Caribbean & Central America - September 2020

As a country that is heavily dependent on tourism, Barbados is inevitably one of the worst affected by the coronavirus (Covid-19) pandemic. On the tourism-dependency index, Barbados is ranked 14 out of 166 countries, with tourism’s contribution to GDP calculated at 39%. Tourism is also responsible for 39% of employment. To make matters worse, the crisis comes at a time when Barbados has been struggling to reduce debt under the terms of the International Monetary Fund (IMF)-supervised Barbados Economic Recovery and Transformation (Bert) programme introduced in June 2018. An IMF team conducted a ‘virtual’ staff visit from 25-28 August “to discuss implementation” of Bert.

At the conclusion of its virtual staff visit, the IMF issued a statement acknowledging the difficulties faced by Barbados, with “a double-digit decline in economic activity projected for 2020”. The statement said: “In this very challenging environment, Barbados continues to make good progress in implementing its ambitious and comprehensive economic reform programme, while expanding critical investments in social protection. International reserves, which reached a low of US$220m (5-6 weeks of import coverage) at end-May 2018, are now in excess of US$1bn. All indicative targets for end-June under the EFF [Extended Fund Facility] were met. The targets for international reserves, net domestic assets and the primary balance were met with some margin, which bodes well for meeting the end-September EFF targets…Good progress also continues to be made towards implementing structural reform under the EFF. The two structural benchmarks for end-June 2020, related to tax and customs administration, were both met. A revised central bank law is expected to be ready to be sent to Parliament in September”.

This staff visit, and the relatively positive statement, follows on from the third review of the EFF conducted in June when it was reported that “all performance criteria for the review were met”. However, it was agreed that “resetting” of benchmarks for future reviews as a result of the pandemic would be required – and a “programme augmentation” of US$90m was proposed “to help the authorities accommodate the external Covid-19 related shock with a lower primary surplus”.

The structural benchmarks to be reset, include moving the target dates for the achievement of a new central bank law to end-December 2020 (it was originally scheduled for end-December 2019); for an actuarial review of civil service pensions from end-June 2020 to end-September 2020; for the achievement of a new public pension law from end-September 2020 to end-December 2020; for the development of plans to recapitalise the central bank and “address the medium and long-term challenges” for the National Insurance Scheme (NIS - originally scheduled for March/April 2020) “to a date yet to be defined”; and for the designing of a new fiscal rule with the help of an IMF mission, originally planned for March/April 2020, “to a date yet to be defined”.

One of the main achievements noted in the review was that the primary surplus target of 6% of GDP for FY2019/2020 was achieved even though tax revenues fell short of budget projections by close to 1% of GDP due to lower corporate tax receipts from financial institutions following the public-debt restructuring in December 2019.

The IMF believes that the restructuring agreement will still enable the government to bring debt down to 60% of GDP by FY2033/2034, however, the path to that goal has necessarily become less straightforward. Due to the collapse in tourism revenues, the primary surplus for FY2020/2021 is now targeted at 1% of GDP. According to the IMF: “The Covid-19 induced fiscal accommodation will need to be compensated by higher primary surpluses in the medium term to reach the 60% medium term anchor in FY2033/2034, while delaying by two years the achievement of the interim target of 80%, which will now be achieved in FY2029/2030”.

A two-year delay in reaching the interim debt target of 80% of GDP doesn’t seem too serious, but the IMF adds that a further deepening and lengthening of the Covid-19 crisis would jeopardise this. Indeed, it warns that “the debt trajectory could become unsustainable”. On the other (more optimistic) hand, the IMF points out that “the large share of domestic debt reduces rollover risks”, and it says “if growth turns out higher than projected, this would allow for more rapid debt reduction than is envisaged under the baseline, so long as the authorities preserve the savings”.

One area of reform that the IMF has been keen to re-emphasise as key is the reform of Barbados’ state-owned enterprises (SOEs). In FY2017/2018, the SOEs were consuming close to 8% of GDP and (in the words of the IMF) “had become a significant burden on the budget, and a major contributor to fiscal risks”.

Unfortunately, due to the Covid-19 shock, grants to SOEs will increase further during this financial year due to one-off expenditures mainly in health, tourism, and social assistance. Thereafter, the IMF says they should decline to 6% of GDP by FY2021/2022 “by a combination of: (i) much stronger oversight of SOEs supported by improved reporting and tighter control over SOE borrowing; (ii) cost reduction, including reduction of the wage bill; (ii) revenue enhancement, including an increase in user fees; and (iv) mergers and divestment”.

There has already been some progress with SOEs, including reducing the numbers from 60 to 52 through mergers and closures, the renegotiation of supplier contracts, an increase in some tariffs (bus fares and water rates), and new levies on sanitation, health services, and tourism. There has also been a strengthening of oversight. However, the IMF admits, “with the authorities fully focused on handling the coronavirus crisis” discussions over further reform of SOEs will have to be delayed until the next review.

Another area that the IMF is discussing with the Barbados’ authorities is the need for structural reforms “to unlock Barbados’ growth potential”. In its review paper, the IMF emphasised that these would “need to be accelerated” once the Covid-19 crisis recedes. Areas of concern will include improving the business climate by “(i) streamlining the process for setting up new businesses, (ii) eliminating the requirement to use a company seal, (iii) introducing a single business administration number, (iv) amending the company law to strengthen protection of minority shareholders, (v) reforming customs administration to facilitate trading across borders, and (vi) digitising property records in the land registry”.

Despite the generally positive tone of the review, there is no hiding the IMF’s concerns over the difficulties confronting programme implementation going forward. Obvious risks to the programme include a longer and/or larger than expected impact of the pandemic and slower than expected global recovery. The IMF also points to “limited implementation capacity and untested ability to maintain high primary surpluses over a sustained period required in the future to achieve the 60% debt anchor”. Concerns about “limited implementation capacity” also apply to the structural reform agenda.