IMF Executive Board Approves US$290 million Extended Arrangement Under the Extended Fund Facility for Barbados

October 1, 2018

The IMF supported program aims to help Barbados: restore debt sustainability, strengthen the external position, and improve growth prospects.
Approval of the program allows for the immediate disbursement of about US$49 million immediately.
A comprehensive debt restructuring will complement the fiscal consolidation. The authorities have identified parameters that would provide debt relief without jeopardizing financial stability.

On October 1, 2018, the Executive Board of the International Monetary Fund (IMF) approved a four-year Extended Arrangement under the Extended Fund Facility (EFF) for Barbados for an amount equivalent to SDR 208 million (about US$290 million, or 220 percent of Barbados’s quota in the IMF). The Board’s decision enables the authorities to purchase the equivalent of SDR 35 million (or about US$49 million) immediately. The remainder will be available upon successful completion of seven semiannual reviews.

The EFF-supported program aims to help Barbados: restore debt sustainability, strengthen the external position, and improve growth prospects. Upfront fiscal consolidation, meaningful debt restructuring, and structural measures to support growth should put debt on a clear downward trajectory. The program will seek to protect vulnerable groups through strengthened social safety nets.

Following the Executive Board discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, said:

“The Barbadian authorities have developed a homegrown economic program to address longstanding challenges, which will be supported under the IMF’s Extended Fund Facility. Over the last decade, Barbados’s economy has experienced low growth, while fiscal and external imbalances have gradually widened to reach an unsustainable situation, with very high debt and very low reserves. The authorities’ reform program seeks to address these challenges with a combination of front-loaded fiscal consolidation, measures to boost growth, and debt restructuring, while protecting social spending.

“Fiscal consolidation is key to the adjustment effort. The authorities aim to increase the primary surplus to 6 percent of GDP in FY2019/20 and maintain it at that level for several years thereafter. Reducing transfers to state-owned enterprises will be key in reaching the primary surplus targets. The program aims to reduce these transfers with a combination of much stronger oversight of state-owned enterprises, improved reporting, cost reduction, revenue enhancement, and mergers and divestment. A planned comprehensive review of tax policies is expected to lead to improvements in the tax system. The adoption of a fiscal rule and reforms in public financial management will help sustain the fiscal reform effort.

“A comprehensive debt restructuring will complement the fiscal consolidation. The authorities have identified parameters that would provide debt relief without jeopardizing financial stability, and an exchange offer for domestic debt (Barbados dollar-denominated) to private creditors was launched on September 7, 2018. The proposed debt restructuring includes features, including a natural disaster clause, that are expected to help the authorities stay current on their future debt obligations. It is important to continue good faith negotiations with domestic and external creditors.

“Bold structural reforms are needed to improve Barbados’s growth potential and competitiveness. There is significant room for improvement in key business facilitation processes, including speeding up the process for providing construction permits and faster clearing of goods through customs.

Adequate social spending and an improved safety net are key priorities for the program. Targeted reforms, to be pursued in close collaboration with development partners, aim at improving the efficiency and effectiveness of social spending.”

ANNEX

Recent Developments

A new government that took office in May 2018 has inherited a precarious economic situation. Over the last decade, Barbados’ economy has experienced very low growth, and fiscal and external imbalances have gradually led to an unsustainable situation, with very high debt, and very low reserves. Public debt has increased to 157 percent of GDP, while international reserves dropped to 5-6 weeks of import coverage.

Although the fiscal deficit has decreased over the last few years, it remains large, at about 4 percent of GDP in FY2017/18. In 2017 and early 2018, the economy slowed owing to measure taken by the previous government to tighten the fiscal stance and uncertainty about the road ahead, with the Central Bank of Barbados (CBB) reporting a contraction of 0.6 percent in the first half of 2018 (over the same period last year).

The new government announced a comprehensive debt restructuring, including commercial external debt and treasury bills, on June 1, 2018. Significant progress has been made in discussions with domestic and external creditors, and an exchange offer for domestic debt (Barbados dollar-denominated) was launched on September 7, 2018.

Program Summary

Key element of the authorities’ homegrown economic reform program are:

(i) upfront fiscal adjustment: the authorities aim to increase the primary surplus by 2½ percent of GDP to reach 6 percent of GDP in 2019/20 and maintain it at that level for several years thereafter, while protecting vulnerable groups through strengthened social safety nets. Adjustment measures include reduced transfers to state-owned enterprises, higher taxes on tourism, and increased personal income tax and corporate income tax rate rates. The fiscal adjustment effort will be supported by the adoption of a fiscal rule, and Public Financial Management (PFM) reforms.

