November 14, 2023
An International Monetary Fund (IMF) staff team, led by Mr. Pablo Morra, held a virtual mission during November 6-13, 2023. The staff team held discussions on the 2023 Article IV consultation with the Barbadian authorities. The Barbadian authorities and IMF staff also reached a staff-level agreement on the completion of the second review of the arrangements under the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF).
Barbados continues to advance the implementation of its comprehensive economic reform program. The authorities are implementing their updated Economic Recovery and Transformation plan (BERT 2022) and an ambitious climate policy agenda. Barbados has weathered the COVID-19 pandemic and other recent shocks well and has preserved macroeconomic stability. The economy has recovered strongly, with ten consecutive quarters of growth, driven by a rebound in tourism. In the context of an expanding economy, the authorities are placing renewed focus on structural reforms with the aim of achieving inclusive and sustainable growth and increasing resilience to climate change while maintaining debt sustainability and social cohesion.
Economic activity has rebounded, and inflation is moderating. After a 13.8 percent-rebound in 2022, real GDP is projected to expand by about 4.5 percent in 2023. Inflation fell to 4.3 percent year-over-year as of mid-2023, from a peak of 6.7 percent recorded in May 2022. Lower international fuel prices and freight costs contributed to the reduction in overall inflation, while domestic factors such as prolonged drought conditions and higher demand for restaurants and recreational activities as a result of the recovery in tourism pushed up the prices of some food items and domestic services. The economic recovery resulted in higher job growth, with unemployment claims and the unemployment rate reverting to pre-pandemic levels.
Ample international reserves support the exchange rate peg. Gross international reserves rose to US$1.4 billion as of end-September, equivalent to almost 8 months of imports of goods and services, supported by the improvement in the current account balance and loan disbursements from international financial institutions. The exchange rate peg continues to provide a key anchor for macroeconomic stability. Staff’s external sector assessment suggests that the external position is broadly in line with the level consistent with medium-term fundamentals and desirable policies. The new Central Bank Act in 2020 further strengthened the policy framework underpinning the exchange rate peg by enhancing the autonomy of the central bank, improving its governance, and limiting monetary financing.
The fiscal position continues to strengthen. The authorities met the primary fiscal target set for the first half of FY2023/24 and are on track to raise the primary surplus to about 3½ percent of GDP by the end of the fiscal year. The public debt ratio has fallen to pre-pandemic levels and is projected to continue declining, while sovereign credit ratings are gradually improving. The authorities are advancing their fiscal consolidation plans envisaged under the BERT program while maintaining adequate social spending and gradually increasing public investment. They are reforming the corporate income tax regime in line with Pillar Two of the OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing. The revenues arising from the reform are expected to be primarily used to increase public investment. The authorities are also gradually restarting the domestic capital markets and remain committed to reducing the public debt to 60 percent of GDP by FY2035/36.
Steady implementation of structural reforms is essential to support fiscal sustainability and create fiscal space for public investment. The authorities are taking important steps to strengthen revenue administration, modernize the tax exemptions framework, implement a new procurement framework, and enhance public financial and investment management and fiscal governance, supported by technical assistance from the IMF and other development partners. They have completed the policy and legislative framework for pension reform and are making progress on state-owned enterprises (SOEs) reforms, which had been interrupted as a result of the COVID pandemic. The combination of strong fiscal balances, a more efficient public sector, and higher social and investment spending can support a virtuous cycle of declining debt and sovereign risk, higher and more efficient investment, and stronger, inclusive, and more climate-resilient growth.
Conditions in the financial system remain stable. Barbados’ financial system withstood well the shocks of recent years. The banking system is well capitalized, has abundant liquidity, and is profitable. Banks’ non-performing loans have declined to the lowest levels in several years. High liquidity levels coupled with long-standing capital controls have kept domestic interest rates broadly stable despite rising international interest rates. Financial soundness indicators and stress tests by the authorities suggest that the financial system is broadly sound and resilient. The authorities are working to further enhance financial system supervision and regulation.
The review of the monetary policy toolkit is a welcome step to further develop policy instruments to manage domestic liquidity and credit conditions. The Central Bank of Barbados (CBB) undertook a comprehensive review to enhance its monetary policy toolkit under the fixed exchange rate regime, informed by IMF technical assistance. The objective is to develop liquidity management instruments to gradually enhance the CBB’s capacity to manage monetary conditions and interest rate transmission while also maintaining an adequate level of international reserves to support the exchange rate peg.
Barbados has made significant progress in strengthening its AML/CFT framework. At its October 2023 Plenary, the Financial Action Task Force (FATF) made the initial determination that Barbados has substantially completed its action plan to strengthen the effectiveness of its AML/CFT regime and warrants an on-site assessment to verify its implementation. Verification of the progress made on its action plan could allow Barbados to be removed from the FATF Grey List in 2024.
Advancing the growth agenda will help raise the economy’s growth potential. To increase medium-term growth, it is important to further enhance the ease of doing business, boost economic efficiency, and stimulate private investment, including by improving trade and business facilitation, investing in skills and education, and promoting digital technologies. The newly created Growth Council is a welcome step to support the advancement of the priorities established by the BERT plan to unlock the economy’s growth potential. Digitalization could offer significant benefits by increasing public sector efficiency and delivery of public services, facilitating access to credit, enhancing labor force participation, and supporting human capital.
Barbados is highly vulnerable to climate change. To increase climate resiliency and secure a sustainable, inclusive, and prosperous future, the authorities are working to make Barbados a green and fossil fuel-free country. Achieving this goal involves implementing a broad set of policies and making investments to adapt to climate change and adopt renewable energy sources. These efforts are supported by the Fund, including through the RSF arrangement, and development partners.
The Barbadian authorities are implementing their ambitious climate policy agenda. Efforts to green the economy are progressing, and renewables have gradually increased their share in the energy matrix. Progress will continue in coming years, as near-term impediments to adding renewables to the grid are addressed. The authorities are also investing in climate-resilient infrastructure, which will reduce capital and output losses in the event of natural disasters and contain their adverse impact on growth, public debt, and the external accounts. Furthermore, the authorities implemented important climate policy reform measures. A fiscal risk statement discussing climate change risks was included in the FY2023/24 budget and the authorities approved regulations to enhance the efficiency and effectiveness of public procurement. A sustainable/green public procurement framework and guidelines for the implementation of green/climate budget tagging have been developed. In addition, a bill was submitted to Parliament to improve the disaster risk management framework and action was taken to address regulatory gaps in battery storage to facilitate investments in renewable energy.
The climate policy reforms are expected to create an enabling environment that mobilizes private sector resources for climate related projects. Concerted efforts to mobilize and scale up climate financing are underway, supported by development partners.
The IMF staff and the Barbadian authorities reached staff-level agreement on the completion of the second review of the EFF and the RSF. All quantitative program targets and structural benchmarks set for the second review under the EFF have been met. In addition, all reform measures set for the second review under the RSF have been implemented. The staff-level agreement is subject to approval by the IMF Executive Board, which is expected to consider the review in December. The completion of the review will make available SDR 14.175 million (about US$19 million) under the EFF arrangement and SDR 42.525 million (about US$56 million) under the RSF arrangement.
The team would like to thank the authorities and other counterparts for their constructive and candid policy dialogue.