Barbados: Fourth Review Under the Extended Arrangement, Requests for Augmentation of Access, and Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for Barbados

Fourth Review Under the Extended Arrangement, Requests for Augmentation of Access, and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Barbados


Fourth Review Under the Extended Arrangement, Requests for Augmentation of Access, and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Barbados

Recent Developments and Outlook

A. Recent Developments

1. Barbados has made good progress in implementing the Economic Recovery and Transformation (BERT) plan—but faces major challenges owing to the global coronavirus pandemic. International reserves, which reached a low of US$220 million (5–6 weeks of import coverage) at end-May 2018, have increased to more than US$1 billion by end-October 2020, supported by strong fiscal adjustment before the COVID-19 pandemic, lending from international financial institutions, and external commercial debt restructuring. 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, and the third review of the EFF-supported program was completed on June 3, 2020. The safeguards assessment of the Central Bank of Barbados was completed in December 2018.

2. The government took swift actions to contain the spread of COVID-19. Enhanced screening measures were established at all ports of entry and restrictions on movement and economic activities were initiated within two-weeks of the first confirmed coronavirus case. This culminated into a 24-hour lockdown on all but essential services and a suspension of commercial airlift into Barbados at the beginning April. The rapid flattening of the coronavirus curve in the post- lockdown period suggests that these early actions to strictly curtail activities were effective. Active cases peaked at 56 and steadily declined to zero by end-June notwithstanding the phased re-opening of the economy in May, which included the observance of social distancing, temperature testing, and mask requirements. The resumption of commercial airlift in July resulted in a modest resurgence of imported cases, but enhanced screening protocols (e.g., mandatory quarantines and double-negative testing) have prevented domestic outbreaks and kept the overall number of cases contained in the low double or single digits.

Barbados: Evolution of COVID-19 Outbreak

(Number of cases as of November 10, 2020)

Citation: IMF Staff Country Reports 2020, 314; 10.5089/9781513563671.002.A001

Source: Government Information Service.

3. Preliminary data suggests that the economy contracted by 27 percent in the second quarter of 2020 (relative to the same quarter in 2019), followed by an 18 percent decline in the third quarter. Tourism came to a virtual standstill: most hotels closed, occupancy plummeted at facilities that were still open, and bookings for the following months were canceled. Airlines sharply reduced the number of flights or suspended them altogether. Unemployment increased three-fold to about 30 percent while unemployment insurance claims increased six-fold requiring liquidity support to the National Insurance Scheme (NIS), to be provided by the central government buying back its debt held by the NIS (as discussed below). In early July, the authorities cautiously reopened the island for international tourists, after successfully halting local transmission of the disease.

4. To mitigate the impact of the crisis, the primary balance target for FY2020/21 was reduced from 6 percent of GDP to 1 percent of GDP at the time of the third EFF review. In the first six months of FY2020/21 (April to September), tax revenues from tourism-related activities (such as VAT) fell sharply, while COVID-related expenditures for health care, welfare, and capex increased. Supported by a large one-off CIT revenue windfall from the international business sector in June (of 2½ percent of GDP), the primary surplus for the first six months of FY2020/21 amounted to 1½ percent of (annual) GDP.

5. Structural reform of SOEs continue. Under the new FMA law, the government must approve all SOE borrowing and can sanction SOEs for noncompliance with enhanced reporting requirements. Financial reports on SOE performance are presented to the government and parliament. As a testament to the effectiveness of reforms enacted to date, nominal aggregate transfers to SOEs in FY2020/21 are expected to remain close to FY2019/20 levels, despite increased COVID-related pressures. SOE reforms already implemented under the reform program (prior to the pandemic) include staff layoffs at SOEs, renegotiation of supplier contracts, an increase in some tariffs (bus fares, water rates), and new levies on sanitation, health services, and tourism.

6. Barbados’ international reserves have rebounded sharply supported by International Financial Institution (IFI) loans. Reserves increased to more than US$1 billion by end-October 2020, more than 7 months of import coverage and about 200 percent of the APIA metric. A sharp decline in tourism, partially mitigated by lower petroleum imports, led to a deterioration of the current account, though this was offset in the financial account by larger than expected official sector inflows. Since the third review, the BOP has strengthened with a smaller than originally projected current account deficit and larger than expected net inflows, especially FDI. The external sector assessment finds that Barbados’ external position in 2019 was broadly consistent with fundamentals and desirable policies (see Annex II).

