1. What are the key achievements of Barbados' economic recovery and climate policy agenda supported by the EFF and RSF arrangements?
Barbados has made significant progress in its economic recovery and climate policy agenda, supported by the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) arrangements. After weathering a series of shocks, the Barbadian economy has recovered strongly, with eight consecutive quarters of growth and continued expansion in 2023, driven by a rebound in tourism and related activities. The fiscal balance has improved, public debt is on a downward trajectory, and international reserves have risen. The authorities are advancing structural reforms, including strengthening the duty and tax exemptions framework, enhancing tax compliance and risk management, and unlocking the economy's growth potential. Barbados is also making progress in its ambitious climate policy agenda, with ongoing efforts to incorporate climate considerations in the budget process, develop guidelines for sustainable/green public procurement, and introduce climate/green budget tagging. The authorities have implemented important reforms under the RSF arrangement, and renewables are gradually increasing their share in the energy matrix. The newly created Fiscal and Growth Councils are critical to monitor the implementation of the authorities' fiscal strategy and support the growth agenda. The authorities are focused on enhancing the monetary policy toolkit and safeguarding financial stability, with plans to develop liquidity management instruments and strengthen the AML/CFT framework. Overall, Barbados' economic recovery and climate policy agenda, supported by the EFF and RSF arrangements, are making significant strides towards fiscal sustainability, structural reforms, resilience to climate change, and greening the economy.
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2. What are the key elements of the BERT 2022 program and how does it aim to achieve inclusive and sustainable growth while maintaining fiscal and debt sustainability and building resilience through climate adaptation and mitigation efforts?
BERT 2022 is the successor to BERT 2018 and focuses on achieving inclusive and sustainable growth, while both maintaining fiscal and debt sustainability and building resilience through climate adaptation and mitigation efforts. The key elements of the program include a fiscal strategy that ensures Government balances and finances are consistent with the debt anchor by streamlining expenditure and reforming the public sector, particularly the State-Owned Enterprises (SOEs); a debt management strategy that actively manages the debt portfolio to minimize costs; and a growth strategy that enhances the business environment and enables private-sector led growth, improves labor market flexibility, and builds resilience through climate adaptation and mitigation spending. The program aims to mobilize external financing and facilitate the restoration of access to international capital markets through steadfast implementation of these key elements.
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3. What are the risks to the medium-term economic outlook?
The medium-term economic outlook is vulnerable to a slower than expected recovery in the tourism sector, which depends on developments in key source markets (US, UK, and Canada). An intensification of Russia's war in Ukraine could further increase global commodity prices and fuel inflationary pressures, reducing real incomes in both the main tourism source markets and Barbados. With the peg to the US dollar, further US dollar appreciation could dent Barbados' competitiveness. Tighter global financial conditions and a rise in global risk aversion would increase the cost of external financing, affecting the fiscal and external accounts. The economy is also exposed to climate change risks, which could have a dampening impact on economic activity, increase the fiscal deficit and public debt, and pose financial stability risks.
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4. What factors contributed to fiscal performance improvement in FY2022/23?
The fiscal performance in FY2022/23 improved significantly due to a decline in COVID-related expenditure, prudent expenditure management, and higher revenue collection from the International Monetary Fund (IMF). The primary balance recorded a surplus of 2.5 percent of GDP, compared to a deficit of 1 percent of GDP in FY2020/21 and FY2021/22. This improvement allowed the authorities to meet the fiscal target and accelerate debt reduction, including prepaying domestic debt held by individuals. The main objectives for Barbados include consolidating achievements, strengthening institutions, and making progress on macro-critical reform areas. The government is committed to the policies outlined in the Memorandum of Economic and Financial Policies (MEFP).
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5. What is the primary surplus target for FY2023/24?
The primary surplus target for FY2023/24 is 3.5 percent of GDP, as envisioned in the FY2023/24 budget. This target aligns with program goals and aims to balance fiscal consolidation with safeguarding social and investment needs. The increase in the primary surplus is supported by reforms to reduce transfers to SOEs, the phasing-out of exceptional spending on COVID and Hurricane Elsa emergency-support programs, and prudent expenditure management. The cyclical recovery in revenues is expected to offset the prudent public service wage increases and temporary extension of targeted VAT relief programs due to elevated global food and fuel prices. Data on the primary surplus will be provided to the Fund on a monthly basis with a lag of no more than four weeks from the end of the period.
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6. What are the key provisions for duty and tax exemptions reforms?
The key provisions for duty and tax exemptions reforms include: i) that any exemption be 'in the public interest'; ii) the approval of the Minister of Finance and/or the Cabinet to grant exemptions above a certain threshold; and iii) repayments if recipients breach the laws of Barbados. These reforms aim to modernize procedures for granting and managing duty and tax exemptions, aligning with IMF technical assistance. The rationalization of the exemption framework is expected to gradually increase public revenue over the medium term.
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7. What is the capital adequacy ratio of commercial banks in 2022?
The capital adequacy ratio of commercial banks in 2022 was 17.6 percent, which is more than double the minimum regulatory requirement. This indicates that banks and credit unions are adequately capitalized and have a strong financial position. The high capital adequacy ratio reflects the stability and resilience of the banking sector, which is crucial for maintaining confidence in the financial system. It also suggests that banks have sufficient capital to absorb potential losses and continue operating during economic downturns. The increase in capital adequacy ratio in 2022 can be attributed to the economic recovery and increased demand for credit, which led to annual credit growth for the first time since 2019. Overall, the high capital adequacy ratio of commercial banks in 2022 demonstrates the strength and stability of the banking sector in Barbados.
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8. What steps has Barbados taken to address key issues in the AML/CFT framework?
