Aug 2016 Financial News

IMF questions Barbados borrowing from central bank

Aug 29, 2016

The executive board of the International Monetary Fund has noted the inconsistency of Barbados maintaining a stable exchange rate and financing its fiscal deficit by borrowing from the island’s central bank.

In a statement last week at the conclusion of the institution’s Article IV consultation with the Barbados authorities, the IMF said: “Directors emphasised that the continued financing of the fiscal deficit by the Central Bank of Barbados is inconsistent with maintenance of the exchange rate anchor. They encouraged the Central Bank of Barbados to allow domestic interest rates to rise in line with increases in US interest rates and ensure adequate international reserve buffers.”

The IMF said that monetary policy in Barbados “has been driven by fiscal considerations, as the Central Bank of Barbados continued to fund the government through money creation and with commercial banks’ excess reserves. Interest rates have begun to rise, with reduced direct intervention by the central bank in the Treasury Bill auctions.”

The IMF’s executive directors said they welcomed the fact that Barbados has experienced a pickup in economic growth led by the tourism sector and the improvement in the external position. 

The institution said real GDP grew by 0.8 per cent in 2015, underpinned by an increase in private investment and surge in tourism arrivals, which increased by 14 per cent, among the highest in the Caribbean. 

The improvement in the island’s tourism sector boosted employment by 2 per cent, while the unemployment rate fell to 11.3 per cent. Inflation eased owing to lower import prices, with end-period prices falling by 2.5 per cent, compared with an increase of 2.3 per cent in 2014. 

The external current account position improved significantly, reflecting improved terms of trade, as the deficit narrowed from 9.9 per cent of GDP in 2014 to 6.7 per cent in 2015, primarily reflecting lower oil and other prices. 

Exports of goods and services rose mainly due to higher tourism receipts. Net inflows in the capital and financial account fell, driven by large official amortization payments and lower FDI. As a result, net international reserves dropped to US$469 million at end-April 2016 (2.8 months of imports).

But while welcoming the return of economic growth, at the same time the IMF noted that the large fiscal deficit and a further increase in public debt remain a challenge, notwithstanding the authorities’ consolidation efforts.

“They stressed that continued fiscal adjustment and public sector reforms are necessary to bring public debt on a downward path, preserve external sustainability, and improve investor sentiment. They also underscored the need to eliminate impediments to stronger longR09;term growth and bolster competitiveness.”

The IMF said that more efforts are needed to put the island’s “high and growing public debt on a sustainable path, while minimizing the negative impact on growth and preserving social cohesion.”

The directors also agreed that a comprehensive growth strategy is needed to lift the country’s longR09;term competitiveness in the key tourism sectors and that priorities for raising growth include timely implementation of tourism investment and infrastructure projects, improving public service efficiency and streamlining business regulation, increasing labor market flexibility, and unlocking agriculture’s growth potential.

The executive directors of the institution said the new fiscal measures outlined in Barbados’ August 2016 budget, including reductions in current expenditure and new revenue measures, were welcomed. But they cautioned that a further increase in tax exemptions could erode revenues. 

According to the IMF: “Directors underscored the importance of completing the reform of the revenue authority to improve tax administration and increase compliance. They stressed that stronger efforts are also needed to reform stateR09;owned enterprises through better governance, consideration of user fees, and potential divestment and consolidation of public entities. They also called for swift action to eliminate government arrears.”

The IMF’s executive board said it “welcomed the recent improvement in the nonR09;performing loan ratio and banks’ liquid and wellR09;capitalized balance sheets. They encouraged continued close supervision of the financial sector, particularly of nonR09;bank institutions, including credit unions and insurance companies. 

“Directors noted that domestic banks have not experienced a decline in correspondent banking relationships and welcomed the authorities’ efforts with regional partners to understand the issue. They recommended taking quick action on any shortcomings that might be identified by the upcoming AML/CFT evaluation.be

Source:
Trinidad Guardian
Monday August 29, 2016

http://www.guardian.co.tt/business/2016-08-29/imf-questions-barbados-borrowing-central-bank