conservative assumption on tax base shifting;3 however, this projection critically depends on elasticity assumptions. The CIT reform could make revenue from this source less predictable; it could lead to a loss of revenue that would need to be compensated by offsetting measures to meet fiscal targets under the program. The OECD has indicated that, with this reform, Barbados is now compliant with its guidelines on Base Erosion and Profit Shifting (BEPS), while the EU removed Barbados from the list of non-cooperative tax jurisdictions in May 2019. A recent FAD tax policy mission suggested measures that could be taken to limit the impact of the recent CIT reform on the Personal Income Tax (PIT), and other steps that could be taken to strengthen the tax system (see paragraph 13 and Box 1). The CIT reform is expected to have minimal impact in FY2019/20, with the main effects of the new legislation (on the composition of CIT revenue) expected in FY2020/21.

5. A domestic debt exchange operation was completed in November 2018. The Government announced a comprehensive debt restructuring, including external commercial debt and domestic treasury bills, on June 1, 2018. Agreement with the vast majority of domestic creditors (including all banks and insurers) was announced on October 14, 2018, and the transaction with domestic creditors was closed in November. Legislation adopted in September 2018 to retrofit a collective action mechanism into domestic debt was used to secure 100 percent participation in the domestic debt exchange. The domestic debt restructuring represents about 90 percent of the debt to be restructured. External commercial debt (about 15½ percent of GDP)4 is yet to be restructured.

6. The domestic debt restructuring has significantly reduced Barbados’ public debt burden (Table 3). The restructuring resulted in an immediate reduction in the debt-to-GDP ratio of about 30 percentage points in nominal terms,5 as well as a reduction in gross financing needs (GFN) of about 35 percentage points of GDP. Claims of private sector creditors were restructured mainly through lengthening of maturities and reduction of interest rates, while claims of public sector creditors were restructured through a combination of upfront haircuts, lengthening of maturities, and reduction in interest rates (Appendix I). Staff estimates average NPV losses for domestic creditors at about 42 percent, with losses for private sector creditors averaging about 30 percent and losses for public sector creditors averaging about 55 percent (see text table). The rapid completion of the domestic part of the debt restructuring has been very helpful in reducing economic uncertainty, and the new terms agreed with creditors put debt on a clear downward trajectory. Risks to the debt dynamics remain elevated since debt remains above the 70 percent of GDP risk assessment threshold. Following the completion of the domestic debt exchange, Standard and Poor’s upgraded Barbados’ long- and short-term local currency ratings to B-/B. The authorities target an intermediate anchor of 80 percent debt-to-GDP by FY2027/28 and a long-term anchor of 60 percent debt-to-GDP by FY2033/34.

Barbados: Aggregate NPV losses from domestic debt restructuring

article image

Including government sinking fund at CBB and ways and means.

Other holders of government debt, including mutual funds and companies.

Using a 7 percent interest for discounting.

7. Barbados’ international reserves rebounded sharply in the second half of 2018, supported by International Financial Institution (IFI) loans and the suspension of debt service on commercial external debt (Table 4). Reserves increased to US$531 million as of end-March 2019, about 3 months of import coverage and 100 percent of the Assessment of Reserve Adequacy (ARA) metric (see text chart). Following the IMF Board approval of the Extended Arrangement on October 1, 2018, both the Caribbean Development Bank (CDB) and the Inter-American Development Bank (IDB) approved policy-based loans, worth US$75 million and US$100 million, respectively. About three quarters of the increase in gross international reserves between May 2018 and March 2019 was due to IFI inflows. Debt service on external commercial debt was suspended immediately following the Government’s June 1, 2018 restructuring announcement. Attaining reserve adequacy on a sustained basis will require fully-restored confidence in Barbados’ macroeconomic prospects.

uA01fig01

Gross international reserves

(Import coverage and percent of ARA)

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Sources: Fund staff calculations.

