IMF: Barbados needs to raise tax rates
On November 29, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Barbados. The following is the statement of the Executive Board on the Barbados economy.
THE global economic crisis has hit Barbados particularly hard by adversely impacting all of its key economic activities, including tourism, financial services, and real estate investment.
After contracting by almost five per cent in 2009, output is expected to continue its decline in 2010, albeit at a slower rate.
The weak economy has led to a steady increase in the unemployment rate, which reached 10.7 per cent in the second quarter of 2010, up from 7.4 per cent in 2007.
While average inflation fell in 2009, it has picked up in 2010 and is expected to end the year at about five per cent, fuelled by higher energy prices, before receding again.
Lower Government revenues and higher expenditures are contributing to persistently large fiscal imbalances. Thus, the non-financial public sector deficit is expected to remain at around seven per cent of gross domestic product, or GDP, in fiscal year 2010/11 (April to March), only marginally lower than in the previous two fiscal years.
Public debt up
As a result, public debt continues to grow and could approach 115 per cent of GDP by the end of the current fiscal year.
The external current account deficit narrowed in 2009 to 5.5 per cent of GDP, down from almost ten per cent in the previous year, thanks to a recession-induced contraction of imports and lower petroleum prices.
Lower tourism receipts, the near stop in foreign direct investment inflows in 2009, and a US$100 million bond repayment mid-2010 put the country’s reserves under severe pressure.
However, the Special Drawing Rights allocations of US$85 million in 2009 in addition to two foreign bond placements in 2009 and 2010 totalling US$220 million, boosted international reserves, which are expected to end 2010 above US$700 million.
Executive directors noted that the global crisis severely impacted the Barbados economy, especially its key sectors – tourism, financial services, and real estate.
The economy is expected to rebound gradually but downside risks persist mainly from the uncertain global economic environment.
Directors commended the authorities for adopting a Medium-Term Fiscal Strategy aimed at generating a balanced Budget and reducing the high public debt-to-GDP ratio.
They welcomed the recent measures to raise VAT rates and public transportation tariffs while boosting spending targeted at vulnerable segments of society.
Directors emphasised that to place public debt on a sustainable path, additional measures will be necessary.
They encouraged efforts aimed at broadening the tax base, making the VAT increase permanent, raising corporate tax rates, and streamlining government operations while continuing to rein in current spending.
Prioritising expenditure would also make room for moderate increases in capital spending to support medium-term growth.
Directors observed that the peg to the United States dollar has provided a valuable anchor to Barbados. Noting that Barbados’ real exchange rate may have become somewhat overvalued, they called for decisive fiscal adjustment to safeguard the viability of the peg.
Directors viewed the current monetary policy stance as broadly appropriate. They recommended maintaining spreads between the minimum deposit rate and policy rates in core economies at levels consistent with prevailing market conditions.
Directors noted that banks in Barbados remain healthy. While non-performing loans have increased, robust capital bases provide effective cushions against future losses.
They commended the authorities for strengthening bank oversight, including by creating a financial stability unit in the central bank.
Implementing the recommendations of the 2008 FSAP Update and more detailed data collection on banks’ loan portfolio will further strengthen supervision and stress-testing exercises.
Directors welcomed the authorities’ efforts to improve the supervision of non-bank financial institutions, an area of weakness highlighted by the recent demise of two insurance companies.
They called for timely action to consolidate non-bank financial supervision into the Financial Services Commission and underscored the need to resolve the problematic insurance companies to lift market uncertainty and provide clarity on contingent fiscal costs.
Directors acknowledged the relatively good business environment in Barbados. However, in light of the country’s weak productivity growth, they saw merit in further streamlining Government agencies and procedures, and looking for ways to broaden growth sources.