The Government’s current fiscal adjustment programme faces considerable risks, but failure to implement them quickly and fully could result in “a disorderly adjustment process”.
This outlook came from the International Monetary Fund (IMF) in its latest assessment following the conclusion of the executive board’s 2013 Article IV consultation with Barbados.
The IMF stressed that it was extremely critical that the measures outlined to cut Government’s spending, increase revenues and improve its tax structures, be implemented promptly. It also recommended that Government carry out additional belt-tightening measures in order to lower the fiscal deficit and put a rein on the declining foreign reserves.
The country is also faced with a high external debt.
“Recent fiscal measures, if fully implemented, should stabilize debt levels by 2016. However, downside risks are considerable, and failure to implement corrective policies could result in a disorderly adjustment process. Even with full implementation, fiscal financing pressures and external sector sustainability would remain challenging,” said the IMF.
“The sustainability of the debt hinges on the Government’s ability to implement timely and vigorous fiscal consolidation, but even then considerable risks remain,” it added.
The IMF said delays or failure to implement planned fiscal measures could lead to a widening of the deficit, a drop in investor confidence, further reserve losses and pressure on the currency peg.
Risks that could “aggravate vulnerabilities and could trigger a disorderly adjustment process” include a further decline in tourism receipts, which would hurt growth, revenues and the balance of payments as well as a fiscal shock in the United States, Britain and Trinidad & Tobago, Barbados’ three biggest trade partners, said the IMF.
Adding that the Government was faced with the challenging task of meeting its targets in an environment of low growth, high debt and a fixed exchange rate, the IMF said adjustments in those circumstances often “rely on currency devaluations”.
However, during a conference call today, when asked if recommendation of a devaluation of the Barbados currency was possible if the targets were not met Nicole Laframboise, IMF’s mission chief, told Barbados TODAY “what the country should do and the authorities have to do is stick with their reform plan”.
“We have said in the past that the exchange rate regime in Barbados has served the country well. Unfortunately, in the past few years their macro policies and structural have not been sufficiently supported, but the authorities are committed to addressing this and we are providing them with the policy and technical support that they have asked for and that we think they need,” she said.
Laframboise added that the implementation “must”be done vigorously and transparently, saying that it should be monitored on a monthly basis.
In its release, the IMF criticized Government’s current tax structures, saying there was scope to raise tax revenues by strengthening revenue and customs administration and by reducing widespread exemptions.
“[I]n addition, there is significant revenue forgone from applying below-standard rates to some taxpayers. Some of the 2013 measures move away from the goal of expanding the base, and concessions to specific tourism projects in late 2013 further erode the tax base and create a non-level playing field,” said the IMF.
Also among its recommendations, the IMF said monetary policy should be more consistent with the fixed exchange rate regime and closer monitoring of the financial system was required in view of elevated non-performing loans “and the risk of a deeper sovereign-financial feedback loop”.
The IMF said “a stronger and more front-loaded strategy” would reduce pressure on outflows, put reserves at more comfortable levels sooner, and help reduce gross financing needs in the near term.
The IMF said it “recommended additional fiscal tightening of 1.1 percent of GDP over the next five years . . . coupled with further cuts in transfers to public enterprises of around 0.3 percent of GDP”.
Laframboise said if the fiscal adjustment policy was fully implemented, the IMF projected the fiscal deficit would be lowered to just under five per cent of GDP for fiscal year 2014/2015. It is anticipated the deficit for the current fiscal year will be about 9.6 per cent of GDP.