(ii) reform of state-owned enterprises (SOEs). At 7½ percent of GDP, transfers from the central government to state-owned enterprises are very high, and a major contributor to fiscal risks. The program aims to reduce transfers by about 2 percentage points of GDP, by a combination of much stronger oversight of SOEs, supported by improved reporting; cost reduction, including reduction of the wage bill; revenue enhancement, including an increase in user fees; and mergers and divestment.

(iii) structural reforms to support growth. The program seeks to address weaknesses in the business climate, including slow processes for obtaining construction permits, getting electricity, and registering property, and will include financial and labor market liberalization policies.

Table 1. Barbados: Selected Economic, Financial, and Social Indicators
I. Social and Demographic Indicators (most recent year)
Population (2016 est., thousand)	280.4	Adult literacy rate			99.7
Per capita GDP (2016 est., US$ thousand)	17.8	Poverty rate (individual, 2010)			19.3
Life expectancy at birth in years (2013)	75.3	Gini coefficient (2010)			47.0
Rank in UNDP Development Index (2014)	57	Unemployment rate (2016 est.)			9.9
Main products, services and exports: tourism, financial services, rum, sugar, and chemicals.
II. Economic Indicators
			Est.	Projection
	2015	2016	2017	2018	2019
	(Annual percentage change)
Output, prices, and employment
Real GDP	2.2	2.3	-0.2	-0.5	-0.1
CPI inflation (average)	-1.1	1.5	4.4	4.2	0.8
CPI inflation (end of period)	-2.5	3.8	6.6	0.0	1.4
External sector
Exports of goods and services	3.2	6.6	0.8	2.9	2.8
Imports of goods and services	-3.9	0.2	-0.4	4.3	3.1
Real effective exchange rate (average)	8.0	0.9	2.5	…	…
Money and credit
Net domestic assets	3.0	7.1	2.6	1.7	3.1
Of which: Private sector credit	0.5	1.1	3.0	1.0	3.5
Broad money	3.7	3.6	-0.6	3.0	4.7
	(In percent of GDP, unless otherwise indicated)
CG Public finances (fiscal year) 1/
Revenue and grants	25.9	28.2	28.4	29.6	31.1
Expenditure	34.9	33.6	32.7	30.9	28.5
Fiscal Balance	-9.1	-5.3	-4.3	-1.3	2.6
Interest Expenditure	7.1	7.6	7.6	4.7	3.4
Primary Balance	-2.0	2.2	3.3	3.3	6.0
Public Debt (fiscal year) 1/
Central gov't gross debt (incl. guaranteed and arrears)	146.7	149.1	157.3	123.6	116.7
External	33.9	31.2	28.3	26.9	25.9
Domestic	112.8	117.9	129.0	96.8	90.8
Balance of payments
Current account balance	-6.1	-4.3	-3.8	-3.1	-3.4
Capital and financial account balance	4.5	0.8	0.8	5.4	6.8
o/w Public Sector	-0.8	-1.8	-1.4	2.0	3.2
o/w IMF disbursement	0.0	0.0	0.0	0.9	1.9
Private Sector	5.4	2.6	2.2	3.4	3.6
o/w FDI	5.5	3.4	3.1	3.4	3.6
Net Errors and Omissions	0.0	1.0	0.3	0.0	0.0
Overall balance	-1.6	-2.5	-2.6	2.2	3.4
Memorandum items:
Exchange rate (BDS$/US$)	2.0	2.0	2.0	…	…
Gross international reserves (US$ million)	478.4	358.5	227.7	342.0	516.7
In months of imports of G&S	2.8	2.1	1.3	1.9	2.8
In percent of ARA	105.3	72.6	43.8	65.8	95.1
Nominal GDP, CY (BDS$ millions)	9,451	9,681	9,979	10,343	10,414
Nominal GDP, FY (BDS$ millions)	9,509	9,756	10,070	10,361	10,480
Sources: Barbados authorities; UNDP Human Development Report; Barbados Country Assessment of Living Conditions 2010 (December 2012); and Fund staff estimates and projections. 1/ Fiscal year is from April to March.

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