The International Monetary Fund (IMF) is advising the Freundel Stuart administration to consider “additional tightening” – including making changes to the tax system to increase revenue – to put the country back on sound economic footing.
The Washington-based institutiton says while the measures announced last year such as reduction in the size of the civil service by about 13 per cent, further downsizing by attrition, wage cuts for elected and appointed officials, and a two year nominal wage freeze will help the cause, more may be needed in time.
In a full statement and report on its Article IV Consultation with Barbados, issued after the Executive Board of Directors meeting on Monday, the Fund said it “welcomed the measures announced in the second half of 2013 and urged their prompt implementation, which should raise confidence, stem the government’s cash flow needs, and increase foreign reserves.”
“For the coming years, Directors encouraged the authorities to consider additional tightening, focusing on growth-friendly measures, to put debt on a steeper downward trajectory . . . Directors saw scope for raising revenues by broadening the base, reducing tax exemptions, and improving tax and customs administration.”
The IMF noted that some of the 2013 measures announced by the Freundel Stuart administration move away from the goal of expanding the tax base, and concessions to specific tourism projects in late 2013 further erode the tax base and create a non-level playing field.
“The tax base has been significantly eroded by waivers and exemptions. For example, tax waivers by the Customs and Excise Department are estimated at over 5.5 percent of GDP in 2012/13. In addition, there is significant revenue forgone from applying below-standard rates to some taxpayers,” it said.
“The tax system would benefit from a comprehensive review with the aim of broadening the base, improving equity, and reducing distortions and the scope for discretion.”
The IMF noted, however, that it will provide technical assistance to review domestic taxation sometime this year.
In its assessment of the Barbados economy, the IMF noted that the country had still not recovered from the adverse consequences of the global financial crisis and it faces considerable challenges including low growth, a high fiscal deficit and debt, and declining foreign reserves.
The IMF also stressed the need for public enterprise reforms, particularly to improve oversight and accountability and underscored the need for a growth strategy focused on improving the business climate while preserving Barbados’s long-standing tradition of equity and social cohesion.
“While Barbados fares reasonably well in international surveys of competitiveness, Directors encouraged efforts to strengthen competitiveness in the tourism and international business sectors, and to lower labor costs. They noted that pending large investment projects should help to raise productivity and support reserve levels. They encouraged the authorities to divest some of the government’s commercial assets, tackle labor market rigidities, and reduce the cost of doing business, while reducing reliance on tax incentives,” the statement said.