The International Monetary Fund (IMF) has put forward a number of recommendations that the Government of Barbados should undertake in order to lower its widening deficit, increase revenues, and avoid the need for a devaluation of the revered Barbados currency.
At the same time, the Washington-based agency, while acknowledging that the Government had started to take some action, agreed with the decision to cut public sector wages through the retrenchment of workers.
The observations came after about ten days of discussions on Article IV.
In a statement this afternoon, IMF mission chief Nicole Laframboise described the discussions as “constructive and candid”.
She said the Barbados economy continued to face considerable economic challenges and “the authorities agreed with staff on the need for urgent policy adjustments and deeper reforms over an extended period to restore fiscal and external sustainability”.
The Freundel Stuart administration had come under increasing pressure over the last few months as it sought to increase its revenues and plug an approximate $143 million widening fiscal deficit.
Laframboise said central government’s wage bill was expected to reach 10.3 per cent of GDP in 2012/13, “the highest in the region, which together with interest payments limits room for investment spending”.
“A strategic, comprehensive approach is needed to address the underlying weaknesses in public finances and to increase efficiency in the public sector. Policy formulation should be guided by a medium-term fiscal anchor to reduce Central Government debt to below 85 per cent of GDP by 2018,” said Laframboise.
She said: “A fundamental review of the tax system is warranted, and the authorities have requested technical assistance on this from the IMF. The goal would be to broaden the revenue base, which has been seriously eroded by statutory and discretionary waivers. In the interim, a number of measures could be taken to significantly improve the yield by strengthening compliance and efficiency in revenue and customs administration.”
Laframboise said there was scope to “greatly improve the targeting of social spending and lower costs” to ensure that Barbados retained its high standards of equity and social protection.
She said there was duplication “across ministries, and some social programs, such as child care and housing, are not well targeted and may be benefiting middle and higher income groups at the expense of the most needy”.
The IMF official said it would be critical to address weaknesses in the oversight and operations of the statutory bodies, whose financial performance in many instances was not available.
“In the near term, the authorities could establish an independent oversight mechanism tasked with enforcing compliance and accountability. Equally urgent, the operations of the main state entities should be reviewed with a view to identifying their strategic purpose, reducing losses and raising efficiency. Fund technical assistance in support of reform of statutory bodies is expected to start in early 2014,” said Laframboise.
During the days of talks which started on December 3, 2013, a team from the IMF met with a number of Government ministers, Central Bank Governor DeLisle Worrell, members of the Legislature and representatives from the private sector, labour unions, and academia.
In support of Government’s decision to trim its wage bill by cutting staff, the IMF official said: “Staff takes note of the Government’s decision to reduce the Civil Service up front. This will lower spending and send a strong signal about policy commitment, though these workers should have access to unemployment support and programmes for re-employment”.
She said: “Alternatively, downsizing by attrition and implementing a wage formula that freezes the average wage per worker would also reduce the wage bill significantly over time and would contribute to lowering economy-wide labour costs. This is needed to raise Barbados’ external competitiveness, particularly given the nation’s deep commitment to its exchange rate peg, which the IMF recognizes.”
In painting a dismal picture for the economy for 2013, Laframboise said weak exports and [a decline in] tourism arrivals, slow growth, and expansive fiscal policy led to a sharp increase in public debt and fiscal financing pressures.
She said real output was projected to fall by 0.7 per cent while inflation had declined and was forecast to average 2.3 per cent for this year.
“In the external sector, tourism receipts have remained flat and the current account deficit is projected to widen to 11.4 per cent of GDP this year. Together with a sharp drop in private capital inflows in 2013, international reserves have fallen this year to US$468 million at end [of] October,” said Laframboise.
“In this environment,” she said, “the fiscal position has come under increasing strain. The Central Government deficit is expected to rise to 9.5 per cent of GDP in 2013/14 and Central Government debt had risen to 94 per cent of GDP by September 2013. Spending cuts under the authorities’ Budget Proposals announced in August are broadly on track, but tax revenues are falling short of projections,” she added, while acknowledging that authorities planned to take additional measures to strengthen adjustment and reduce pressures on the balance of payments.
Laframboise said, “The IMF remains committed to supporting the government of Barbados in its pursuit of macro stability and stronger growth.
“A number of large scale private investment and public works projects are expected to come on stream in the coming months, supporting a rebound in capital inflows and offsetting the drag on growth from fiscal adjustment. While these projects should enhance competitiveness, the role of the state should be carefully considered, particularly in the productive sectors, and contingent liabilities of the state minimized,” she added. (MM)