IMF again sounds the alarm over large fiscal deficit
The International Monetary Fund (IMF) has again raised a red flag over Barbados’ large fiscal deficit and high public debt in a report that nevertheless highlighted a positive turnaround on several fronts.
“Real GDP [Gross Domestic Product] grew by 0.8 percent in 2015, underpinned by an increase in private investment and a surge in tourism arrivals, which increased by 14 per cent, among the highest in the Caribbean,” the Washington-based financial institution said.
The report, which followed the Fund’s Article IV consultation that wrapped up on Monday, also pointed to a drop in the unemployment rate to 11.3 per cent, a falloff in inflation from 2.5 to 2.3 per cent and a significant improvement in the external current account position, as the deficit narrowed from 9.9 per cent of GDP in 2014 to 6.7 per cent in 2015.
Despite the much welcomed pick-up in economic activity, the global lending agency noted that the fiscal situation remained challenging.
The IMF took issue with the budget deficit, which it said “was broadly unchanged at seven per cent of GDP”.
“At end of FY [Financial Year] 2015/16, central government debt excluding securities held by the National Insurance Scheme (NIS) reached the equivalent of 105.5 (141.6) per cent of GDP, from 98.0 (132.3) per cent in FY 2014/15. The large funding requirements, totalling about 45 per cent of GDP, have been mostly met by the Central Bank of Barbados (CBB), the NIS, and growing arrears.”
The Fund chastised Government for relying on the Central Bank to finance the fiscal deficit
“Directors emphasized that the continued financing of the fiscal deficit by the Central Bank of Barbados is inconsistent with the maintenance of the exchange rate anchor,” the report said.
During debate last week on the Financial Statement and Budgetary Proposals, former Prime Minister Owen Arthur had labelled the practice, the “worst ever” for a small, open economy as he too urged the Freundel Stuart administration to stop the Central Bank from printing money.
The IMF recommended that the Central Bank should instead allow domestic rates to rise in line with increases in US interest rates and ensure adequate international reserve buffers.
The international financial experts emphasized the need for continued fiscal adjustment and public sector reforms, and in this regard gave the last budget, which saw the rise in the Bank Asset Tax from 0.2 per cent to 0.35, as well as the introduction of the Social Responsibility Levy, high marks.
However, the Fund cautioned authorities to keep tax exemptions in check, while urging that the reform of the Barbados Revenue Authority should be fast-tracked to improve tax administration and increase compliance.
The IMF also called on the administration to focus on state-owned enterprises, which remained a drag on the economy.
“Stronger efforts are also needed to reform state enterprises through better governance, consideration of user fees and potential divestment and consolidation of public entities,” it urged.
They also called for swift action to eliminate Government arrears.