The IMF directors encouraged government to minimize fiscal costs in any plan to resolve CLICO and to seek a private sector solution in a statement issued yesterday, December 7. The IMF noted that the CLICO failure underlines the importance of a coordinated regional approach to financial sector supervision and a mechanism for establishing a framework for crisis resolution.
The statement that followed the executive board of the IMF’s conclusion on its Article IV consultation with Barbados, expressed strong concern about Barbados’ fiscal stresses in light of its “anemic” economic growth and escalating double-digit inflation and unemployment.
The directors noted that fiscal performance remained “under stress” especially in light of Barbados’ high public debt as central government deficit rose to about 8.5 percent of gross domestic product (GDP) from 8.2 percent of GDP in FY 2009/10; expenditures increased by 0.5 percentage points of GDP, while revenue weakness, particularly in corporate taxes, implied an overall deficit in excess of the budget target.
Moreover, Barbados remains one of the most highly indebted countries in the region with public debt at the end of the 2011 fiscal year standing at 117 percent of GDP, up from about 90 percent of GDP two years earlier.
However, the IMF did note that budgetary measures put in place by the Freundel Stuart administration looked on track to achieve an overall central government deficit target of 5.1 percent of GDP.
Included in these measures had been the move by the Minister of Finance Christopher Sinckler to raise the value added tax rate by 2.5 percent for 18 months from November 2010. However, the IMF is pushing for this to be a permanent solution.
In the statement, the directors encouraged government to make further sustained efforts to curtail and prioritize government spending, and enhance revenue, including by broadening the tax base and making permanent the temporary hike in the value-added tax. They also recommended expanding the coverage of the fiscal strategy to include public enterprises.
While the current account deficit widened in recent times due to higher oil and food prices to around an estimated 10.5 percent of GDP in 2011, the IMF was satisfied that international reserves were comfortable at 4.5 months of import cover at the end of September 2011, having been boosted by public and private capital inflows. However, they also pointed to a projected medium-term decline in international reserves and recommended close monitoring be kept of net foreign reserves levels.
Still, the Washington-based monetary authority is not advocating any changes in the country’s exchange rate. The directors observed that the exchange rate peg has served the country well. They emphasized that a credible fiscal consolidation, together with efforts to enhance competitiveness, would be crucial to support the peg and external stability.
The IMF noted that the banking system is stable and healthy. Nonetheless, the recent increase in nonperforming loans, coupled with low loan-loss provisioning, requires close monitoring and improved risk management. They welcomed the consolidation of supervision of the nonbank financial sector under the newly operational Financial Services Commission, and recommended strengthening its supervisory capacity.