Barbados: Gross International Reserves

(G&S import coverage and percent of ARA)

Citation: IMF Staff Country Reports 2020, 314; 10.5089/9781513563671.002.A001

Source: Fund staff calculations.

B. Outlook and Risks

7. The global coronavirus pandemic is expected to lead to a sharp contraction in 2020 with partial recovery in 2021 and 2022. Staff and the authorities now project the economy to contract by about 15 percent in 2020, down from 11½ percent at the time of the third EFF review, with the exact size of the downturn mainly dependent on the duration of the epidemic. Despite the cautious reopening of the tourism in July, arrivals remain at a small fraction of normal levels, with September arrivals still down almost 90 percent relative to previous years (see text chart). The economy is expected to start gradually recovering in 2021 and 2022. Over the medium term, structural reforms are expected to return growth to its medium-term average of about 2 percent.

Barbados: Tourist Arrivals


Citation: IMF Staff Country Reports 2020, 314; 10.5089/9781513563671.002.A001

Source: Central Bank of Barbados.

8. Risks to the outlook are high and tilted to the downside. The key risk is a further deepening and lengthening of the COVID-19 crisis. Lower than projected tourism arrivals will depress economic activity. Key source markets for tourism are the UK (with a market share of about 33 percent), the US (30 percent) and Canada (13 percent). With both the US and the UK in the grip of major coronavirus outbreaks, appetite for travel from these countries is expected to be negligible for the next six months. How quickly tourism trends will return to normal is hard to predict. A second outbreak of COVID-19 in Barbados itself could further reduce economic activity. A slower than projected recovery would further impact revenues and outlays for social safety nets and increase the risks to debt sustainability. Under this scenario, while some additional financing from IFIs will need to be sought to cover higher financing needs, there will likely also be a need to take additional measures to increase revenues and/or reduce expenditures, with a view to reducing the elevated level of public debt.

Policy Issues

A. Fiscal Policy in FY2020/21 and Beyond

9. For FY2020/21, the primary balance is now projected at minus 1 percent of GDP, down from plus 1 percent at the time of the third EFF review. This corresponds to an overall fiscal deficit of 5 percent of GDP. A meaningful recovery of tourism is no longer anticipated for the last quarter of 2020, and hence projections for government revenue in FY2020/21 have been reduced, while outlays to provide social support will be higher than anticipated at the time of the third review. For FY2021/22, the primary surplus target has been reduced to 2 percent of GDP, reflecting lower expected revenues. The authorities remain committed to compensate a lower primary balance this year and next with higher surpluses in future years, to ensure that debt targets can be reached (as discussed below). The lower primary balance targets for FY2020/21–2021/22 are appropriate given lower revenue owing to the worse-than-anticipated slump in tourism, the need to address the social impact of the global pandemic, available financing, and the authorities’ commitment to medium- and long-term debt reduction. A new procurement bill aimed to strengthen public procurement to promote integrity, fairness, transparency, and value for money in public procurement, and to ensure that outlays (including those related to COVID-19) are efficiently allocated is expected to be submitted to parliament by December 2020. Under this bill, the Chief Procurement Officer will be charged with facilitating the audit of crisis expenditures and publication of contracts and names of successful bidders (and their beneficial owners).

Barbados: Central Government Operations 1/

(In percent of FY GDP)

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Sources: Ministry of Finance; and Fund staff estimates.

Fiscal year is from April to March.

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

10. Over the medium term, fiscal adjustment will be supported by a cyclical recovery in revenues and continued structural reforms of SOEs. Tax revenues are projected to improve gradually with economic activity in FY2021/22 and FY2022/23.1 After increasing in FY2020/21 to accommodate higher spending on health and welfare, expenditure is expected to normalize in FY2021/22 while continuing SOE and pension reforms, together with containment of discretionary spending on goods and services and capital expenditure should help reduce outlays over time.

