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IMF Concludes Article IV Consultation With Barbados

by Amanda Banks,, London

17 September 2007

The International Monetary Fund (IMF) announced on Thursday that it had concluded its Article IV Consultation with Barbados earlier in the week.

Barbados has one of the highest per capita incomes in the region, ranks high on social, political, and competitiveness indicators, and enjoys an investment grade rating. Services, particularly tourism and increasingly financial services, account for three-quarters of GDP, and an even higher share of exports.

The economy has been growing at a solid pace, and the outlook for this year is generally favorable. Robust output growth of about 4 percent is expected to continue this year, supported by tourism and construction. Inflation, which was pushed up in 2006 by higher energy prices and a temporary import surcharge, is set to decelerate to 5.5% in 2007. However, the current account deficit, despite having narrowed in 2006, is still high and projected to remain unchanged at about 8.5% percent of GDP.

Outlining the conclusions reached by its officials during their visit, the IMF announced that:

"Executive Directors welcomed Barbados' strong economic performance and the favorable near-term outlook for economic activity and inflation. Looking forward, Directors observed that the authorities should be prepared to tighten fiscal policies in order to improve the public sector position and reduce the large current account deficit."

"Directors generally regarded the announced liberalization of the capital account as a milestone in the government's strategy of regional and global integration. They noted that, while the removal of remaining controls is not expected to trigger large immediate market reactions, liberalization does entail medium-term risks. In particular, sizeable current account deficits financed by short-term capital inflows could heighten the risk of sudden capital account reversals and challenge the credibility of the peg or force sharp and disruptive policy adjustments."

"Directors agreed that Barbados' real exchange rate currently appears to be broadly in line with fundamentals, and stressed the importance of continued sound policies to maintain competitiveness and contain risks. Sufficient internal economic flexibility will be needed to allow the real effective exchange rate to continue to move in line with the equilibrium over time."

The directors further stated that they welcomed the government's commitment to fiscal consolidation and to a reduction in the public debt. Given the government's debt objective and the importance of reducing vulnerabilities arising from high current account deficits and a declining trend in international reserve coverage, they observed that fiscal policy needed to be strengthened further, while acknowledging the authorities' commitment to take additional steps should risks materialize.

The statement continued:

"An early tightening of policies would reduce the risks of stronger and more disruptive adjustments later. Directors saw a range of options for the government to achieve fiscal savings, including reining in future public projects, raising VAT rates, reducing tax exemptions, and adjusting selected utility tariffs. Directors also encouraged the authorities to consolidate the activities of all public entities in the budget presentation to facilitate proper planning."

"Directors welcomed the authorities' recognition that market-based monetary policy instruments will need to be developed to effectively manage domestic liquidity in a more challenging open capital account environment. In this connection, they supported the authorities' intention to liberalize domestic interest rates and stimulate banks' use of the discount window. They recommended a gradual phasing out of the minimum deposit rate and encouraged the authorities to also put in place procedures for conducting open market operations."

The IMF concluded by announcing that:

"Directors also noted that capital account liberalization will expose the financial sector to greater volatility and risk taking, and thus will require stronger prudential regulation and supervision. Directors welcomed the progress being made on containing financial risks in the banking sector and encouraged the authorities to proceed with the speedy passage and implementation of pending financial sector legislation, and improved prudential oversight of non-bank financial institutions, and encouraged the development of a regional framework for financial regulation and supervision."

The full text of the IMF Article IV Consultation conclusions can be found in the Tax News Resources section.

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