Fiscal consolidation critical

FISCAL consolidation has to be high on the agenda of the new Mia Mottley led Administration.

This blunt assessment has come from the International Monetary Fund (IMF) upon the conclusion of its visit to the island over the past few days.

The IMF team led by Bert van Selm had discussions on economic policies and possible IMF financial support of the government’s economic plan.

Van Selm stated that while the fiscal deficit had decreased in recent years, Barbados faced multiple threats, including low net international reserves combined with low economic growth in the first quarter of this year, which made for a dangerous combination of challenges. “Barbados is in a precarious economic situation. International reserves have dwindled to US$220 million, while central government debt is unsustainable. The fiscal deficit has decreased over the last few years but remains large, at about four per cent of GDP in FY2017/18. Meanwhile, the Central Bank of Barbados (CBB) is reporting a contraction of output of 0.7 per cent in the first quarter of 2018 (over the same period last year). The Barbadian authorities, in close consultation with their social partners, are rapidly developing a plan to address current economic vulnerabilities. We welcome the government’s plans to urgently address infrastructure problems, and its goal of seeking to support the most vulnerable during the economic adjustment process.

Van Selm stressed the need for the Administration to focus on ‘substantial fiscal consolidation’, and positioning the debt downwards. He also maintained that a strong course of action is needed, inclusive of expenditure cuts, public service efficiencies, control of wages and pension reforms. In line with efforts from the now former Democratic Labour Party (DLP) efforts contained in the Budget of 2017, the IMF team leader, also pointed to the need to widen the tax base, pursuing mergers or privatisation, greater oversight of tax administration was also recommended. Those efforts included the proposed sale of the Hilton and the Barbados National Oil Terminal Limited, inclusive of revenue raising measures, such as increasing the National Social Responsibility Levy from two to ten per cent.

“At this juncture, the IMF’s recommendations contained in the 2017 Article IV Consultation remain highly relevant to rebuild confidence and address Barbados’ current challenges. Substantial fiscal consolidation is needed to place debt on a clear downward trajectory in conjunction with the proposed debt restructuring, and to address balance of payments risks that cloud the country’s future. Since tax and revenues are relatively high, the adjustment effort should focus on the expenditure side, including by improving the efficiency and effectiveness of public services, containing wages, and reforming government pensions. Government transfers to SOEs need to be reduced by reviewing user fees, exploring options for mergers and privatisation, and by providing much stronger oversight. Tax policy should be reviewed with a view to broadening the tax base and improving its progressivity, while efforts to strengthen tax administration should continue. Structural reforms are critical to improve the business climate in Barbados to attract investment, and develop the private sector,” it was further explained.

Calls were also made to continue efforts to protect the island’s exchange peg, through limiting the Central Bank from printing money. It was also stressed that an orderly debt restructuring was critical. “Fiscal consolidation will also help to reduce financing needs, in conjunction with the proposed debt restructuring. It will be important for the CBB to limit financing of the government budget given that such practice is not consistent with Barbados’ exchange rate peg; the large monetary financing over the last few years has contributed to the decline in international reserves. We also note the authorities’ decision to seek a restructuring of domestic debt and external debt to commercial creditors. An early and open dialogue with the country’s creditors, aiming to achieve an orderly debt restructuring process, is important.”

Van Selm maintained that the IMF stood ready to assist. “Overall, the team had very positive and candid discussions with the government during the visit. In the coming months, we expect to continue our close dialogue with the Barbados government with the aim of reaching understandings on economic policies that could underpin an IMF supported programme. Our goal is to help Barbados achieve higher living standards and more inclusive growth for the years ahead. During the visit, the team met with Prime Minister Mia Mottley, Minister of Finance, Economic Affairs and Investment, CBB Governor Haynes, and other key officials. The team also had good opportunities for exchange of views with social partners, including labour unions and the private sector. The team would like to thank the Barbados government for open and candid discussions, and to express its desire to continue to work closely with Barbados in the period ahead.”
The IMF visit came even as the island was downgraded by Standard and Poor’s on Wednesday evening to Selective Default (SD) from junk bond status. Government had announced on Tuesday, that it had appointed White Oak Advisory Ltd. to act as its financial advisor in the context of the debt restructuring process announced on June 1, 2018.

Prime Minister and Minister of Finance, Economic Affairs and Investment, Mia Mottley is expected to deliver a Budget aimed at addressing the economic imbalances and challenges on Monday June 11, in the House of Assembly.

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