Context: Barbados is struggling in the aftermath of the global crisis, with a slow recovery underway. Tourism, offshore financial services and construction were especially hard hit, but some activity has resumed. In response, to limit employment losses and shield vulnerable groups, the government increased social spending, putting pressure on public finances and raising public debt further. The authorities are revising their medium term fiscal strategy to improve fiscal outcomes mainly by reducing spending. Downside risks from the weak external environment are increasing.
Focus of the consultation:
The main policy challenge is to implement a credible fiscal strategy without jeopardizing the still-fragile recovery. To this end, policy discussions focused on fiscal consolidation and external stability in presence of high debt, financial stability (including the resolution of CLICO Barbados), and enhancing medium term growth prospects. The staff made the following recommendations:
- Fiscal consolidation and external stability: Push ahead with efforts to put debt on a sustainable path and to sustain the peg. Broaden the coverage of the revised Medium Term Fiscal Strategy to include public enterprises. Focus on expenditure reduction, especially lowering transfers to public bodies and reducing the wage bill since room for further tax increases is limited.
- Strengthening financial regulation and supervision: Minimize fiscal costs in the CLICO resolution and seek a private sector solution. Increase provisioning as a prudential measure for insurance companies and make the financial sector more resilient to shocks through frequent monitoring and improved risk management. Strengthen the supervisory capacity of the Financial Services Commission through technical assistance from international agencies, including CARTAC, and intensify efforts to improve regional financial stability.
- Enhancing medium term growth prospects: Continue efforts to improve productivity since total factor productivity is low. Improve the efficiency of government services including by consolidating agencies with complementary mandates and reducing the bureaucratic burden on the private sector.