IMF Completes 2023 Review, Fund Extensions for Barbados

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Barbados and completed the second reviews of the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) arrangements. The completion of the reviews allows the authorities to draw the equivalent of SDR 14.175 million (about US$19 million) under the EFF and SDR 42.525 million (about US$57 million) under the RSF.

Barbados continues to advance the implementation of its comprehensive economic reform program and climate policy agenda. The economy has weathered the COVID-19 pandemic and other recent shocks well and macroeconomic stability has been preserved. Economic activity 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 with the aim of achieving inclusive and sustainable growth and increasing resilience to climate change while maintaining debt sustainability and social cohesion.

After a 13.8 percent-rebound in 2022, real GDP is projected to expand by about 4.5 percent in 2023. Inflation has fallen 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, while prolonged drought conditions and higher demand for restaurants and recreational activities driven by the recovery in tourism pushed up the prices of some food items and domestic services. The economic recovery resulted in higher job growth, with the unemployment rate reverting to pre-pandemic levels. The fiscal position has continued to strengthen, and international reserves remain ample, supporting the exchange rate peg.

The economy is expected to continue growing and inflation to moderate, with real GDP and tourism returning to pre-pandemic levels in the near term. The current account deficit is expected to narrow as tourism and commodity prices fully normalize.

Following the Executive Board's discussion today, Mr. Bo Li, Deputy Managing Director and Acting Chair, made the following statement:

"Barbados is advancing the implementation of its homegrown Economic Recovery and Transformation (BERT) Plan and its ambitious climate policy agenda, supported by the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF) arrangements.

"After successfully weathering a series of shocks in recent years, the Barbadian economy has recovered strongly amid a rebound in tourism. The fiscal balance has strengthened, the public debt-to-GDP ratio is declining, and international reserves have risen. Inflation is moderating driven by lower fuel prices and freight costs, and unemployment has fallen.

"The authorities' focus on reducing debt through higher primary surpluses while maintaining adequate social and capital expenditure is appropriate. The revenues arising from the corporate income tax reform are expected to be used to increase public investment, including on climate resiliency.

"Progress is being made on structural reforms, including steps to strengthen revenue administration, modernize the tax exemptions framework, enhance public financial management, and unlock the economy's growth potential. Advancing pension and state-owned enterprise reforms is important.

"Ample international reserves continue supporting the exchange rate peg, which remains a key anchor for macroeconomic stability. The authorities are working on enhancing their monetary policy toolkit and financial sector oversight. The significant progress made in strengthening the AML/CFT framework is an important achievement.

"The authorities are advancing their ambitious climate policy agenda to increase resilience to climate change and green the economy. Important reforms are being implemented to achieve these objectives, including by incorporating climate considerations into the budget process, improving the disaster risk management framework, providing incentives for the purchase of electric vehicles, and addressing regulatory gaps to facilitate investments in renewable energy. The climate policy reforms are expected to help create an enabling environment that facilitates the mobilization of climate finance and private sector investment in climate-related projects."

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities' strong program implementation of their homegrown economic reform strategy and ambitious climate policy agenda under the EFF and RSF arrangements. Directors welcomed the economy's robust recovery amid a rebound in tourism and encouraged the authorities to maintain the reform momentum to achieve inclusive and sustainable growth, increase climate resilience, and maintain debt sustainability. They noted that continued capacity development assistance will be important to support the authorities' efforts.

Directors welcomed the authorities' progress in advancing fiscal consolidation and reducing the public debt-to-GDP ratio while maintaining adequate social and capital expenditure. They supported increasing public investment, including in climate resilience, using revenues from the corporate income tax reform. They underscored the importance of maintaining strong primary surpluses to continue reducing the public debt-to-GDP ratio and achieve the long-term debt target. They also welcomed the efforts to restart the domestic capital markets.

Directors commended the progress in strengthening revenue administration, modernizing the tax exemptions framework, and enhancing public financial and investment management and fiscal governance. They encouraged the authorities to continue to implement pension and SOE reforms. Directors emphasized that steady implementation of structural reforms is essential to preserve fiscal sustainability and create space for higher public investment.

Directors noted that ample international reserves support the exchange rate peg, which provides a key anchor for macroeconomic stability. They encouraged steps to further enhance the monetary policy toolkit by developing liquidity management instruments. They also welcomed ongoing work to strengthen financial supervision. Directors urged the authorities to build on the significant progress in strengthening their AML/CFT framework and looked forward to Barbados' timely exit from the FATF grey list.

Directors welcomed the authorities' efforts to unlock Barbados' growth potential, including by enhancing the business environment, investing in skills and education, and promoting digitalization. The latter could increase public sector efficiency, facilitate access to credit, enhance labor participation, and support human capital.

In the context of Barbados' vulnerability to climate shocks, Directors commended the authorities' strong commitment to their ambitious climate agenda. They welcomed their determined efforts and impressive progress in advancing various reforms, including incorporating climate considerations in the budget process, improving the disaster risk management framework, and addressing regulatory gaps to facilitate investments in renewable energy. They recommended continuing efforts to green the economy and build resilience to climate change. These climate policy reforms should facilitate mobilization of climate financing and private sector investment. In this context, Directors recognized Barbados' promising initiatives on climate finance.

It is expected that the next Article IV Consultation with Barbados will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.