Much has been made in the Press and elsewhere about the measures announced in Parliament by the Minister of Finance, the Hon. Christopher Sinclair, following our recent Article IV Consultation with the IMF. The impression gained from the debate so far is that the announced measures by the Minister of Finance are, if not the whole story, certainly very nearly so. The reality is we have witnessed only Scene 1, Act 1, in a three act play. How it will end, will depend on how much assistance Barbados feels it needs to obtain with IMF help.
For length and the implications for the lives of many Barbadians, the Minister’s statement was a sobering document. Equally important was an understated, carefully worded Press Release by the Head of the IMF Mission, Ms. Nicole Laframboise. This statement is worthy of careful study by all Barbadians, if for no other reason than that it gives a hint of where we are likely to go from here.
The Mission will make a more detailed report to the IMF Management and Board, which will issue the final recommendations to government on what additional steps the Fund recommends to correct the various weaknesses identified in our current macroeconomic policy framework. These recommendations will also be passed along to Credit Suisse with our plans for their implementation. Other international institutions from whom we may wish to borrow (the CDB and IDB) will also take careful note of the more detailed final report.
A paraphrase of the main recommendations, shorn of IMF-speak, is given by topic below:
Fiscal Policy. Fiscal policy should be guided by the goal of reducing central government debt to below 85 percent of GDP BY 2018. To this end, a fundamental review of the tax system is warranted, and the authorities have requested technical assistance on this from the IMF. The goal would be to broaden the revenue base, which has been seriously eroded by statutory and discretionary waivers such as fiscal incentives and concessions of various kinds. In the interim, a number of measures could be taken to significantly improve the yield by strengthening compliance and efficiency in revenue and customs administration.
International Competitiveness of the Barbados Economy. The lowering of economy-wide labor costs is needed to raise Barbados’ external competitiveness. Downsizing by attrition and implementing a wage formula that freezes the average wage per worker would also reduce the wage bill significantly over time and would have the added benefit of contributing to lowering economy-wide labor costs. This approach to raising Barbados’ international competitiveness is made all the more desirable, given the nation’s deep commitment to its exchange rate peg, which the IMF recognizes.
The Need for Means Testing of Social Expenditures. There is scope to greatly improve the targeting of social spending and lower costs to ensure that Barbados retains its high standards of equity and social protection. There is some duplication across ministries, and some social programs, such as childcare and housing, are not well targeted/means tested and may be benefiting middle and higher income groups at the expense of the most needy.
Reform of Statutory Corporations. It will be critical to address weaknesses in the oversight and operations of the statutory bodies, whose financial performance is in many instances not available. Equally urgent, the operations of the main state entities should be reviewed with a view to identifying their strategic purpose (abolishing where warranted), reducing losses and raising efficiency. Fund technical assistance in support of reform of statutory bodies is expected to start in early 2014.
The Role of Monetary Policy. Under a new interest rate policy framework in place since April, the Central Bank of Barbados (CBB) has increased its holdings of Treasury bills in 2013, resulting in a decline in short-term yields. Direct financing of the government by the Central Bank, which is exacerbating pressures on the balance of payments (international reserves), should be reversed and short-term interest rates allowed to rise to levels more consistent with safeguarding the exchange rate anchor. This would demonstrate that monetary policy is supportive of the currency peg.
The Role of Public Sector-Private Sector Partnerships (PPs). A number of large scale private investment and public works projects are expected to come on stream in the coming months, supporting a rebound in capital inflows and offsetting the drag on growth from fiscal adjustment. While these projects should enhance competitiveness, the role of the state should be carefully considered, particularly in the productive sectors, and contingent liabilities of the state (e.g., by assuming guarantees for debt obligations and by the granting of generous fiscal incentives) minimized.
We are, then, at the beginning of a process of formulation and implementation of reform measures for the Barbados economy with IMF advice. No IMF financial resources are in play up to now. Apart from the Credit Suisse condition for lending to Barbados, IMF diagnoses take the form of recommendations. Should we need, for any reason, to move to the stage of seeking IMF financial assistance, a more rigorous examination of our weaknesses and remedies for identified shortcomings would be undertaken. Disbursements of IMF loans would be conditional on implementation of their recommendations. The areas that would receive greatest attention are not likely to stray very far from those identified above. Special emphasis would be given to policies the Fund considers inconsistent with honoring our debt obligations and to maintaining the currency peg.