The chances that the Freundel Stuart administration will achieve its deficit target this year following Minister of Finance Chris Sinckler’s presentation of a $542 million austerity package back in May, are slim to none, according to the International Monetary Fund (IMF), which today warned of the need for “urgent” corrective action.
Following its two-week Article IV Consultation which ended yesterday, the IMF team, led by Deputy Division Chief Judith Gold, issued its preliminary report, in which it also cautioned that Government’s programme was simply too “ambitious”, while pointing out that the overall deficit was likely to fall by a mere two percentage points by the end of this fiscal year.
Back in May when Sinckler announced the programme he had said that Government was aiming to wipe out the deficit of $537.6 million and achieve a small surplus of $4.4 million.
However, Gold and her team warned today that without divestment proceeds, the deficit would only decline to 4.1 per cent of gross domestic product (GDP) in financial year 2017/2018.
“The larger than expected fiscal deficit is increasing funding challenges,” Gold warned.
At the same time, while Government is seemingly intent on achieving a surplus of 4.4 per cent of GDP in financial year 2018/2019, the IMF is suggesting that it aims instead for a 7.5 per cent GDP surplus by financial year 2020/2021.
“The sizeable fiscal adjustment would put the debt-to-GDP ratio on a clear downward path toward debt sustainability,” Gold said.
In terms of the performance of the actual measures, which included a whopping increase in the National Social Responsibility Levy (NSRL) from two to ten per cent, an introduction of a new sales tax on foreign currency transactions and a hike in the excise duty on fuel, the IMF reported that due to exemptions to the NSRL, lower-than-expected non-oil imports, shortfalls in some other revenues, and high transfers, Government was likely to fall short of its overall target.
The lending agency also warned that the country’s international reserves, which stood well below the 12 weeks benchmark at just 8.6 weeks of import cover or $549.7 million at the end of September, were likely to dip even further by yearend as Government continues to service its debt, and private foreign inflows remain weak.
While the island’s long-stay tourism performance remains strong, the IMF said fiscal tightening was contributing to an overall slowdown of the economy, with real growth now projected at 0.9 per cent this year, down from last year’s improved performance of 1.6 per cent.
In this context, it reiterated its willingness to help Government, “including through continued policy dialogue and technical assistance”.
But with the Freundel Stuart administration currently not entertaining suggestions of a borrowing relationship with the Washington-based financial institution, the Fund said it welcomed progress in formulating the Barbados Sustainable Recovery Programme (BSRP), while emphasizing the need for immediate structural reforms, as well as reform of state-owned enterprises, which it said should include improved management, mergers, closures, and privatization.
With Government currently wrestling with a ballooning national debt in excess of 100 per cent of GDP, a high fiscal deficit of 5.5 per cent of GDP and dwindling international reserves of below $600 million, the IMF also warned that “substantial further fiscal effort is needed to decisively place the debt on a downward trajectory.
“Given the urgency in addressing funding, balance of payment risks, the high debt, and the limited policy options, the fiscal adjustment must continue, with a focus on accelerating [state-owned enterprises’] reforms to facilitate a significant and durable reduction in transfers,” Gold said, adding that structural reforms to support growth and improve the business climate for domestic and foreign investment were also urgent.
“These reforms would aim to improve business processes, such as significantly reducing clearance times for immigration and customs, accelerating approval of building permits, and streamlining legal procedures,” she added.
With no mention of general elections, due here by the middle of next year, Gold said any adjustment strategy “should focus on addressing the high transfers, containing other current expenditures and maintaining a strong revenue effort”.
“Reforms of state owned enterprises should include improved management, cost recovery, reduced services, mergers, closures, and privatization. Containing other current expenditures, including the wage bill, and Government pensions is also critical,” she said.
The Washington-based financial institution also called for a review of domestic tax policy “with a view to broadening the tax base and improving its progressivity, while suggesting that efforts to strengthen tax administration must continue.
During their visit from November 7 to 21, the IMF team held meetings with Sinckler and other senior Government officials, as well as the Opposition and key members of the private sector.
In light of those talks, it is urging Government to immediately settle its arrears to the private sector and to remain current with its payments to the business community.
“Further, arrears to the private sector should be cleared, and remaining current should be a Government priority. A concentrated effort to improve implementation capacity, including by providing clear direction and clarifying expectations, is also needed,” Gold said, while commending plans by the authorities to enact a new Financial Management and Audit Act, which could help address some of the implementation gaps.