The Barbados economy appears to have “turned the corner with activity picking up,” says the International Monetary Fund (IMF) in its latest review.
But, and perhaps most notably, the IMF directors emphasised that the continued financing of the fiscal deficit by the Central Bank of Barbados (CBB) was “inconsistent with maintenance of the exchange rate anchor”. But that small point was buried deep in the report toward the end.
Before I offer you a summary of the IMF’s own summary of its 2016 staff report – since the actual report has not be made available yet to media on its website – let me say that I find the Fund to be quite muted in its executive review this time round.
Seems to me that for some reason it has decided to “accen-tuate the pos-i-tive,” as the song says, even if it doesn’t “elim-i-nate the neg-a-tive” quite completely.
With apologies to the late, great Johnny Mercer, the IMF this time seemed to “latch on to the affirmative”.
On August 22, the executive board of the IMF concluded this year’s Article IV consultation with Barbados, and published its executive summary.
Barbados’ fiscal situation remained “challenging despite ongoing Government adjustment efforts,” said the Fund, noting that the budget deficit for FY 2015/16 was “broadly unchanged” at about seven per cent of GDP.
It could have pointed out that the current budget does not see that deficit dropping by much this year, either.
Among the main factors keeping the deficit high, it said, were that while new measures did raise revenue by one percent of GDP, they fell short of target due to implementation delays. You will remember that Government had said last year that its goal was to increase revenue intake by about $200 million, but, according to my tallying up of the numbers in the Estimates, it only got in around $110 million. Not including any accruals, that is.
Another factor was that, on the expenditure side, “progress on reducing transfers to state-owned enterprises was also slower than anticipated,” said the IMF.
And of course, our debt is now approaching 150 per cent of GDP. The IMF said that at the end of FY2015/16, central Government debt including securities held by the National Insurance Scheme (NIS) reached the equivalent of 141.6 per cent of GDP, from 132.3 per cent the previous year.
By the way, I would be grateful if anyone can show me where that 141.6 per cent figure appears in the latest Central Bank half-year report. I can’t seem to lay my eyes on it.
I probably need an eye check-up.
The large funding requirements, the IMF said, “have been mostly met by the Central Bank of Barbados (CBB), the NIS, and growing arrears”.
On the positive side, the IMF said that in 2015, Barbados’ real GDP – that is, economic output adjusted for price changes such as inflation or deflation – grew by 0.8 per cent in 2015, mainly due to an increase in private investment, and a 14 per cent surge in tourism arrivals. These factors boosted employment by two per cent, while the unemployment rate fell to 11.3 per cent.
But although Barbados’ external current account position “improved significantly” as it “narrowed from 9.9 per cent of GDP in 2014 to 6.7 per cent in 2015, primarily reflecting lower oil and other prices,” and “exports of goods and services rose mainly due to higher tourism receipts,” the cost of servicing the national debt proved to be a heavy millstone around the neck of the economy, along with a recent slowing of foreign direct investment.
And so, “driven by large official amortisation payments and lower FDI,” said the IMF, net international reserves dropped to US$469 million at the end of April 2016, or about 2.8 months of imports.
The IMF noted that “the financial sector remains stable while commercial bank liquidity continues to rise”.
In addition, private sector credit growth was modestly positive in 2015, following two years of decline, and non-performing loans declined.
The IMF said Barbados’ monetary policy had been driven by fiscal considerations, as the Central Bank “continued to fund the Government through money creation and with commercial banks’ excess reserves”.
And despite the efforts to date by the Government, “continued fiscal adjustment and public sector reforms are necessary to bring public debt on a downward path”.
The executive directors said they welcomed the reductions in current expenditure and new revenue measures announced in the August 2016 budget, warning that a further increase in tax exemptions could erode revenues.
But they were anxious to see the reform of the revenue authority completed in order “to improve tax administration and increase compliance,” and stressed that “stronger efforts are also needed to reform state‑owned enterprises through better governance, consideration of user fees, and potential divestment and consolidation of public entities”. They also called for urgent action to pay off Government arrears.
Can you imagine the IMF welcoming that extra $142 million in taxes at the ports of entry into Barbados without offering one word of caution about its inflationary side effects?
Every economist and business organisation leader in this country, it seems, is talking about the price consumers (and the businesses which serve them) may have to pay in increased inflation due to putting on a “cess” at the port.
But you know what? It’s just a warm-up session. Remember that as Antigua & Barbuda reduced its income tax rates over a couple of budgets, the government also increased the tax on everything at the ports. I think it is now at ten per cent.
The purpose, very clearly stated, was to replace government revenue lost by eliminating the income tax. So what do you think is going to happen if these duty-free areas for BWFEs (Bajans With Foreign Exchange) take off and Government finds itself losing revenue from so many duty-free purchases?
The bottom line is that Government, unless it reduces it size and overhead, needs more revenue than it is currently getting.
And if it doesn’t get it one way, it will try to get it another.
