IMF says Barbados faces economic challenges

BRIDGETOWN, Barbados, August 29, 2008 – The International Monetary Fund (IMF) says Barbados has weathered the global financial turmoil well so far, but noted that a deteriorating external environment is posing significant challenges to the new Democratic Labour Party (DLP) government. And it says how wage negotiations are handled will make a difference to how the country overcomes those challenges.

The IMF noted that while fairly solid growth in 2997 continued through the first quarter of 2008, driven by strong tourism activity and helped by improved competitiveness vis-à-vis Europe and Canada, the global slowdown is increasingly taking hold of Barbados’ main trading partners.

As a result, the IMF said, economic growth is expected to decline by one percentage point to 2.75 per cent this year.

“Inflation, which was kept low by price controls, is projected to accelerate this year. The spike reflects record high import prices, particularly for oil and food, in conjunction with the recent adjustment in controlled fuel prices, which had been kept unchanged since late-2006. As a result, inflation is projected to rise to nine per cent this year from four per cent in 2007. At the same time, the rising import bill and the slowdown in tourism will widen the current account deficit to a projected 8.5 per cent of GDP from seven per cent in 2007,” the IMF said in a release following its recent Article IV consultation with Barbados.

The IMF Executive Board of Directors said they saw the main task for fiscal policy in identifying savings to finance targeted support to the most vulnerable groups, while containing risks to medium-term sustainability.

They welcomed the recently revised budget, “which combines a reduction in the central government deficit with well-identified revenue measures to finance additional social and other priority spending”.

The IMF officials also noted that the outcome of wage negotiations is critical in determining the effectiveness of the overall policy response to the current challenges
“Wage moderation was needed to minimise second-round effects of the oil and food price shocks and thereby help the economy adjust in the least harmful way,” they added.

The Directors encouraged the government to make additional efforts to generate a modest overall public sector surplus over the medium term, to reverse unfavorable debt dynamics and put public debt on a firmly declining trajectory.

“As fiscal savings could take time to materialise, Directors advised the authorities to identify specific revenue and expenditure measures early on,” the IMF release said.

“Directors saw the main role for monetary policy in containing the risk of entrenching inflation expectations, and deemed the current policy stance as appropriately tight.

However, a reduction in interest rates may become necessary should a more severe slowdown in economic activity be accompanied by easing of inflationary pressures.
Directors also encouraged the authorities to advance preparations for introducing indirect monetary policy instruments, to be ready for their implementation once global financial markets have calmed.”

To ensure that Barbados’ financial sector continues to thrive, they encouraged the authorities to address the identified weaknesses in its prudential oversight and to implement the key recommendations of the FSAP update mission.