11. Short term risks to debt sustainability have increased (Annex I). The public debt-to-GDP ratio is projected to increase to 146 percent of GDP in FY2020/21 before decreasing to 107 percent of GDP by 2025. Debt remains above the 70 percent of GDP risk assessment threshold in the short and medium term. In addition, because of the COVID-19 crisis, the fiscal accommodation raises GFNs above the 15 percent of GDP risk assessment threshold. The COVID-19 induced fiscal accommodation will need to be compensated by higher primary surpluses starting with FY2021/22 to ensure debt sustainability. Under the baseline, the 60 percent medium term anchor is reached in FY2033/34 and the interim target of 80 percent continues to be reached in FY2029/30. Debt sustainability is contingent on the authorities maintaining high primary balances for several years. Risks to debt sustainability are mitigated by Barbados’ strong track record under the EFF-supported program. The higher GFNs in FY2020/21 are primarily due to the lower GDP and not to an increase in short term debt. About 50 percent of GFNs has no rollover risk (see Annex I). Finally, market perception of country risk continues to improve. Spreads on commercial external debt have decreased to about 500bps in October 2020(text chart). For FY2020/21, excess external financing sources will be used to pre-fund below the line liquidity support to NIS in the next fiscal year and to support the medium term fiscal adjustment to continue to maintain debt sustainability.

Barbados: Bond Spread (Barbados over U.S. 10-year bonds)

(Basis points)

Citation: IMF Staff Country Reports 2020, 314; 10.5089/9781513563671.002.A001

Sources: Central Bank of Barbados, Bloomberg and Fund staff calculations.

12. The sharp increase in unemployment has led to higher outlays on unemployment benefits and puts pressure on NIS finances. By mid-October 2020, unemployment insurance outlays exceeding B$120 million (just over 1¼ percent of GDP) had been paid out by the NIS. For full FY2020/21, additional NIS unemployment and severance outlays are projected at about B$160 million (1¾ percent of GDP). To facilitate these payments, the authorities plan to provide liquidity support to the NIS by buying back central government debt held by the NIS. This operation would also help reduce central government GFNs.

Barbados: Annual Unemployment Claims 1/

(Left axis, thousand; right axis, percent of laborforce)

Citation: IMF Staff Country Reports 2020, 314; 10.5089/9781513563671.002.A001

Source: Barbados National Insurance Department.1/ Data for 2020 includes claims up to October 16, 2020.

13. The authorities have launched a plan to increase the long-term competitiveness of the tourism sector and reduce unemployment by training staff and investing in renewable energy. Under this plan, employers that re-hire and train workers currently unemployed owing to the slump in tourism, and invest in renewables, can benefit from public support through a mix of grants and equity investments. This plan is tentatively estimated to cost ¼ percent of GDP in FY2020/21 and ½ percent of GDP in FY2021/22, while reducing NIS payments on unemployment and severance. Additional support to businesses is being provided through the recapitalization of SME lending funds.

Barbados: Estimates of Covid-Related Expenditures in FY2020/21

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Sources: Barbados authorities and IMF staff estimates

14. The authorities have started issuing a limited amount of long-term domestic debt under the Barbados Optional Saving Scheme (BOSS) program. Under the program, civil servants can elect to receive a limited portion of their wages in the form of long term bonds until the end of 2021. The program provides an additional (albeit limited) source of financing, at a time when sources of financing are limited for the government, it is strongly supported by public sector unions, and it contributes to unions’ support of the economic reform program. At the same time, the BOSS program could be seen as a retail savings program for civil servants that could compete with bank deposits. So far, take-up has been modest, with most civil servants preferring to receive their salaries in cash. By end-September 2020, about B$19 million (0.2 percent of GDP) in bonds were issued. The authorities expect to issue about B$90 million (1 percent of GDP) in long term domestic securities under the program.

15. To reinforce debt sustainability over the medium and long term, a fiscal rule is expected to be introduced by end-September 2021. The fiscal rule will target a steady reduction of the debt/GDP ratio to 60 percent by FY2033/34.

B. Monetary and Financial Sector Policies

16. Measures to support the credit market introduced by the central bank and commercial banks in March 2020 are still in place. Key measures include a reduction of the overnight lending discount rate from 7 to 2 percent and a reduction of the minimum statutory holding requirement for government securities from 17½ to 5 percent of deposits. As expected, banks have not resorted to the CBB for liquidity support so far, and in fact continue to hold excess bank reserves at the CBB. Staff assesses the measures taken by the CBB as appropriate to signal banks that sufficient liquidity support is available. However, in the long term, unremunerated structural excess liquidity in the market could undermine the exchange rate regime. In this context, repairing the CBB balance sheet to provide it with space to sterilize excess liquidity would be important to reduce this source of vulnerability. Commercial banks have also announced a voluntary and broad-base moratorium of up to six-months (expired by end-September) on loan repayment and revised loan terms on new loans for individuals and firms affected by the pandemic. Banks are now working with individual borrowers, as needed, including on further repayment extensions. The 2 percent foreign exchange fee introduced in 2017 remains in place . This was assessed by the IMF as a capital flow management measure and should be phased out.