B. Outlook

8. A small decline in output is projected for 2019, with the impact of fiscal consolidation expected to be offset by continued growth in tourism and increasing private sector confidence. Multipliers are small, with the economy heavily dependent on external demand for tourism services. Policy uncertainty has decreased significantly since mid-2018, and there are strong signals that new inflows from large international investors may materialize. Over the medium term, growth is projected to return to close to its medium-term average of about 2 percent.

9. The primary balance is projected to increase to 6 percent of GDP in FY2019/20 and to remain at that level over the medium term. The 6 percent primary surplus target is a key element of the agreement reached with domestic creditors in the debt restructuring.

10. International reserves are projected to increase further over the medium term, supported by additional IFI inflows. The current account deficit is projected to stabilize around 3 percent of GDP, with gains from tourism and fiscal consolidation offset by higher imports related to higher FDI inflows and other projected current account balance (CAB) dynamics. Confidence gains associated with program implementation would contribute to a recovery of net private inflows to the historical average. Reserves are projected to reach 5 months of import coverage or about 150 percent of the ARA metric by the end of the program period contingent on a successful external commercial debt restructuring and sustained implementation of policies supported by the program.

11. Domestic and external risks to the outlook are elevated.

  • Domestic risks primarily relate to the Government’s untested ability to reach and sustain a 6 percent primary surplus. Fiscal adjustment could be less than estimated due to implementation delays, increased spending owing to political pressures, or a weaker-than-expected full-year impact of the new taxes introduced in 2018. Starting with FY2020/21, CIT and PIT revenues could be impacted by the CIT reform that was adopted in late 2018. At the same time, growth could be much higher than projected if large FDI projects materialize.

  • External risks include a disorderly Brexit or a US slowdown. Key source markets for tourism are the UK (with a market share of about 33 percent), the US (30 percent), and Canada (13 percent). Weaker growth in these economies could slow arrivals and reduce private investment in refurbishing and expanding tourism facilities. Tightening of monetary policy in the US could appreciate Barbados’ real exchange rate and reduce competitiveness.

Policy Issues

A. Fiscal Adjustment in FY2019/20

12. The FY2019/20 budget adopted by Parliament in March targets a primary surplus of 6 percent of GDP. The budget for FY2019/20 was approved in March, prior to the start of the new fiscal year, as required under the new FMA legislation. The targeted fiscal adjustment amounts to 2½ percentage points of GDP. The budget is premised on conservative revenue assumptions and ambitious SOE reforms to facilitate lower transfers to SOEs (grants to public institutions). Revenue is projected to increase as full-year effects of new taxes introduced in 2018 materialize and new measures following the recent FAD TA on tax policy are implemented (next paragraph and text table);6 layoffs at the central Government and SOEs that took place in FY2018/19 should help reduce the wage bill as well as transfers to SOEs in FY2019/20, with severance payments reflected in the FY2018/19 fiscal outturn. The budget approved for FY2019/20 provides a solid basis for the targeted fiscal consolidation. If necessary, the authorities stand ready to take additional measures recommended during the recent FAD TA on tax policy while maintaining the quality of fiscal consolidation by prioritizing capital expenditure. Over the medium term, capital spending is projected to gradually increase to 3 percent of GDP over the program period, as transfers to SOEs are gradually reduced further.

Barbados: Fiscal adjustment in FY 2019/20

(In percent of GDP, unless otherwise indicated)

article image
Sources: Ministry of Finance; and Fund staff estimates.

13. The authorities are reviewing and implementing recommendations provided by recent FAD TA missions on tax policy and customs administration (see Box 1). The FY2019/20 budget includes key recommendations on tax policy including broadening the VAT and Land Tax bases, and limiting potential base erosion stemming from large discrepancy between CIT and PIT rates. The FAD TA report also suggests to: repeal the discretionary provisions for providing tax concessions; introduce a standardized, rules-based incentives package, overseen by the Minister of Finance; and, should revenue measures underperform, consider increasing the VAT rate, from 17.5 percent at present.7 The February 2019 FAD TA mission on customs administration identified severe management problems that require urgent attention. A modernized customs agency could play a key role in enhancing revenue and facilitating Barbados’ integration in the global economy. An FAD TA mission to provide advice on a fiscal rule is scheduled for the second half of 2019.

