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    September 18

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IMF cautions Barbados on public finances

CMC,

Added 01 July 2017

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BRIDGETOWN – The International Monetary Fund (IMF) says the Barbados economy continues to recover due to a stronger tourism performance but warned that improving public finances remains a critical challenge.

It said that economic growth in 2016 was estimated to have been 1.6 per cent and to have accelerated in the first quarter of 2017 to two per cent.

The IMF, which said it is ready to assist the Freundel Stuart government through continued policy dialogue and technical assistance, has ended a two week mission here.

The mission, which was led by Judith Gold, said the stronger economic performance has supported a reduction in the unemployment rate to 9.7 per cent in 2016 from 11.3 per cent in 2015.

It said Inflation started to pick up in the second half of 2016 after deflation in 2015, and on a point-to-point basis reached 3.2 per cent by end-December 2016 mainly due to higher food prices.

“The current account has further narrowed by two percentage points to 4.5 per cent of gross domestic product (GDP) on the back of improved tourism receipts, a robust increase in exports, and low oil prices.”

She said notwithstanding this improvement, international reserves fell to BDS$682 million (One Barbados dollar =US$0.50 cents) by end-2016, about two months of imports.

“Delayed official loan disbursements and privatization, as well as lower private-sector inflows, were key drivers of this decline. Net International reserves remain relatively low,” Gold said, adding that there was there was some progress in reducing the fiscal deficit in financial year 2016/17, which is estimated to have declined to 5.5 per cent of GDP from 6.8 per cent in financial year 2015/16.

“The majority of the adjustment was generated by lower government spending, while fiscal revenues held steady. Despite this progress, the large government financing requirements were a challenge, as banks reduced their sovereign exposure. As a result, the government had to increasingly resort to funding from the Central Bank of Barbados (CBB).”

Gold said that growth in 2017 is projected to slow to less than one per cent, reflecting the fiscal consolidation efforts introduced in the financial year 2017/18 budget.

“Inflation is expected to continue to accelerate to 6.7 per cent by year end because of the increase in the National Social Responsibility Levy (NSRL) and other taxes and fees, but revert to more historical norm in 2018 and subsequent years. There are important downside risks related to the increase in domestic and global uncertainty, including the impact of the Brexit on the British pound.”

She said that continued fiscal discipline, with economic growth, are essential to securing Barbados’ future and that they will be critical to bolster international reserves and support the currency peg.

“Only a substantial and a sustained reduction in the fiscal deficit, which will put the debt-to-GDP ratio on a solid downward path, will restore the country’s credit rating and attractiveness to investors.”

Gold said that the May 30 budget accelerates the pace of adjustment.

“It seeks to address the fundamental imbalance between revenues and expenditures that has characterized Barbados’ public finances in the past decade, and to significantly reduce new funding requirements.

“The budget is primarily focused on raising revenues while shoring up international reserves, including through an increase in the NSRL—which mostly impacts imported goods—from two per cent to 10 per cent. The government also plans cuts in current expenditure, to complete ongoing privatisation efforts, and to undertake new divestments. In addition, the government seeks to initiate a voluntary exchange of debt instruments with the National Insurance Scheme and the CBB to reduce the interest bill.”

She said if implemented as envisaged, the 2017 budget would lead to substantial gains toward improving public finances.

The IMF official said that over the medium-term, further fiscal adjustment would be needed on the expenditure side to decisively reduce debt and debt service costs.

She said transfers to public enterprises of close to eight per cent on an annual basis represent the second largest expenditure item, after the wage bill, and about the same magnitude as the interest bill on the public debt.

“Both expenditure categories weigh heavily on public finances and critical reforms are needed over to restore sustainability and confidence. Reduction in transfers to public enterprises must be supported by structural reforms to reduce SOEs’ operating costs, rationalize their programmes, and raise their revenues.

“Consideration should also be given to divesting commercial SOEs that can be run more efficiently and profitably by the private sector. Other structural reform, especially those focused on improving the investment climate and fostering growth are also critical,” she added. (CMC)

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