Barbados: IMF staff concluding statement of the 2021 Article IV Mission and Sixth Review under the extended fund facility

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WASHINGTON, USA – Barbados continues to make good progress in implementing its comprehensive economic reform program but faces economic challenges owing to the ongoing global pandemic. International reserves have increased to US$1.4 billion by October 2021.

This, and a successful 2018-19 public debt restructuring, have helped rebuild confidence in the country’s macroeconomic framework. However, a virtual standstill in the tourism sector during the pandemic took a significant toll in 2020, with the economy contracting by 18 percent. While Barbados was successful in containing the outbreak during 2020, renewed COVID-19 waves weigh on a nascent economic recovery. In addition, Barbados has recently been hit by two natural disaster shocks – volcanic ashfalls from neighboring St Vincent in April and category 1 hurricane Elsa in July. Economic growth is projected at 2 percent for 2021 premised on a modest recovery of tourism towards end of 2021 – down from 3 percent projected at the time of the fifth EFF review. The outlook remains highly uncertain, and risks are elevated.

Government revenue is showing tentative signs of recovery in 2021, while spending pressures remain high

Prior to the pandemic, the government met its primary surplus target of 6 percent of GDP in FY2019/20. The impact of the pandemic on government finances reduced the primary balance to minus 1 percent of GDP in FY2020/21. The authorities are targeting a similar primary deficit in the current fiscal year (FY2021/22), with tourism still well below normal levels, and additional spending related to the twin shocks of volcanic ashfalls and Hurricane Elsa. The authorities are expected to resume fiscal consolidation required to achieve long-term fiscal objectives starting in FY2022/23.

The authorities remain firmly committed to unwind the temporary fiscal accommodation caused by the COVID-19

While fiscal policy must remain accommodative in FY2021/22 to offset the impact of the pandemic and natural disasters, a gradual economic recovery will facilitate a gradual reduction in the debt-to-GDP ratio over the medium term. The authorities should be able to achieve the debt target of 60 percent of GDP by FY2035/36 through ambitious primary balances in the medium and long-term. The projected improvement in the fiscal position is supported by a cyclical recovery in revenues, phasing out of COVID-related expenditures, continued state-owned enterprise (SOE) reform, and the expected introduction of a fiscal rule.

Structural reforms to transform the state-owned enterprise (SOE) sector have been undertaken

Reforms under the authorities’ comprehensive economic reform program included upfront cost savings measures as well as strengthened oversight and accountability frameworks to improve SOE performance and limit fiscal risks. The 2019 Public Financial Management Act requires approval of SOE borrowing and stipulates sanctions for noncompliance with enhanced SOE reporting requirements. Additionally, financial reports on SOE performance are presented to parliament. These combined efforts were successful in reducing transfers to SOEs by 1 percent of GDP prior to the pandemic, but transfers rose in FY2020/21 by 15 percent to accommodate the national COVID-19 policy response including the implementation of the nation-wide vaccination program.

While this increase is transitory, most SOEs struggle with longstanding challenges in terms of weak profitability and high operating costs that give rise to transfer needs. The introduction of a risk dashboard provides the authorities with a mechanism to analyze the financial performance of priority SOEs and helps to devise targeted reform measures to enhance performance and reduce government dependence.

The authorities have developed a recapitalization plan for the Central Bank of Barbados (CBB)

The plan follows a gradual approach aiming to strike a balance between the magnitude of the capital shortfall and the current limited fiscal space, drawing on recent IMF technical assistance. The CBB remains profitable, and the implementation of the plan will allow it to engage in operations to help sterilize excess systemic liquidity over the medium term.

The CBB has maintained credit support measures in effect to support the economy during the pandemic

Those measures include reductions of both its overnight lending discount rate from 7 to 2 percent and of the minimum statutory holding requirement for government securities from 17½ to 5 percent of deposits (this requirement was subsequently removed with the introduction of the new central bank act). In addition, in April 2020 commercial banks announced a 6-month voluntary debt service moratorium – which is still in place on a limited, case-by-case basis. To support this, the CBB has extended regulatory guidance through October 2022 by allowing banks to exclude deferred loan payments from the calculation of past‑due days, provided those loans were performing when the deferral was agreed. Unwinding these measures should be carefully managed and contingent on the financial position of borrowers and lenders to avoid creating adverse macro-financial feedback loops.

The financial position of banks remains stable

Banks appear adequately capitalized and liquid, amid low profitability. While the system’s nonperforming loans ratio has slightly increased, they are largely covered by provisions. Banks continue to work with individual borrowers by extending deferrals or reprofiling loan terms as needed, on a voluntary and commercial basis while maintaining regulatory standards on loan classification and provisioning.

Structural reforms and investments to unlock Barbados’ growth potential should be accelerated once the global pandemic recedes and fiscal space is created

While Barbados has been steadily improving its business climate—by easing trading across borders, opening the electricity sector to independent power producers, and introducing a more reliable payment and digital identity system—additional efforts are important to further unlock Barbados’ growth potential, including by facilitating further digitalization, as well as promoting small and medium sized enterprises’ access to the financial system.

Investments to increase resilience and the implementation of supportive policies to facilitate the transition to renewables will be critical for macroeconomic stability and sustainable growth

Climate change could manifest itself in Barbados with higher temperatures, increasing sea levels, changes in rainfall patterns and in the frequency of powerful hurricanes. While Barbados has already implemented several policies to increase structural resilience and spur a green recovery, investment to further strengthen infrastructure resiliency is needed. Continued engagement with regional integration initiatives (such as the Caribbean Catastrophe Risk Insurance Facility) will support Barbados’ financial resilience. Achieving Barbados’ target to decarbonize the economy and fully transition to renewable energies by 2030 will require a stepped-up implementation of key supporting policy initiatives and reforms to enhance the business environment.

The authorities’ BERT program, supported by the IMF’s extended fund facility, is on track

All quantitative program targets for end-June and end-September 2021 have been met. Further, all structural benchmarks for the sixth review have been met, with the exception of the adoption of the Fair Credit Reporting Act (planned for end-October 2021 and slightly delayed). Following productive discussions, the IMF team and the Barbadian authorities reached staff-level agreement on the completion of the sixth review under the EFF arrangement. The agreement is subject to approval by the IMF Executive Board, which is expected to consider the review in December. Upon completion of the review, SDR 17 million (about US$24 million) will be made available to Barbados, bringing the total disbursement under the EFF to SDR 305 million.

The team conducted a virtual visit to Barbados November 1-5 and would like to thank the authorities and the technical team for their openness and candid discussions.

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