B. SOE Reforms

14. SOE reforms are a key element of Barbados’ economic reform program. At close to 8 percent of GDP in FY2017/18, transfers to SOEs had become a significant burden on the budget, and a major contributor to fiscal risks. SOE transfers support a wide range of activities, including provision of utilities (such as water, transportation, electricity, and waste disposal), social programs, especially public health and education, and economic development (mainly tourism and investment promotion). Under the program, grants to SOEs are expected to decline to about 6 percent of GDP by FY2021/22, by a combination of: (i) much stronger oversight of SOEs, supported by improved reporting; (ii) cost reduction, including reduction of the wage bill; (iii) revenue enhancement, including an increase in user fees; and (iv) mergers and divestment (text table).

Barbados: Scope and coverage of SOE reforms

article image
Sources: Barbados authorities.

For a total of 4 mergers and 2 transfers of ownership in FY2019/20 and FY2020/21.

Tax Policy and Customs Administration Reforms

Improving the efficiency and effectiveness of tax collection is critical to support the fiscal adjustment effort. In the newly adopted budget for FY2019/20, the authorities are implementing a new tax policy based on a shift from direct to indirect taxation, and a fairer distribution of the tax burden between residents and non-residents. In addition, the Barbados Customs and Excise Department (BCED)— contributing around 38 percent of total tax receipts—will be strengthened.

Measures already implemented:

  • The authorities have taken measures to increase VAT collection, in line with recent FAD TA recommendations. The VAT base has been broadened by moving items from zero-rated to exempt, which will reduce VAT refunds. In addition, the VAT rate on the accommodation sector has been increased from 7.5 to 10 percent.

  • To reduce distortions stemming from low CIT and high PIT rates and limit individuals’ incentives to incorporate, the authorities have announced their intention to gradually reduce PIT rates By extending the reverse tax credit to BRB$25,000, the authorities have also made the PIT more progressive.

  • Land tax reforms adopted by Parliament in the context of the FY2019/20 budget will increase progressivity and fairness. Land tax discounts for hotels and other tourist accommodation were reduced, while the cap on the residential land tax was increased from BRB$60,000 to BRB$100,000, and land tax rates were increased.

Future measures:

  • With CIT rates now unified at low levels, the CIT tax base could be further broadened by removing concessions and introducing interest deductibility restrictions. While several CIT incentives have been eliminated in the context of the budget for FY2019/20, most of the remaining concessions could also be abolished. For example, a grant program administered by the National Productivity Council could replace the productivity and innovation tax incentives. Any remaining CIT incentives could be consolidated into the Income Tax Act and overseen by the Minister of Finance.

  • The authorities aim to reform the BCED to strengthen governance and promote accountability Key reform objectives include to: (i) prepare a new strategic plan to guide decisions and communicate the organization’s vision; (ii) develop key performance indicators to monitor the effectiveness of BCED’s operations; (iii) reorganize the human resources department to improve organizational effectiveness and lower staff attrition; and (iv) strengthen the BCED’s IT system and migrate to the newer ASYCU DA World.

  • Strengthening BCED’s core functions and controls will improve efficiency. BCED plans to: (i) review rules and procedures to strengthen compliance activities, (ii) adopt a holistic risk management framework to better monitor and process importers by size and risk; and (iii) strengthen controls of foreign trade operations, cargo targeting, and post-clearance audits.

15. With the adoption of the new FMA law in January 2019, SOE borrowing and reporting requirements have been tightened. Under the new law, the Government must approve all SOE borrowing and can sanction SOEs for noncompliance with the reporting requirements. The Government now also receives standardized quarterly financial reports on SOE performance and a consolidated report on the performance of SOEs was submitted to Parliament in early April 2019. A comprehensive review of all tariffs and fees charged by SOEs is now underway; the Government implemented a steep increase in bus fares in April 2019.

