Barbados: Staff Report for 2013 Article IV Consultation

KEY ISSUESContext. Economic performance has been weak and public debt is high. Foreign reserves are under pressure as fiscal and external imbalances widened in 2012 and further in 2013. Recognizing the need for urgent action, the authorities announced ambitious budget consolidation proposals in 2013 aimed at strengthening the fiscal position and arresting the slide in reserves.Focus of the consultation. The authorities stated clearly their desire and intention to preserve the exchange rate peg-a position supported strongly by the private sector and civil society in Barbados. In this context, discussions focused on the fiscal measures needed to address immediate pressures, making monetary policy consistent with the nominal exchange rate anchor, a medium-term fiscal framework, and reforms to boost competitiveness.Outlook and risks. Recent fiscal measures, if fully implemented, should stabilize debt levels by 2016. However, downside risks are considerable and failure to implement corrective policies could result in a disorderly adjustment process. Even with full implementation, fiscal financing pressures and external sector sustainability would remain challenging.Policy recommendations: A comprehensive and sustained fiscal effort is needed to reduce vulnerabilities and lower public debt. To this end:• There is scope to raise tax revenues by strengthening revenue and customs administration and by reducing widespread exemptions. However, spending reductions will be critical, especially targeting the wage bill and inefficiencies in public enterprises (where stronger governance is needed).• The social safety net must be preserved, but benefits should be better targeted to strengthen protection for the most vulnerable, raise efficiency and lower costs.• A medium-term fiscal anchor is needed to guide policy formulation and accountability. A debt-to-GDP target of 85 percent is recommended by 2018/19.• Monetary policy should be more consistent with the fixed exchange rate regime.• Closer monitoring of the financial system is required in view of elevated non- performing loans (NPLs) and the risk of a deeper sovereign-financial feedback loop.• The growth strategy should focus on reducing business and labor costs.