The International Monetary Fund (IMF) says continued strong growth in long-stay tourism has supported Barbados’ economic growth, but fiscal consolidation is contributing to a slowdown and that real growth is projected to fall below one per cent this year..
An IMF team, which has ended a two week visit to the island, said that the adjustment strategy should focus on addressing the high transfers, containing other current expenditures and maintaining a strong revenue effort.
It said that urgent structural reforms are needed to support growth and improve the business climate for domestic and foreign investment.
The team, led by Judith Gold, the Deputy Division Chief at the Washington-based financial institution, said that following last year’s improved performance of 1.6 per cent, real growth is projected to slow to 0.9 per cent for the year, reflecting ongoing fiscal consolidation efforts. It said long-stay tourist arrivals continue to expand at a healthy pace. Inflation is projected to rise by year end to 5.5 per cent, from 3.6 per cent at end-2016. While credit growth remains subdued, financial soundness indicators suggest a relatively healthy banking sector.
“Although the current account balance is improving, net international reserves (NIR) have fallen further. The current account deficit narrowed to 4.4 per cent of gross domestic product (GDP) in 2016, and it is expected to narrow further in 2017, as non-oil imports fall in response to the May 2017 budget measures,” said Gold.
She noted however, NIR continue to decline as government debt service exceeds new funding, and private foreign inflows remain weak. At end-September, NIR stood at BDS$550 million (One Barbados dollar=US$0.50 cents).
She said that the fiscal performance in the financial year 2016/17 improved but the deficit remains large. “The fiscal deficit declined more than anticipated in financial year2016/17 to 5.5 per cent of GDP reflecting improvement in revenue performance, including one-off factors and lower current expenditure. “Central government debt increased to 137.1 per cent of GDP, up from 134.7 per cent in fiscal year 2015/16 and 99.4 per cent of GDP in financial year 2011/12. Excluding NIS holdings, central government debt was 101 per cent of GDP in financial year 2016/17,” she added.
The IMF official said that with the growing financing challenges and falling reserves, the government introduced an ambitious budget on May 30, 2017 aimed at significantly reducing the fiscal deficit and shoring up international reserves.
However, exemptions to the NSRL, lower-than-expected non-oil imports, shortfalls in some other revenues, and high transfers indicate that the government is likely to fall short of its target, she said.
The IMF estimates that the deficit will decline to 4.1 per cent in financial year 2017/18 without divestment proceeds.
“The larger than expected fiscal deficit is increasing funding challenges. While the central bank significantly reduced its funding of the government in the first half of financial year 2017/18, the commercial banks’ reserve requirements for holding government securities have been increased,’ Gold said.
She said that substantial further fiscal effort is needed to decisively place the debt on a downward trajectory.
“Given the urgency in addressing funding, balance of payment risks, the high debt, and the limited policy options, the fiscal adjustment must continue, with a focus on accelerating SOEs’ reforms to facilitate a significant and durable reduction in transfers.”
The IMF is recommending that the government seeks to increase the primary surplus from the 4.4 per cent of GDP expected in financial year 2018/19 to 7.5 per cent of GDP by financial year 2020/21, corresponding to an overall budget close to balance. The sizable fiscal adjustment would put the debt-to-GDP ratio on a clear downward path toward debt sustainability.
Gold said that the adjustment strategy should focus on addressing the high transfers, containing other current expenditures and maintaining a strong revenue effort.
She said reforms of state owned enterprises should include improved management, cost recovery, reduced services, mergers, closures, and privatization.
“Containing other current expenditures including the wage bill and government pensions is also critical. Tax policy should be reviewed with a view to broadening the tax base and improving its progressivity, while efforts to strengthen tax administration must continue. Further, arrears to the private sector should be cleared, and remaining current should be a government priority.
“A concentrated effort to improve implementation capacity, including by providing clear direction and clarifying expectations, is also needed. In this regard, staff commend the authorities’ intention to shortly enact a new Financial Management and Audit Act, which could help address some of the implementation gaps.”
Gold said that structural reforms to support growth and improve the business climate for domestic and foreign investment are also urgent.
“These reforms would aim to improve business processes, such as significantly reducing clearance times for immigration and customs, accelerating approval of building permits, and streamlining legal procedures.”
The IMF said that it welcomed the progress in formulating the Barbados Sustainable Recovery Programme (BSRP), which is being drafted in consultation with the Social Partnership, and encourages the authorities to continue to closely collaborate to develop a consensus on a strategy for reform.
“The IMF stands ready to assist the government of Barbados, including through continued policy dialogue and technical assistance. The team would like to thank the authorities, technical staff, representatives of civil society, and the private sector, for their open discussions and constructive dialogue,’ Gold said.