Barbados Must Step Up Deficit Cutting Efforts

by Phillip Morton, Investors Offshore.com

16 December 2010

The International Monetary Fund has published its Article IV consultation with Barbados, recommending that the government continue efforts to slash the territory's debt, which is set to reach 115% of GDP by the end of the current fiscal year, ending in March 2011.

"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. [In addition,] after contracting by almost 5% in 2009, output is expected to continue its decline in 2010, albeit at a slower rate," the IMF's report states.

With these pressures on the economy, the IMF reported that government revenues had fallen and expenditures had increased, creating persistent, large fiscal imbalances. “As a result, public debt continues to grow and could approach 115% of GDP by the end of the current fiscal year,” the IMF warned.

Government efforts to counter the fiscal deficit, through its Medium-Term Fiscal Strategy were lauded by the International Monetary Fund. In particular, the Executive Board welcomed the recent measures to raise VAT rates and public transportation tariffs, while boosting spending targeted at vulnerable segments of society. The Board emphasized that to place public debt on a sustainable path, additional measures will be necessary.

Presenting recommendations, the Board 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. Prioritizing expenditure would also make room for moderate increases in capital spending to support medium-term growth, the Board further recommended.

In terms of the island's financial services industry, the IMF Board noted that banks in Barbados remain healthy. While non-performing loans have increased, robust capital bases provide effective cushions against future losses, the IMF reported. Authorities’ efforts to strengthen bank oversight, including by creating a financial stability unit in the central bank were commended.

The Board welcomed the authorities’ efforts to improve the supervision of non-bank financial institutions, an area of weakness, the IMF said, highlighted by the recent demise of two insurance companies. The IMF 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.”

Concluding, the Board acknowledged the relatively good business environment in Barbados. In order to further stimulate investment going forward, the IMF lastly recommended that government agencies and procedures could be streamlined.

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