16. Staff reductions at key SOEs are ongoing, and several entities are being merged. To date, layoffs amount to around 320 staff but some entities plan further retrenchment in the upcoming months. The authorities have launched a training and outplacement program to mitigate the impact on unemployment.8 The authorities estimate savings from these layoffs at about 2 percent of GDP from FY2019/20 onwards (with limited or no fiscal savings in FY2018/19, owing to severance payments). Ongoing and planned mergers include the Government Information Service (GIS) with the Caribbean Broadcasting Corporation (CBC), and the Urban Development Corporation (UDC) with the Rural Development Corporation (RDC); entities tasked to promote tourism are also being merged.

17. SOE arrears amount to 2½ percent of GDP and the authorities plan to reduce them by about 1 percent of GDP by March 2020. To enhance control over liabilities, the Government has introduced a system for monitoring and reducing SOE arrears. At the end of March 2019, SOE arrears amounted to BRB$294 million, of which 97 percent accrued towards private sector suppliers and the rest to the Barbados Revenue Authority (BRA) and the National Insurance Corporation (NIS).9 The SOEs owing the largest shares of arrears are the Barbados Water Authority (36 percent), the National Housing Corporation (32 percent), and the Transport Board (11 percent). The Government has taken charge of negotiating the settlement of outstanding SOE arrears with private suppliers, planning to extinguish all SOE arrears over the course of the BERT program. A new quantitative indicative target to reduce SOE arrears for the monitored 33 SOEs (representing 96 percent of total SOE arrears) was added to the program (Table 2, Appendix II).

C. External Debt Restructuring

18. Discussions with external commercial creditors are ongoing. The authorities and the external creditor committee have continued to meet regularly, with a recent meeting in Washington, DC in mid-April 2019. Despite positions narrowing since the creditor committee and the authorities shared initial scenarios in late 2018, differences remain.10 The authorities’ good faith efforts are reflected in the ongoing dialogue and information and data sharing with creditors, including by seeking the external creditors’ inputs into the design of the restructuring. A moratorium on external commercial debt service has given rise to arrears, and the Fund’s lending into arrears policy applies. In view of ongoing good faith negotiations, staff is of the view that financing assurances remain in place.

19. The authorities have decided not to seek official bilateral debt restructuring, and arrears to Canada have been repaid. Official bilateral debt is small, at 2 percent of GDP. The authorities are now current on their official bilateral obligations.11

D. Impact of Debt Restructuring on Domestic Financial Institutions

20. The domestic debt restructuring succeeded in reducing Government debt without jeopardizing financial stability.12 The financial system remains stable and liquid, with now reduced capital but no signs of stress. Plans will be developed to recapitalize the CBB and address medium and long-term challenges for the NIS stemming from the debt restructuring by mid-2020, as envisaged under the program. More specifically:

  • Banks have capital above the regulatory minimum, remain liquid, but with higher asset concentration ratios and reduced profitability. Between December 2017 and March 2019, the capital adequacy ratio in the banking system declined from 17 to 13 percent. Liquidity in the banking system remains high: between the first quarter of 2018 and end-2018, the excess cash reserves held at the CBB increased from about 14 to 15½ percent of deposits.

  • The CBB now has negative capital and has requested technical assistance to consider how to address this over the medium term. After the debt restructuring, the CBB’s capital stands at BRB$-1.6 billion (or negative 16 percent of GDP). A plan for recapitalization will be developed by mid-2020, with the help of Fund TA The new securities provided to the CBB during the debt restructuring (see Box 1 in Appendix I for details) ensure that it has an adequate income stream to meet operational expenses.

  • The financial position of the NIS has deteriorated and systemic or parametric reform will be required in the medium term (text charts). The NIS provided large debt relief to the central Government through an upfront BRB$1.3 billion haircut (equivalent to about 26 percent of its reserves), amortization grace periods and lower interest payments. Staff estimates that its operative balance will become negative around 2028 and reserves will be exhausted around 2041—five and ten years earlier than pre-restructuring, respectively. Reforming the country’s pension system will be required in the future, well before the operating balance becomes negative. This could be achieved through systemic and/or parametric reforms. The objective of such reforms would be to retain pension benefits adequacy while restoring sustainability and improving actuarial fairness by distributing the impact of the recent domestic debt restructuring across generations.

