Barbados On Growth Track, Says IMF

by Amanda Banks, Tax-News.com, London

20 May 2011

While Barbados's economy is beginning its recovery, with growth expected to continue on a steady path, fiscal consolidation must remain the top priority, according to the International Monetary Fund's latest findings.

Released following the conclusion of a May 10-13 mission to the island, a statement by mission chief Therese Turner-Jones shows that real growth began to pick up in early 2011, with GDP projected to rise by approximately 2% this year. This is a relatively considerable improvement, given the 4.7% contraction recorded in 2009, and the 0.3% growth experienced in 2010. The IMF believes future growth will be occasioned mainly by activity in the financial services sector and a recovery of the tourism industry, with higher tourist arrivals expected.

Barbadian strategies to maintain fiscal and debt sustainability were heavily discussed, with the government intending to place the country's debt on a declining path over the medium-term. According to recent comments made by Barbados's finance minister, the government's goals are to halt the decline in the economy by reversing negative trends in GDP output in the shortest possible time frame and return the country to positive economic growth; reduce the fiscal deficit to a sustainable level and achieve a small surplus by 2015; shrink the country's debt and deficit, and reposition Barbados as a major foreign direct investment hub.

The IMF recognized that fiscal consolidation remains the top priority, consistent with the country's commitment to the implementation of the medium-term fiscal framework, and welcomed those measures adopted in late 2010 to strengthen revenues. A temporary 18-month VAT increase, from 15% to 17.5%, was noted in particular, and government estimates indicate that the initiative will raise BBD124m (USD62m). The economy remains vulnerable, but the government's ongoing efforts to improve the fiscal outturn, challenging though they may be, are praised. It was also noted that strengthening the fiscal stance would also underpin external sector stability and strengthen reserves, which is crucial given high oil prices and the uncertain global outlook.

Nonetheless, the IMF warned that continued vigilance in the banking and financial services sectors is required to push forward with the recovery. The Fund contends that the creation of the new Financial Services Commission, which will bring under one umbrella the supervision of insurance, credit unions, securities and international financial services, will strengthen the regulation and supervision of non-bank financial institutions.

The IMF's conclusions mirror the Research Update recently issued by Standard and Poor's, which found that the Barbadian economic outlook remains stable, with those fiscal measures passed in December, 2010, coupled with constrained expenditures, helping to stabilize the fiscal accounts. In particular, elimination of the tax-free allowance for travel and entertainment and a hiked gasoline excise tax were cited as beneficial to this cause. Standard and Poor's also expects GDP growth of 3% in 2012/13, and a gradual narrowing of the government's fiscal deficit from 5.6% in 2010 to 4.6% in 2011, 3.5% in 2012, and 3% of GDP in 2013.

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