The International Monetary Fund (IMF), in its Barbados Staff Report for the 2017 Article IV consultation, says the island’s economy is slowing, following recovery in 2016.
The report was released Friday after Prime Minister Mia Mottley met with her economic team, the Governor of the Central Bank and senior officials of the Ministry of Finance and Economic Affairs to receive a briefing on the economic challenges facing the Barbados economy.
According to the report, international reserves, which are already low, continue to decline.
“While there is significant progress in reducing the high fiscal deficit, the government will fall short in meeting the ambitious fiscal adjustment targets set in the May 2017 budget,” the IMF said.
“The adjustment, if maintained, will lead to a decline in the debt-to-GDP ratio, but debt will remain unsustainable. Further delays in privatization will lead to a continued decline in reserves, while large financing requirements remain a serious challenge.”
The Washington-based financial institution said balancing the budget within three years, and maintaining the balance thereafter, while challenging, would help address financing needs and decisively place the debt on a downward trajectory.
The IMF said the fiscal adjustment should focus on reducing expenditure, centered around cutting transfers by reforming state-owned enterprises (SOEs) and public pensions.
It said the revenue effort should continue by broadening the tax base while increasing the overall progressivity of taxation.
“Strengthening the business climate and competitiveness would support economic growth. Eliminating reliance on the Central Bank financing of the government deficit would make monetary policy consistent with maintaining the peg,” the IMF said.
Reflecting the impact of a prolonged recession following the global financial crisis, and inadequate fiscal policy, the IMF notes that Barbados is contending with large fiscal deficits, high debt, and low reserves.
It said that the May 2017 budget sought to address the increasing funding challenges and falling reserves with an ambitious fiscal adjustment that aimed to eliminate new funding requirements including with receipts from additional privatization.
“The large adjustment was also intended to reverse the debt trajectory, but would slow growth and increase inflation. However, weaker than expected revenues and budget implementation slippages, suggest that the deficit is likely to remain significantly higher than planned with correspondingly large funding requirements,” the IMF said.
“Debt also remains unsustainable, while low and falling international reserves raise vulnerabilities. Against this background, tourism continues to do well, some competitiveness indicators, although deteriorating, remain stronger than those of Barbados’ peers, and the Human Development Index remains significantly higher than in the rest of the region.”
Meanwhile, the IMF says the economy is slowing in response to a large fiscal adjustment and weak confidence.
Growth is estimated at 1.6 per cent in 2016, and after a robust performance in the first quarter of 2017, it has sharply slowed in the third quarter.
Long-stay arrivals increased by 6.2 per cent in the first three quarters of 2017, after a strong performance in 2016.
Inflation increased to 6.6 per cent in October 2017, following an increase to 3.8 per cent at end-2016.
The IMF said confidence is low reflecting repeated credit rating downgrades, falling reserves and protracted reforms of the public sector.