BARBADOS-Barbados in line for funds from IMF.

WASHINGTON, CMC – An International Monetary Fund (IMF) delegation Monday ended a one-week virtual mission to Barbados that could result in the island receiving US$75 million in future assistance from the Washington-based financial institution.

According to a statement issued by the head of the delegation, Pablo Morra, a staff-level agreement has been reached with Bridgetown following the completion of the second review of the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF).

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 IMF official said.

In December last year, the IMF Executive Board approved a 36-month EEF for US$113 million and an RSF for US$189 million.

Morra said Barbados continues to advance the implementation of its comprehensive economic reform program and that the authorities are implementing their updated Economic Recovery and Transformation plan (BERT 2022) and an ambitious climate policy agenda.

He said 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 to achieve inclusive and sustainable growth and increase resilience to climate change while maintaining debt sustainability and social cohesion.”

The IMF official said that after a 13.8 percent rebound in 2022, actual gross domestic product (GDP) will 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. At the same time, 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.

Morra said the economic recovery resulted in higher job growth, with unemployment claims and the unemployment rate reverting to pre-pandemic levels.

The IMF official said that gross international reserves rose to US$1.4 billion as of end-September, equivalent to almost eight months of imports of goods and services, supported by improved account balance and loan disbursements from international financial institutions.

Morra said the exchange rate peg is a crucial 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 2020 further strengthened the policy framework underpinning the exchange rate peg by enhancing the central bank’s autonomy, improving its governance, and limiting monetary financing.”

The Barbadian authorities met the primary fiscal target set for the first half of the financial year 2023/24 and are on track to raise the primary surplus to about 3.5 percent of GDP by the end of the fiscal year.

The IMF official said the public debt ratio has fallen to pre-pandemic levels and is projected to continue declining while sovereign credit ratings gradually improve.

“The authorities are advancing their fiscal consolidation plans 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 the financial year 2035/36.”

Morra said steady implementation of structural reforms is essential to support fiscal sustainability and create fiscal space for public investment.

The IMF official said the authorities are taking essential 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 due to 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.”

The head of the IMF delegation said conditions in the financial system remain stable and that the island’s financial system withstood the shocks of recent years well.

“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 and 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 enhance financial system supervision and regulation further.”

Reviewing the monetary policy toolkit is a welcome step to develop further policy instruments to manage domestic liquidity and credit conditions.

Morra, 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.

He said the objective is to develop liquidity management instruments to gradually enhance the CBB’s capacity to manage monetary conditions and interest rate transmission while maintaining adequate international reserves to support the exchange rate peg.