IMF Recommends Permanent VAT Hike For Barbados

by Amanda Banks, Tax-News.com, London

25 January 2012

The International Monetary Fund (IMF) has suggested that the Barbados government should raise more money from tax in reviewing its medium-term fiscal strategy, aimed at eliminating the territory's deficit by the fiscal year 2014/2015.

The IMF reported that Barbados's fiscal performance remains "worrisome". The FY2010/11 central government deficit widened to about 8.5% of GDP from 8.2%. Expenditures increased by 0.5% of GDP, while revenue weakness, particularly in corporate taxes, implied an overall deficit in excess of the budget target. The overall fiscal deficit for the non-financial public sector (NFPS) reached 7.3% in FY 2010/11. The IMF however reported that budget execution in the first half of FY 2011/12 appears to be on track to achieve an overall central government deficit target of 5.1% of GDP, and 4.1% of GDP for the NFPS.

In its report, the IMF has recommended a number of revenue-enhancing and expenditure-reducing measures to consolidate fiscal imbalances and reduce debt levels. On the revenue side, the mission suggested a permanent increase in value-added tax (VAT) by 3% to 18% combined with the broadening of the tax base, elimination of exemptions and improvements in tax administration.

The authorities have implemented some of the recommendations previously advocated by the IMF in temporarily increasing the VAT rate from 15% to 17.5% for a period of 18 months. Other measures previously implemented include an increase to the excise tax on gasoline, by 50%, and the elimination of some tax-free allowances for travel and entertainment.

Identifying further measures, the IMF has recommended exploring the scope for increasing the corporate tax rate, particularly for offshore operations, as activity recovers. The IMF has further recommended authorities to develop a plan to reduce tax exemptions (currently estimated to amount to 5.6% of GDP) by at least 15% by 2015.

While welcoming the fiscal adjustment proposed in the 2011/12 budget, the report points out that even more consolidation would be necessary to put Barbados’s debt on a sustainable path. The FY 2011/12 budget, presented to Parliament in early August, proposes to reduce the central government deficit further to 5.1% of GDP in line with the existing Medium Term Fiscal Strategy (MTFS). Most of the savings are projected to come from improvements in the efficiency of government and cuts in spending on goods and services, wages, and transfers.

The IMF reported that the country's banking system is stable and well capitalized, but non-performing loans are on the rise and loan loss provisioning remains low. At the end of June 2011, bank capital averaged about 17.4% of risk-weighted assets. Non-performing loans increased from 7.9% in December 2009 to 10.3% in September 2011 due to two substandard loans to the hotel sector, while provisioning remained at around 3.5%. The ratio of liquid assets to total assets has increased sharply to 12.8%, pointing to ample liquidity in the banking system, the IMF said. Stress test results from the Central Bank have shown that a domestic commercial bank would, under reasonable additional stress, remain adequately capitalized.

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