17. The CBB has issued regulatory guidance to clarify the scope of temporary arrangements. While regulatory standards have been maintained, including on lending and reporting, in specific cases where the moratorium impacts banks’ prudential minima institutions are being allowed longer periods to rebuild capital and comply with regulatory requirements (subject to restrictions on dividend payments). The CBB is monitoring the situation to identify early signs of stress in the system and, if needed, to intervene to avoid disorderly conditions. Banks should continue to prudently restructure loans, as needed, on a commercial basis. They should also continue to carefully assess the credit quality of exposures, including those subject to moratoria.

18. The financial position of banks appears stable. Banks remain adequately capitalized and liquid, amid low profitability and heightened credit risk. As of September 2020, system-wide CAR was at 15.8 percent, liquid assets to total assets at 23.9 percent, and bank excess cash reserves at 21.9 percent. The system’s NPL ratio has been stable around 7.2 percent. Provisions have been increasing and reached 66 percent of NPLs. Banks are also liquid in FX acquired from their clients and, as such, have been able to meet clients’ FX demand without resorting to the CBB’s reserves.

19. A new central bank law which aims to enhance the CBB’s autonomy was submitted to parliament in November. The authorities and Fund staff have reached agreement on a law in line with best practice that establishes a double veto procedure for the appointment of the Governor and the members of the CBB Board, limits the circumstances under which the Governor of the CBB and the members of the Board can be dismissed, and further limits financing of the government to smooth unforeseen developments in revenues and spending (to 7.5 percent of an average of government revenue observed in the preceding three years), and/or in exceptional (and tightly defined) emergency situations, such as hurricanes (up to 3 percent of GDP). Submission of the law to parliament is a prior action for the completion of the fourth EFF review.2

Enhancing the Autonomy of the Central Bank

The new draft Act will redefine the mandate of the CBB to focus on core central bank activities. The main objectives of the CBB will be to maintain the value of the currency and to promote financial stability. The CBB will not be allowed to conduct quasi-fiscal activities. The CBB’s advances to the Government will be limited to short term advances to permit the Government to manage its cash flow. The new draft Act will include an escape clause to allow the CBB to purchase a limited amount of government securities on the primary market in the event of a public emergency declared by Parliament.

The new draft Act will redefine the governance structure of the CBB to limit potential undue interference in policy formulation. The mandate of the CBB Board will be limited to overseeing the Executive Committee. The Executive Committee will be in charge of formulating and implementing policy, and of daily management of the CBB. This governance structure ensures an effective separation between oversight and executive management while enhancing the CBB’s autonomy.

20. Barbados remains on the Financial Action Task Force (FATF) list of jurisdictions under increased monitoring. It was added to the “grey list” in February 2020. Barbados was also added to the EU list of non-cooperative jurisdictions for tax purposes in October 2020. Staff stressed the need to strengthen the AML/CFT framework, in close cooperation with the FATF, and assess progress in implementing FATF recommendations; and to work in close collaboration with international counterparts on improving the tax policy framework.

C. Policies for Strengthening Resilience to Natural Disasters and Climate Change and to Boost Growth

21. Improving resilience to natural disasters and climate change will reduce risks to the outlook. Although Barbados appears not as exposed to natural disasters as some other Caribbean countries, climate change is likely to increase its vulnerability to weather-related events that could have a major impact on its economy. This has a direct impact on debt sustainability. However, Barbados insures natural disaster risks through the Caribbean Catastrophe Risk Insurance Facility (CCRIF). With the inclusion of natural disaster clauses into the new domestic and external bonds, the government of Barbados effectively used the recent debt restructuring to strengthen its protection against natural disasters. These clauses allow for the capitalization of interest and deferral of scheduled amortization falling due over a two-year period following the occurrence of a major natural disaster. For the new domestic bonds, the trigger for a natural disaster event is a payout above US$5 million by CCRIF. The government has secured an IDB contingent credit facility that would allow Barbados to borrow up to almost 2 percent of GDP in case of a natural disaster. Such facilities provide important financing to accommodate the external shock of natural disasters. While Barbados scores high in financial resilience, it can improve structural and post-disaster resilience, for example by exploiting opportunities to improve the disaster resilience of construction under the ‘roofs to reefs’ program, and by strengthening the public procurement system. Under the plan to support companies in the tourism sector discussed above, the government provides incentives to invest in renewable energy, water conservation, and building resilience.

