(CMC) — The International Monetary Fund (IMF) says Barbados is in a precarious economic situation with its international reserves having dwindled to US$220 million, while central government debt is unsustainable.
Bert van Selm, who headed an IMF delegation to the island, said at the end of the three day visit that the fiscal deficit has decreased over the last few years but remains large, at about four per cent of gross domestic product (GDP) in the fiscal year 2017/18.
He said the Central Bank of Barbados (CBB) is reporting a contraction of output of 0.7 per cent in the first quarter of 2018, over the same period last year.
“The Barbadian authorities, in close consultation with their social partners, are rapidly developing a plan to address current economic vulnerabilities. We welcome the government’s plans to urgently address infrastructure problems, and its goal of seeking to support the most vulnerable during the economic adjustment process,” said van Selm, whose visit here was to hold discussions on economic policies and possible IMF financial support of the government’s economic plan.
“At this juncture, the IMF’s recommendations contained in the 2017 Article IV Consultation remain highly relevant to rebuild confidence and address Barbados’ current challenges.”
He said substantial fiscal consolidation is needed to place debt on a clear downward trajectory in conjunction with the proposed debt restructuring, and to address balance of payments risks that cloud the country’s future.
“Since tax and revenues are relatively high, the adjustment effort should focus on the expenditure side, including by improving the efficiency and effectiveness of public services, containing wages, and reforming government pensions.”
The IMF official said that government transfers to state owned enterprises (SOEs) need to be reduced by reviewing user fees, exploring options for mergers and privatisation, and by providing much stronger oversight.
He said the tax policy should be reviewed with a view to broadening the tax base and improving its progressivity, while efforts to strengthen tax administration should continue. Structural reforms are critical to improve the business climate in Barbados to attract investment, and develop the private sector.
“Fiscal consolidation will also help to reduce financing needs, in conjunction with the proposed debt restructuring. It will be important for the CBB to limit financing of the government budget given that such practice is not consistent with Barbados’ exchange rate peg; the large monetary financing over the last few years has contributed to the decline in international reserves.”
van Selm said that the delegation had also taken note of the authorities’ decision to seek a restructuring of domestic debt and external debt to commercial creditors. He said an early and open dialogue with the country’s creditors, aiming to achieve an orderly debt restructuring process, is important.
““Overall, the team had very positive and candid discussions with the government during the visit. In the coming months, we expect to continue our close dialogue with the Barbados government with the aim of reaching understandings on economic policies that could underpin an IMF supported program. Our goal is to help Barbados achieve higher living standards and more inclusive growth for the years ahead.”
During the three day visit, the delegation met with newly elected Prime Minister Mia Mottley, CBB Governor Haynes, and other key officials.
The delegation said it “also had good opportunities for exchange of views with social partners, including labour unions and the private sector.