BRIDGETOWN, Barbados, November 15, 2019 (CMC) – The International Monetary Fund (IMF) said, today, that Barbados continues to make good progress in implementing its ambitious economic reform program, and that the island is in line to receive US$48 million in assistance by December.
An IMF team has ended a two-week visit, here, noting that the homegrown Barbados Economic Recovery and Transformation (BERT) plan aims to restore macroeconomic and debt stability, increase international reserves, and raise growth.
The IMF said that the BERT program, supported by the IMF’s US$290 million Extended Fund Facility, is on track.
“All program targets for end-September 2019, under the EFF, have been met. The program target for primary surplus was met by a comfortable margin, which bodes well for reaching the financial year 2019/20 primary surplus target of six percent percent of GDP (gross domestic product).”
The IMF said Barbados also continues to make good progress in implementing structural benchmarks, under the EFF.
“Following productive discussions, the IMF team and the Barbadian authorities reached staff-level agreement on the completion of the second review under the EFF arrangement. The agreement is subject to approval by the IMF Executive Board, which is expected to consider the review in December. Upon completion of the review, about US$48 million will be made available to Barbados, bringing the total disbursement to US$144 million,” it added.
The IMF said that international reserves, which reached a low of US$220 million or an average six weeks of import coverage, in May last year, have recovered to more than US$600 million by the end of October this year.
“The completion of a domestic debt restructuring, in late 2018, has been very helpful in reducing economic uncertainty, and the terms agreed with creditors have helped to put debt on a clear, downward trajectory,” the IMF said in a statement.
It added that the agreement — reached in October 2019, between the government of Barbados and the external creditor committee — reduces debt and uncertainty and that the agreed terms will bring about an immediate reduction in public debt, with a 26 percent haircut on principal and accrued interest, and will support further debt reduction, with a lower interest rate.
“The terms of the new instrument will help Barbados reach its medium-term target of 80 percent debt/GDP (gross domestic product) by 2027/28, and 60 percent by 2033/34. The inclusion of a natural disaster clause in the new debt will help Barbados remain current on its debt obligations, in the event of a natural disaster. By reducing uncertainty, the completion of the external debt restructuring improves prospects for investment.”
The IMF delegation said that the fiscal adjustment is proceeding as programmed, with the authorities targeting a six percent of GDP primary surplus for the financial year 2019/20.
It said full-year effects of reforms, set in motion during the last financial year, including the introduction of several new taxes, including an airline travel fee, room levies, a new fuel tax, and a new health service contribution, are helping to achieve this target.
A broadening of the base of the Value Added Tax (VAT) and the land tax, implemented in March 2019 in the context of the financial year 2019/20 budget, are also supporting revenue. The budget approved for the financial year 2019/20 provides a solid basis for the targeted fiscal consolidation, the IMF said.
It noted that reducing transfers to state-owned enterprises (SOE) is key for sustainable fiscal consolidation.
At close to eight percent of GDP in financial year 2017/18, transfers to SOEs had become a significant burden on the budget, and a major contributor to fiscal risks. Under the BERT program, grants to SOEs are targeted to decline to under six percent of GDP by financial year 2021/22, by a combination of much stronger oversight of SOEs, supported by improved reporting and tighter control over SOE borrowing; cost reduction, including reduction of the wage bill; revenue enhancement, including an increase in user fees, combined with investments to improve services delivered by SOEs; and mergers and divestment.”
The IMF said that together with addressing the fiscal dominance problem, the Central Bank of Barbados (CBB) needs to be equipped with tools and facilities to be able to manage liquidity, consistent with the exchange rate peg.
The delegation noted that following several years with high monetary financing, the CBB now provides liquidity to the government, only to smooth unforeseen developments in revenue and spending.
A new CBB law will clarify the mandate of the CBB, enhance the decision-making structures of the central bank, and introduce safeguards to protect the institutional and functional autonomy of the CBB. Work on this new law is well underway, it noted.
The IMF said that the financial sector remains sound, despite a significant impact from the domestic debt restructuring. Depositary corporations are in general well-capitalized and liquid.
“The authorities are providing explicit and time-bound regulatory forbearance targeting select financial institutions with high – post-debt restructuring – concentration ratios until they rebuild capital buffers. With the expected improvements in the business climate and fiscal sustainability, credit growth is expected to pick up, through increased confidence and enhanced opportunities for lending.”
But the Washington-based financial institution warned that structural reform is necessary to unlock Barbados’ growth potential, and that the authorities have started to address challenges, related to the business climate, with several initiatives.
“The process for providing construction permits has been streamlined. The credit bureau regime is being formalized, by preparing a Fair Credit Reporting Act and a Code of Conduct for the operation of credit bureaus. There is much scope for further improvement in the business climate, including by reforming customs administration to facilitate trading across borders, streamlining processes for setting up new businesses, and strengthening protection of minority shareholders.”
The IMF said that improving resilience to natural disasters and climate change will help strengthen the outlook. It said, given limited fiscal space and low fiscal buffers, it is important to make good use of contingent financing and insurance options.
“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 debt restructuring to strengthen its protection against natural disasters.”