On January 26, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Barbados.

Following the economic recovery in 2016, GDP growth is slowing reflecting increased pace of fiscal consolidation. Real growth reached 1.6 percent in 2016, as a result of continued robust long-stay tourism arrival and spending. It is projected to slow to 0.9 percent in 2017 and 0.5 percent in 2018 due to the ongoing fiscal adjustment and policy uncertainty related to the forthcoming elections. Inflation is projected to rise by year end to 5.5 percent as a result of recent tax increases but return to its historical norm in the medium term.

The current account balance continues to narrow but international reserves are falling. The current account deficit declined to 4.4 percent of GDP in 2016, about of half that in 2014, due to lower energy prices and a recovery in export earnings. Notwithstanding, NIR continued to decline with lower official and private capital inflows, to about US$275 million at end-September (1.6 months of imports). The current account deficit is projected to continue to narrow to 3.7 percent in 2017, and to 2.9 percent of GDP in 2018 as a result of lower imports, but continued weakness in the financial account and delayed privatization will contribute to weak reserves.

There has been progress with fiscal consolidation but the deficit and debt remain high. The fiscal deficit is estimated to have declined to 5.5 percent of GDP in FY2016/17 reflecting stronger revenue performance, including the introduction of the National Social Responsibility Levy (NSRL) and one-off factors. The government also reduced total expenditure, despite a large increase in debt service, reflecting efforts to contain spending across the board. Staff project further progress in reducing the fiscal deficit, to 4.1 percent of GDP in FY2017/18 without divestment proceeds. However, this is less than planned as a result of shortfalls in NSRL revenues and higher transfers to SOEs. Central government debt at end-FY2016/17 was 137 percent of GDP or 101 percent of GDP excluding securities held by the National Insurance Scheme (NIS).

The larger than expected fiscal deficit is increasing funding challenges. While the central bank significantly reduced its funding of the government in the first half of FY2017/18, the commercial banks’ reserve requirements for holding government securities have been increased, increasing banks’ exposure to sovereign risk. The financial sector remains stable with banks well capitalized. Financial soundness indicators show further progress in reducing NPLs by commercial banks and credit unions. However, private sector credit growth continued to be subdued and banks’ profitability remains weak.

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