  • Other financial institutions incurred losses comparable to banks’ but with a different impact on their solvency position. Credit unions have no minimum regulatory requirement and, on average, they continue to have capital above the 10 percent of assets recommended by Financial Services Commission (FSC) guideline. Insurers continue to meet minimum capital requirements with maturity matching of property and casualty (P&C) insurers negatively affected by the lack of short-term securities post restructuring and of life insurers positively affected by the introduction of longer-term securities post restructuring. The solvency position of private pension funds deteriorated considerably, especially of those plans heavily invested in Government paper and recapitalization plans have been agreed with the relevant supervisor. The FSC has also put in place a five-year forbearance policy to cover the non-bank sector’s potential breaches of capital, reserves and other statutory benchmarks.

uA01fig02

NIS: Operating Balance

(BRB$ million)

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Sources: Fund staff calculations.
uA01fig03

NIS: Reserves

(BRB$ million)

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Sources: Fund staff calculations.

E. Growth Oriented Reforms

21. Renewed confidence in the country’s macroeconomic framework and regulatory streamlining are expected to increase growth over the medium term. With the adoption of the new Town and Country Planning Law in January 2019, the process for providing construction permits has been streamlined. To support the sound development of fintech start-ups, the Government has established a Sandbox regime; financial innovation could help support more efficient allocation of savings. The authorities intend to carefully review the different components of the World Bank’s Doing Business survey to identify, and address, key obstacles to growth, and they are preparing a growth diagnostic with staff support.

22. The authorities plan to gradually liberalize exchange controls, as envisaged under the program. Initial steps were announced in the Prime Minister’s March 2019 budget speech. The authorities plan to allow residents to open FX deposit accounts starting July 1, 2019, allow banks to lend in FX, and to relax the FX surrender requirement for exporters. Reform in this area will remain cautious and gradual, to ensure that the international reserves position is not impacted. Staff supports the proposed sequencing and gradual liberalization. The CBB will need to develop liquidity management capacity and instruments to support liberalization of the exchange controls with IMF technical assistance support. The FX fee13 introduced in July 2017 was assessed by the Fund as a capital flow management measure and it remains in place; the authorities aim to phase this out as the reserve position and the fiscal position strengthen.

Program Issues

23. All performance criteria for end-March were met (Table 2, Appendix II). Modified performance criteria and indicative targets are proposed to be set through March 2020. A new indicative target for monitoring SOE arrears is proposed covering the same SOEs covered under the indicative ceiling on transfers. Staff supports the authorities’ request to modify the performance criteria for end-September 2019 and end-March 2020 given revised projections.

24. Six structural benchmarks were met and the remaining four were implemented with minor delays (Table 2, Attachment I). The Financial Management Act and the Town and Country Planning legislation were adopted by Parliament in early 2019, and the consolidated report on performance of SOEs was submitted to Parliament in early April 2019.

25. New structural benchmarks for upcoming reviews are proposed, and a few are proposed to be reset (Table 1, Attachment I). The June 2019 structural benchmark on civil servants’ pension reform is proposed to be reset for end-June 2020, to provide more time for consultation and to prepare an actuarial review that will inform the planned reforms (new structural benchmark for end-December 2019). A new structural benchmark for end-July 2019 is proposed to be set to require the proclamation of the new FMA Act by the Governor General. The end-June 2019 benchmark on amending the Central Bank Law is proposed to be reset for end-December 2019 to accommodate the need for further consultations and legal drafting capacity constraints. The end-June 2019 benchmark on reviewing SOE tariffs is proposed to be reset to end-September 2019 to accommodate the need for further consultations with social partners.

