IMF: Wage freeze needed

THE INTERNATIONAL MONETARY Fund (IMF) believes Government’s layoffs in the new year will lower spending, but has suggested there be a wage freeze over time and downsizing by attrition in the public service.
In a grim report from the Washington-based organization yesterday at the end of ten-day Article IV consultations, Mission Chief for Barbados, Nicole Laframboise, described Government’s wages bill as the highest in the Caribbean.
“The central government wage bill rose to 10.3 per cent of GDP in 2012-13, the highest in the region, which together with interest payments limits room for investment spending,” she said.
She added, however, that IMF staff had taken note of the Government’s decision to reduce the Civil Service up front, which would lower spending and send a strong signal about policy commitment, but noted, that “alternatively, downsizing by attrition and implementing a wage formula that freezes the average wage per worker would also reduce the wage bill significantly over time and would contribute to lowering economy-wide labour costs.
“This is needed to raise Barbados’ external competitiveness, particularly given the nation’s deep commitment to its exchange rate peg,” Laframboise explained.
Noting that local authorities had agreed with IMF staff on the need for urgent policy adjustments and deeper reforms over an extended period, she said technical assistance from the fund for reform of statutory bodies was expected to start in early 2014.
Lamenting weak exports and tourism arrivals, along with slow growth which had led to a sharp increase in public debt and fiscal financing pressures, she said “real output is projected to fall by 0.7 per cent in 2013, inflation has declined and is forecast to average 2.3 per cent.
“Tourism receipts have remained flat and the current account deficit is projected to widen to 11.4 per cent of GDP this year. Together with a sharp drop in private capital inflows in 2013, international reserves have fallen this year to US$468 million at end-October”.
The mission chief said a strategic, comprehensive approach was therefore needed to address the underlying weaknesses in public finances and to increase efficiency in the public sector, and noted that policy formulation should be guided by a medium-term fiscal anchor to reduce central government debt.
“A fundamental review of the tax system is warranted,” she added. “The authorities have requested technical assistance on this from the IMF. The goal would be to broaden the revenue base, which has been seriously eroded by statutory and discretionary waivers.”
Observing that there was scope to “greatly improve the targeting of social spending and lower costs” Laframboise pointed to duplication across Government ministries, and noted that some social programmes such as childcare and housing were “not well targeted and may be benefiting middle and higher income groups at the expense of the most needy”.
She therefore called for an immediate independent oversight mechanism tasked with enforcing compliance and accountability, and an urgent review of the operations of the main state entities with a view to identifying their strategic purpose, reducing losses and raising efficiency.
“Vigilance and strong regulation and supervision will be important in the period ahead, as continued economic weaknesses could further weaken asset quality.
“The oversight of commercial banks should be strengthened by better monitoring of credit risks and collateral values, as well as aligning the provisioning schedule more closely with international norms,” she said.
The mission chief and her colleague Sorhab Rafiq left Barbados yesterday after meeting with Minister of Finance Chris Sinckler, Minister of Tourism Richard Sealy, Minister of Industry and Small Business Development Donville Inniss, Central Bank Governor Dr DeLisle Worrell, members of the legislature, and representatives from the private sector, labour unions and academia.