IMF points to ‘bitter medicine’ for Barbados

(Barbados Nation) Even before it reaches an agreement to help Government, the International Monetary Fund (IMF) has prescribed some bitter medicine for Barbados.

An IMF team headed by Dr Bert van Selm ended a three-day visit to the island on Thursday warning that Barbados was in a “precarious economic situation” and needed “substantial” austerity measures.

With Prime Minister Mia Mottley scheduled to deliver a mini-Budget on Monday, van Selm urged her administration to cut spending and consider privatisation among its fiscal measures.

Such policies were expected to underpin an IMF structural adjustment programme and van Selm said discussions on this would continue “in the coming months” with the goal of “reaching understandings”. 

A must

“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,” van Selm said in his statement.

“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.”

He also advised government to reduce transfers to state-owned enterprises “by reviewing user fees, exploring options for mergers and privatisation, and by providing much stronger oversight”.

He added: “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.”

Government was also told it was important to have “an early and open dialogue with the country’s creditors, aiming to achieve an orderly debt restructuring process”. 

Positive

van Selm said its discussions with Government this week were “very positive and candid”. It stressed that fiscal consolidation would “help to reduce financing needs, in conjunction with the proposed debt restructuring”.

Central Bank Governor Cleviston Haynes was one of the officials who met with the IMF team, and the IMF official said it “will be important for the [Central Bank] to limit financing of the government budget given that such practice is not consistent with Barba-dos’ exchange rate peg”.

He said “the large monetary financing over the last few years has contributed to the decline in international reserves”.

The IMF representative said its discussions, which included talks with labour unions and the private sector, focused on “economic policies and possible IMF financial support of the government’s economic plan”.

“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 fiscal year 2017/18,” van Selm noted.

“Meanwhile, the Central Bank . . . is reporting a contraction of output of 0.7 per cent in the first quarter of 2018 (over the same period last year).”

Van Selm added: “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.”

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