26. The authorities have established a program oversight committee (the BERT Monitoring Committee or BERT MC) to strengthen societal ownership and build public support for the program. This committee includes members from the private sector, unions, and civil society who will closely monitor and communicate program implementation to the broader public through regular media briefings. BERT MC issued its first quarterly report and held its first quarterly press conference in February 2019.

27. Progress is being made in implementing technical assistance recommendations on statistical issues. The Barbados Statistical Service (BSS) has revised annual and quarterly GDP series. However, further improvements and rebasing the GDP estimates to 2016 have been delayed due to limited resources. A two-year project from the IMF aiming to accelerate progress in upgrading GDP series has commenced. Since May 2019, the IMF is also supporting the BSS with peripatetic visits to improve coordination and communication on data sources of the national accounts compilation system. The production of PPI statistics has improved, but staff shortages limit the ability of the BSS to meet the monthly publication schedule agreed under the program. The CBB is addressing weaknesses in monetary and external statistics.

28. With strong implementation of the program, Barbados’ capacity to repay the Fund remains adequate and financing assurances remain in place (Table 10). Debt service to the IMF is projected to remain below 2 percent of exports and below 1 percent of GDP throughout the projection period to 2032, while gross reserves are projected to remain well above 100 percent of ARA over the full projection period. The authorities’ commitment to the program and their solid repayment history following its two previous Fund programs also provide comfort. The EFF-supported program is fully financed over the next 12 months, with good prospects for the remainder of the program period. Adequate safeguards remain in place for further use of Fund resources. The limited accumulation of external arrears, which are expected to be temporary, does not undermine the medium-term viability of the BOP and thereby, the capacity of Barbados to repay the Fund.

29. A first-time safeguards assessment of the Central Bank of Barbados (CBB) was completed in December 2018. It found relatively strong internal and external audit mechanisms that are subject to close oversight by the Audit Committee. The assessment identified a need to strengthen the legal framework, foreign reserves management, compilation of monetary data, and to enhance transparency in financial reporting. The CBB is making progress with implementing the assessment’s recommendations, and legal amendments are being drafted with IMF technical assistance (structural benchmark). While the 2018 audit was completed within the statutory three-month deadline, the timeliness of publication of the audited financial statements should be improved.

Staff Appraisal

30. The authorities have shown strong ownership of the reform effort and program implementation has also been strong. All performance criteria for March 2019 were met. All structural benchmarks have been implemented, four with minor delays. Prospects for continued strong program performance are good.

31. The fiscal adjustment continues as programmed with the primary surplus targeted at 6 percent of GDP for FY2019/20. Staff supports the authorities’ view that a 6 percent of GDP primary surplus for this fiscal year entails risks and continued commitment from the authorities. The target is supported by concrete policy measures including the recent tax policy reform, the introduction of several new taxes, ongoing reforms in public financial management, a reduction of transfers to SOEs, and adequate provisions for social safety nets and capital expenditure. The planned adoption of a fiscal rule in 2020 will help sustain the fiscal reform effort over the medium and long term.

32. SOE reforms are essential for achieving the primary surplus target and maintaining it over the medium term. To secure fiscal space for investment in physical and human capital, grants to SOEs are envisaged to decline from 8 percent of GDP in FY2017/18 to 6 percent of GDP by FY2021/22, by a combination of: (i) much stronger oversight of SOEs, supported by improved reporting; (ii) cost reduction, including reduction of the wage bill; (iii) revenue enhancement, including an increase in user fees; and (iv) mergers and divestment.

33. The domestic debt restructuring has significantly reduced Barbados’s public debt burden without jeopardizing financial stability. Domestic public debt declined by 30 percent of GDP, while gross financing needs declined by 35 percent of GDP. Banks’ capital adequacy declined from 17 percent in December 2017 to 14 percent in December 2018. The insurance and credit union sectors remain sound. At the same time, the CBB now has negative capital and the NIS’ financial position has worsened. The authorities will develop plans to recapitalize the CBB and address medium and long-term challenges for the NIS stemming from the debt restructuring.

