The International Monetary Fund (IMF) said today it was ready and willing to come to Barbados’ rescue, while warning that slower growth and a doubling of the domestic cost of living were on the immediate horizon as a result of the austerity measures announced by Minister of Finance Chris Sinckler in his May 30 Budget.
Without passing judgment on the Budget itself or getting into the recent national discussion over whether the island should enter into a formal IMF arrangement or not, the lending institution made it clear the island’s economic problems were not over by any measure.
In this context, it said it “stands ready to assist the Government of Barbados, including through continued policy dialogue and technical assistance”.
The offer comes on the heels of a suggestion made by former Prime Minister Owen Arthur, backed by several other respected economists, that Sinckler’s half-billion dollar adjustment programme effectively amounted to a devaluation of the Barbados currency, and that an IMF adjustment would have been far easier for the entire country to swallow.
In fact, Arthur had explained that based on the IMF’s Article 1V Consultation last year, Government could have been afforded the equivalent of $310 million annually over a three-year period.
However, with Government currently sticking to its homegrown strategy, a team from the Washington-based financial institution, led by Judith Gold, visited the island from June 20–29 to review recent economic developments and to discuss the 2017 Budget.
And after meeting with Sinckler and other key officials, including Minister of Industry, International Business, Commerce, and Small Business Development Donville Inniss and Acting Central Bank Governor Cleviston Haynes, they issued a warning today that the economy, which registered 1.6 per cent growth in 2016 and a further two per cent acceleration in the first quarter of 2017, was likely to falter as a direct result of Sinckler’s $542 million austerity package, which also stands to significantly affect the overall cost of living.
“Growth in 2017 is projected to slow to less than one per cent, reflecting the fiscal consolidation efforts introduced in the FY2017/18 Budget,” the IMF team warned in its statement, in which it also cautioned that domestic inflation, which stood at 3.2 per at the end of last year, was likely to accelerate to 6.7 per cent by the end of 2017.
In this regard, the IMF team, which also met with Opposition Leader Mia Mottley and members of the private sector, pointed the accusatory finger directly at Government over its proposed increase in the National Social Responsibility Levy (NSRL) and other taxes and fees, while suggesting that the situation should “revert to more historical norm in 2018 and subsequent years.
“There are important downside risks related to the increase in domestic and global uncertainty, including the impact of the Brexit on the British pound,” the IMF added, while stressing that “continued fiscal discipline, with economic growth, are essential to securing Barbados’ future.
“They will be critical to bolster international reserves and support the currency peg. Only a substantial and a sustained reduction in the fiscal deficit, which will put the debt-to-GDP ratio on a solid downward path, will restore the country’s credit rating and attractiveness to investors,” the statement added.
The latest report comes against the backdrop of concerns expressed by a wide cross section of Barbadians that notwithstanding some improvements seen in the vital tourism sector, this country’s international reserves fell to $682 million by the end of 2016, which the IMF estimates to be “about two months of imports”.
Delayed official loan disbursements and privatization, as well as lower private-sector inflows, have also been key drivers of this decline. And while there was some progress in reducing the fiscal deficit in fiscal year 2016/17 to 5.5 per cent of GDP from 6.8 per cent in fiscal 2015/16, the IMF has pointed out that most of the adjustment was generated by lower Government spending, while fiscal revenues held steady.
“Despite this progress, the large Government financing requirements were a challenge, as banks reduced their sovereign exposure. As a result, the Government had to increasingly resort to funding from the Central Bank of Barbados (CBB),” the IMF said.
With this in mind, Sinckler’s Budget was premised on raising revenues while shoring up international reserves, including through an increase in the NSRL — which mostly impacts imported goods — from two per cent to ten per cent.
Government also plans cuts in current expenditure, to complete ongoing privatization efforts, and to undertake new divestments, as well as to initiate a voluntary exchange of debt instruments with the National Insurance Scheme and the Central Bank to reduce the interest bill.
“If implemented as envisaged, the 2017 Budget would lead to substantial gains toward improving public finances,” the IMF said.
However, it warned that over the medium-term, further fiscal adjustment would be needed on the expenditure side to decisively reduce its debt and debt service costs.
“Transfers to public enterprises of close to eight per cent on an annual basis represent the second largest expenditure item, after the wage bill, and about the same magnitude as the interest bill on the public debt.
“Both expenditure categories weigh heavily on public finances and critical reforms are needed over the to restore sustainability and confidence,” the IMF said, adding that a reduction in transfers to public enterprises must be supported by structural reforms to reduce state agencies’ operating costs, rationalize their programmes, and raise their revenues.
Consideration should also be given to divesting commercial SOEs that can be run more efficiently and profitably by the private sector. Other structural reform, especially those focused on improving the investment climate and fostering growth are also critical.