November 15, 2019

Barbados continues to make good progress in implementing its ambitious economic reform program. The homegrown BERT (Barbados Economic Recovery and Transformation) plan aims to restore macroeconomic and debt stability, increase international reserves, and raise growth. International reserves, which reached a low of US$220 million (5-6 weeks of import coverage) at end-May 2018, have recovered to more than US$600 million by end-October 2019. 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 agreement reached in October 2019 between the government of Barbados and the external creditor committee reduces debt and uncertainty. 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 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 fiscal adjustment is proceeding as programmed, with the authorities targeting a 6 percent of GDP primary surplus for FY2019/20. Full year effects of reforms set in motion during FY2018/19, including the introduction of several new taxes (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 VAT and the land tax, implemented in March 2019 in the context of the FY2019/20 budget, are also supporting revenue. The budget approved for FY2019/20 provides a solid basis for the targeted fiscal consolidation.

Reducing transfers to SOEs is key for sustainable fiscal consolidation. At close to 8 percent of GDP in FY2017/18, 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 6 percent of GDP by FY 2021/22, by a combination of: (i) much stronger oversight of SOEs, supported by improved reporting and tighter control over SOE borrowing; (ii) cost reduction, including reduction of the wage bill; (iii) revenue enhancement, including an increase in user fees, combined with investments to improve services delivered by SOEs; and (iv) mergers and divestment.

Together with addressing the fiscal dominance problem, the central bank needs to be equipped with tools and facilities to be able to manage liquidity consistent with the exchange rate peg. Following several years with high monetary financing, the Central Bank of Barbados (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.

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.

Structural reform is necessary to unlock Barbados’ growth potential. 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.

Improving resilience to natural disasters and climate change will help strengthen the outlook. 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.

The authorities’ BERT program, supported by the IMF’s 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 FY2019/20 primary surplus target of 6 percent of GDP. The Barbadian authorities also continue 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, SDR 35 million (about US$48 million) will be made available to Barbados, bringing the total disbursement to SDR 105 million.

The team visited Barbados November 5-15 and would like to thank the authorities and the technical team for their openness and candid discussions.