34. The authorities are continuing good faith negotiations with external commercial creditors. The authorities and external creditors’ committee have continued to meet regularly, and the authorities have continued to share data with the external commercial creditors. Together with the already concluded domestic debt restructuring, ongoing fiscal adjustment, and measures to boost growth, the external debt restructuring will help restore debt sustainability.

35. While the authorities are well on the way to restoring fiscal sustainability, these achievements must be secured by improving the CBB’s governance framework. Amendments to the Central Bank Law should limit central bank financing of the Government to short-term advances and strengthen the CBB’s mandate, autonomy, and decision-making structures.

36. Program implementation going forward will be challenging. Risks to the program include limited implementation capacity, untested ability to maintain high primary surpluses over a sustained period, and risks related to the external debt restructuring process. Additional challenges include reforming the civil service pension system and strengthening the effectiveness of customs. The tasks are arduous, but there is no alternative route to restoring fiscal and external sustainability to spur a sustained economic recovery.

37. In light of strong program implementation, staff recommends completion of the first review of the extended arrangement under the Extended Fund Facility, and it supports the authorities’ request to modify performance criteria.

Figure 1.
Figure 1.

Barbados: Real Sector Developments

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Figure 2.
Figure 2.

Barbados: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Figure 3.
Figure 3.

External Sector Developments

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

1/ For 2018, figures for long-term inflows and capital and financial account i.e. reflects the accumulation of external commercial arrears equivalent to US$34 million. The current account deficit in 2018 is higher by one percent of GDP including interest payment of arrears to commercial creditors.”
Figure 4.
Figure 4.

Barbados: Monetary Sector Developments

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

1/ Private sector credit growth reflects the financial consolidation of a financial and trust company with its parent bank. Otherwise, credit growth would be flat.
Figure 5.
Figure 5.

Barbados: Financial Sector Developments

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Figure 6.
Figure 6.

Barbados: Social Development Indicators

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Figure 7.
Figure 7.

Barbados: Competitiveness Indicators

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Figure 8.
Figure 8.

Barbados: Economic Performance in a Regional Context

Citation: IMF Staff Country Reports 2019, 182; 10.5089/9781498321648.002.A001

Table 1.

Barbados: Selected Economic Indicators, 2016–20

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Sources: Barbados authorities; UNDP Human Development Report; Barbados Country Assessment of Living Conditions 2010 (December 2012); and Fund staff estimates and projections.

Fiscal year is from April to March.

Private credit growth in 2018 reflects the merger of a trust company with its parent bank.

After external commercial debt restructuring.

Table 2a.

Barbados: Central Government Operations, 2016/17–2024/25

(in millions of Barbados dollars) 1/

article image
Sources: Ministry of Finance; and Fund staff estimates.

Fiscal year is from April to March.

Privatization proceeds.

Insurance companies and other non bank private sector.

Including: CG, CG guaranteed, and arrears. From FY 2018/19, data includes both external and domestic debt restructuing; hence, it excludes debt directly serviced by SOEs no longer guaranteed by the CG.

Net of domestic expenditure arrears repayment.

Table 2b.

Barbados: Central Government Operations, 2016/17–2024/25

(in percent of GDP, unless otherwise indicated) 1/

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Sources: Ministry of Finance; and Fund staff estimates.

Fiscal year is from April to March.

Privatization proceeds.

Insurance companies and other non bank private sector.

Including: CG, CG guaranteed, and arrears. From FY 2018/19, data includes both external and domestic debt restructuing; hence, it excludes debt directly serviced by SOEs no longer guaranteed by the CG.

Net of domestic expenditure arrears repayment.

Table 3.

Barbados: Public Debt, 2016/17–2024/25 1/2/

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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.

Central Government debt, Central Government arrears, and SOE debt guaranteed by the Central Government.

All medium- and long-term.

All short-term.

Excluding principal amortization arrears.

Including principal amortization arrears.

Table 4a.

Barbados: Balance of Payments, 2016–24

(in millions of US$)

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

Current account balance pre-restructuring.

Includes debt forgiveness as a result of debt restructuring.