A day after the island’s largest public sector union said it was prepared to accept a 4.5 per cent pay offer from Government, the International Monetary Fund (IMF) today warned of the need to contain wages and reduce transfers to state-owned enterprises (SOEs).
At the same time, the Washington-based institution is warning the Mia Mottley-led administration of the need for “substantial fiscal consolidation” and reform of Government pensions, in the wake of a campaign promise made by the less than two-week-old administration to increase non-contributory pensions.
Following three-days of talks with Government representatives, members of the private sector and labour movement, the IMF issued a statement today reminding that the economy was in a precarious position.
Bert van Selm, who currently serves as the IMF’s resident representative in Jamaica and led the Fund’s delegation to Bridgetown, pointed out this evening that at this juncture the recommendations contained in the IMF’s 2017 Article IV Consultation remained “highly relevant to rebuilding confidence and addressing Barbados’ current challenges”.
“Substantial fiscal consolidation is needed to place debt on a clear downward trajectory in conjunction with the proposed debt restructuring, and to address balance of payments risks that cloud the country’s future,” the IMF mission said.
And while acknowledging that the level of taxation in the island was already high, it stressed that “the adjustment effort should focus on the expenditure side, including by improving the efficiency and effectiveness of public services, containing wages, and reforming Government pensions”.
Today’s statement comes on the heels of an announcement by the National Union of Public Workers (NUPW), which had been pressing the previous Democratic Labour Party administration for a double-digit increase, that it had accepted a significantly reduced offer from the new Barbados Labour Party Government.
Barbados TODAY understands that after initially rejecting a 4.5 per cent increase over three years, the union’s national council met yesterday and approved the single-digit offer, with only one council member abstaining and all others voting in favour of the proposed hike of two per cent in the first year, 1.5 per cent in the second and one per cent in the third, for the 2016 to 2019 negotiating period.
However, it remains to be seen how Government will proceed on the matter given the IMF’s current advice for it to hold strain on wages.
Today’s statement also pours cold water on Government’s plans to raise non-contributory pensions from $155 to $225 per week, which was estimated to cost Government $17 million.
However, analysts say Government’s plans to abolish road tax and replace it with a tax at the pump, as well as to reduce the Value Added Tax from 17.5 per cent to 15 per cent, could well be in line with the Fund’s call for a review of tax policy with a view to “broadening the tax base and improving its progressivity”, while efforts to strengthen tax administration continue.
In its report, the IMF also warned that “structural reforms are critical to improve the business climate in Barbados to attract investment, and develop the private sector”.
As for Government transfers to SOEs, it was adamant that those needed to be reduced “by reviewing user fees, exploring options for mergers and privatization, and by providing much stronger oversight.
Mission leader van Selm said he was satisfied that local authorities were rapidly developing a plan to address the island’s economic vulnerabilities.
And following Mottley’s June 1 announcement that her administration, which inherited a $15 billion debt would immediately suspend foreign debt service payments and seek to make interest payments on its domestic debt while negotiating a restructuring agreement with domestic creditors, the IMF advised that “an early and open dialogue with the country’s creditors, aiming to achieve an orderly debt restructuring process, is important”.
“Fiscal consolidation will also help to reduce financing needs, in conjunction with the proposed debt restructuring. It will be important for the Central Bank of Barbados to limit financing of the Government budget given that such practice is not consistent with Barbados’ exchange rate peg; the large monetary financing over the last few years has contributed to the decline in international reserves,” van Selm acknowledged.
He said overall the IMF team had very positive and candid discussions with the Mottley Government during its visit.
In the coming months, the Fund expects to continue close dialogue with the new administration which took office here following May 24 general elections, with a view to reaching understandings on economic policies that could underpin an IMF supported programme.
“Our goal is to help Barbados achieve higher living standards and more inclusive growth for the years ahead,” he said.
Meantime, one of this island’s major international creditors told Barbados TODAY it did not expect any losses as a result of Barbados’ restructuring efforts.
Credit Suisse, while opting not to comment on the island’s economic situation, said in a brief statement in relation to the planned debt restructuring plan, “it is important to note that we actively manage all of our credit exposures and as a result we do not expect any losses from the current situation”.
Barbados had borrowed a loan of US$225 million from the Switzerland-based financial institution four years ago. Payment on that loan is due this month.
However, on June 5 Government failed to make an interest payment due on its 6.625% notes due by 2035, triggering yesterday’s downgrade by Standard & Poor’s of the island’s long-term foreign currency rating to “selective default”.
Prime Minister Mottley’s decision to suspend Barbados’ foreign commercial debt payments has also triggered a downgrade by the regional ratings agency CariCRIS, which dropped Barbados’ rating to ‘CariC’ on both its foreign currency and local currency ratings.
And in a further blow to the island’s credit worthiness, S&P is warning that it could lower the local currency sovereign issuer credit rating to selective default if Barbados fails to make debt service payments on its local currency debt or executes an exchange with bondholders.