An international financial institution which loans Barbados millions of dollars says the island’s worrying fiscal challenges warrant “a higher level of fiscal discipline than is customary”.
The Inter-American Development Bank, saying Barbados could “achieve sustainable economic growth and development if led by the sectors that provide a surplus of foreign exchange”, issued the advice in an October 2013 analysis (see Pages 20 and 21 for full analysis).
It also warned in the quarterly bulletin that Government’s recent withdrawal of an international bond offer was a “setback” that had negative implications for the island’s ability to raise money, while also cautioning officials here about guaranteeing private sector projects.
Referring to its own debt sustainability analysis which used World Economic Outlook data and Barbados Growth and Development Strategy forecasts, the bank “concluded that Barbados will require fiscal adjustments on the primary surplus of more than five per cent of GDP to achieve sustainable debt levels”.
“This finding suggests that Barbados needs a higher level of fiscal discipline than is customary in that country. Therefore, the likely outcome for debt depends on the strength of Barbados’ fiscal-consolidation efforts, the cost of debt, and GDP growth,” it said.
“Barbados’ debt remains high and vulnerable to shocks. Government highlighted its intention to reduce the central government debt-to-GDP ratio, which is currently in excess of 90 per cent, to below 80 per cent by 2024/25. This target is expected to be achieved through various strategies, including reducing the risk associated with floating interest rate external debt; extending and smoothing the maturity profile to better manage refinancing risks; and implementing a debt-retiring schedule,” the IDB noted.
It said “achieving this target could pose a severe challenge for the country given its current sovereign credit rating of below investment grade and its high potential to accumulate additional debt to support the balance of payments position”.
“Some setbacks have already been witnessed as the Government was forced to withdraw a US$250 million bond issue in the international capital market. The inability to raise this money increases financing and rollover risks for the country,” the bulletin said.
“Barbados also faces rising contingent liabilities through the guarantee of numerous projects (such as the construction of the Four Seasons, the restructuring of the cane industry and the purchasing of the Almond Beach Village Resort). Caution needs to be taken because high debt levels increase the vulnerability of a country as the public and private sectors are hindered by unexpected shocks.”
It also said while recently announced infrastructural projects can generate much-needed growth for the stagnant economy, “much care should be taken regarding projects that are financed or guaranteed by the government because a further burden would be placed on an already limited fiscal space”.
The IDB urged Barbados to work on reducing its energy import bill by focusing on the alternative energy sector.
“Barbados can achieve sustainable economic growth and development if led by the sectors that provide a surplus of foreign reserves. The energy sector can accomplish this task, given that investment in renewable energy sources stimulate economic growth, save foreign exchange, and promote a greener economy. It is therefore essential for Barbados to use strategies to build a strong, vibrant, and productive alternative energy sector,” it said.
Bank officials said the institution was prepared to continue lending support to Barbados in this regard. The IDB is committed to continuing its support to Barbados by improving energy efficiency, promoting diversification of energy sources and expanding the use of renewable energy through greater technical and financial backing. Assistance has also been given for capacity building, training and skill development in renewable energy, and energy efficiency in tertiary institutions and schools.
“These initiatives would help advance Barbados on the path to a green economy,” the bulletin said. (SC)
