IMF hails move as "milestone"

BRIDGETOWN, Barbados, September 20, 2007 – The International Monetary Fund (IMF) has hailed Barbados’ move toward capital account liberalisation by year-end as a “milestone” in that government’s strategy for regional and global integration.

This has come from the IMF in its latest report on its Article IV consultation with Barbadian authorities, which was concluded August 16, 2007.

In the report released September 10, IMF analysts said they did not expect the impact of Government’s removal of exchange controls (initially in relation to other CARICOM countries by January 1, 2008, and then the wider world at an unspecified time in the future) to be “large” in the short-term.

As Prime Minister Owen Arthur intimated when he announced the start of the process in his budget presentation this March, the IMF did not see an immediate risk of capital flight and forecast short-term benefits to the capital account as the country would likely be on the receiving end of capital inflows, especially from real estate purchases and other foreign investments previously hindered by the controls currently in place.

However, the IMF cautioned that there could be medium-term risks. They highlighted the threat of sudden capital account reversals, which could lead to challenges to the fixed exchange rate between the Barbados and US dollar (2:1) if the net international reserve cover began to be eroded.

This was a particular a concern as, the IMF highlighted, Government has been financing the “sizeable current account deficits” with short-term capital inflows – a strategy which could be undermined if investment capital became redirected outside of Barbados in search of better opportunities.

The IMF stated Government could be forced to make “sharp and disruptive policy adjustments” if the process is not managed strictly from the beginning.

The Washington-based institution suggested Government undertake an “early tightening of policies” to mitigate against having to make “stronger and more disruptive adjustments later”.

They put the onus on fiscal over monetary intervention as a way of managing the effects of the liberalisation, listing what was described as a “menu of options” for Government to achieve “fiscal savings”. This list included reining in future public projects; raising Value Added Tax from 15 to 17 per cent; reducing tax exemptions, particularly for foreign investors; and adjusting selected utility tariffs where the cost of doing business was not being met by the revenues generated.

The IMF also suggested Government limit its off-budget spending, instead encouraging it to consolidate the activities of all public entities in the budget presentation to facilitate proper planning.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. As the basis of this latest report an IMF team visited Barbados from  July 10 to 19 collecting economic and financial information, and discussing with officials and members of the private sector the country’s economic developments and policies.