22. Structural reforms to unlock Barbados’ growth potential will need to be accelerated once the global pandemic recedes. A solid recovery after the pandemic will critically depend on improvements in the business climate, including by (i) streamlining the process for setting up new businesses, (ii) eliminating the requirement to use a company seal, (iii) introducing a single business administration number; (iv) amending the company law to strengthen protection of minority shareholders; (v) reforming customs administration to strengthen trading across borders, and (vi) digitizing property records in the land registry (see MEFP paragraphs 31–37).

Data Issues

23. Data shortcomings are being addressed. A two-year Canada-funded project coordinated by STA started in May 2019 to upgrade national accounts, with support from the Caribbean Regional Technical Assistance Center (CARTAC) and Canada’s Project for the Regional Advancement of Statistics in the Caribbean (PRASC). The project focuses on updating the GDP benchmark estimates from a supply-use perspective to enable the Barbados Statistical Service (BSS) to compile and disseminate constant 2016 price estimates of GDP (rebased from 2010) and updated quarterly estimates of both activity and expenditure-based GDP. Four additional statisticians were hired by the BSS for the project and to enhance resource capacity. An STA remote mission in September 2020 supported Barbados’ efforts to implement the IMF’s Enhanced General Data Dissemination Standard (e-GDDS) and to launch a National Summary Data Page to enhance data transparency by end-2020.

Program Issues

24. An augmentation of SDR 48 million (51 percent of quota, or about US$66 million) is proposed, to be delivered in the form of budget support, to bolster the reserve position while addressing larger-than-expected fiscal needs.3 The slower-than-expected tourism recovery has generated a BOP and fiscal financing gap that can be filled with a second augmentation under the EFF. The proposed augmentation would bring the total purchase for the fourth review to SDR 65 million (69 percent of quota, or about US$90 million). Access under the EFF would increase to SDR 322 million (341 percent of quota, or about US$450 million) (Table 8). The proposed second augmentation under the EFF would take annual access over the last 12 months (for the third and fourth reviews) to 176 percent of quota—still well below the temporarily increased annual access limit of 245 percent of quota. Sustained pressure on international reserves is projected owing to continued depressed levels of tourism-related inflows (including low FDI) in the remainder of 2020 and in 2021. Given that the country is exposed to large shocks (including natural disasters) and the need to maintain high external buffers to maintain credibility in the exchange rate peg, a rapid drawdown of external reserves would not be advisable. To help address emerging fiscal financing needs, the authorities have requested for the purchase to be made available in the form of budget support, and staff supports this request. With limited other sources of financing available at present (in light also of the recently completed debt restructuring), IMF budget support is appropriate.

Table 1.

Barbados: Selected Economic Indicators, 2017–2021

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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.

Including guaranteed debt, arrears and IMF EFF loan.

Table 2a.

Barbados: Central Government Operations, 2018/2019–2025/2026

(In millions of Barbados dollars) 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, arrears, and IMF EFF loan. From FY 2018/19, data includes both external and domestic debt restructuring; hence, it excludes debt directly serviced by SOEs no longer guaranteed by the CG.

Net of domestic expenditure arrears repayment.

Relative to third EFF review projections.

Table 2b.

Barbados: Central Government Operations, 2018/2019–2025/2026 (In percent of FY-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, arrears, and IMF EFF loan. From FY 2018/19, data includes both external and domestic debt restructuring; hence, it excludes debt directly serviced by SOEs no longer guaranteed by the CG.

Net of domestic expenditure arrears repayment.

Relative to third EFF review projections.

Table 3.

Barbados: Public Debt, 2018/2019–2025/2026 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 including IMF loan to the CBB.

All medium- and long-term.

All short-term.

Excluding principal amortization arrears.

Including principal amortization arrears.

Including IMF loan to the CBB under the Extended Fund Facility.

Including IMF loan to the Treasury under the Extended Fund Facility.

Table 4a.

Barbados: Balance of Payments, 2018–2025 (In millions of US$)

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

Relative to third EFF review.