Barbados has made progress in addressing key items on the Financial Action Task Force (FATF) Action Plan. Key outstanding issues include ensuring accurate and updated beneficial ownership information, effectively applying monitoring mechanisms, addressing low reporting levels in higher risk sectors, and identifying, tracing, and restraining assets for confiscation. The authorities have carried out inspections, risk rating exercises, and applied sanctions for beneficial ownership. The Financial Intelligence Unit (FIU) has issued guidance, conducted training, and engaged supervisory authorities to address low reporting levels. Barbados has initiated international requests for assistance, pursued asset sharing arrangements, and is repatriating assets. The FATF will assess these efforts and their impact on Barbados' grey listing. Barbados is compliant with 33 of the FATF's 40 Recommendations and has implemented measures to improve cargo processing and compliance. A holistic risk management system, standardized cargo processing, post-clearance audit procedures, and compliance units have been introduced. The introduction of Taxpayer Identification Numbers and a Trusted Trader Program have enhanced trade facilitation. The government remains committed to the Customs Modernization program with IMF technical assistance, ensuring no new arrears in external debt payments.
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9. What is the current percentage of Barbados' energy needs covered by renewable sources?
In 2022, renewable energy sources, mainly solar energy, covered about 12 percent of Barbados' energy needs, up from about 9 percent in 2021. This indicates a positive trend towards transitioning away from fossil fuels. However, there is still a need to upgrade the grid's capacity to absorb and store the off-take from renewable sources. To further support this transition, the authorities have introduced a two-year excise and value-added tax holiday for electric vehicles, extended until March 2026. Additionally, the establishment of the Blue-Green Investment Corporation (BGIC) with the support of USAID and the Green Climate Fund will create a financing vehicle to support climate-related projects such as resilient housing, renewable energy, green transportation, and water conservation. Monitoring external arrears by creditors will also be crucial in ensuring the success of these initiatives.
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10. What measures were implemented to enhance climate resilience in road infrastructure?
The authorities implemented measures to enhance climate resilience in road infrastructure under reform measure (RM)#1. The Cabinet approved amendments to the Planning and Development Act, mandating that all new road construction should enhance drainage capabilities and physical resiliency. The new policy incorporates climate adaptation priorities into road infrastructure planning and construction. This approach aims to strengthen the climate resilience of roads, ensuring they can withstand natural disasters and climate change impacts.
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11. What are the proposed climate policy reforms under RM#2?
The proposed climate policy reforms under RM#2 include the approval by the Cabinet of a sustainable/green public procurement framework providing operational parameters to implement sustainable/green procurement, in line with international best practice, and the approval by the Cabinet of guidelines for climate/green budget tagging, in line with international best practice. These reforms aim to support the adoption of sustainable/green procurement and climate/green budget tagging in practice, maximizing progress towards the incorporation of climate goals in the budget process, providing valuable information to policy makers to formulate and assess the impact of climate policies, and helping mobilize climate financing. The results of the budget tagging exercise are to be published in an annex in the annual budget. These measures are expected to be completed by end-September 2023, with technical assistance support by the IMF and the IDB.
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12. What are the climate investment plans for Barbados?
The climate investment plans for Barbados amount to about US$1 billion, to be undertaken through 2030. These investments are focused on water, renewable energy, and housing sectors. However, the high import content associated with these investments, averaging 60 percent, implies an additional balance of payments financing need of around 1 percent of GDP per year based on preliminary estimates. The RSF arrangement is expected to partly finance these additional import needs while allowing the authorities to maintain sufficient reserve buffer. The RSF arrangement is also expected to play a catalytic role in mobilizing private financing. The project preparation facility will be led by the IDB, with the participation of other development partners. The Fiscal Council has been established to promote sound fiscal management and ensure accountability and transparency in the implementation of the fiscal strategy. The strategy focuses on slimming public expenditure, maintaining fiscal discipline, and realigning government spending to be more effective and efficient. Public debt is defined as domestic and external CG debt, SOEs debt guaranteed by the CG, and domestic CG expenditure arrears, excluding interest and penalties arrears resulting from nonpayment of debt service on external commercial debt subject to debt restructuring. Program FX rates will be used to value debt in FX.
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13. What are the reform priorities in Barbados' growth strategy?
The reform priorities in Barbados' growth strategy include advancing digitization of government services, modernizing the customs framework, simplifying the regulatory framework to support green investment, enhancing labor and product market efficiencies through skills training and education, and improving access to private credit for small and medium-sized enterprises. These priorities aim to increase Barbados' growth potential by improving the business environment, increasing private sector investments, boosting competitiveness, and diversifying the economy.
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14. What are the forward-looking priorities for the business environment reform?
The forward-looking priorities for the business environment reform include finalizing the second phase of CAIPO reform to merge registration, payment, and information exchange processes within a single window, broadening the Trusted Trader program for vetted companies, and fully operationalizing the Barbados Electronic Single Window (ESAW) by 2025 to enhance intermediation between the business community and government agencies. These priorities will be supported by a newly established independent Growth Council with a mandate to advise on reforms to enhance the investment climate, productivity, and competitiveness. The most recent stocktaking exercise suggests that most of the identified reforms are still in train, and these priorities will help address challenges in the ease of business entry and operations, processes to secure credit and enforce property rights, and trade facilitation.
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15. What are the key pillars of Barbados' public pension reform?
The key pillars of Barbados' public pension reform include the introduction of employee contributions for new public sector employees, parametric reforms on the calculation of pension benefits, and allowing for the administration of pension arrangements by the National Insurance Department from January 1, 2024. These reforms aim to ensure the long-term sustainability of the public pension system and wider national insurance and social security system. The government has tabled public pension reform legislation in May 2023, following extensive consultations with key stakeholders. The proposed legislation seeks Parliamentary approval and is a structural benchmark for end-March 2024.
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16. What is the proposed reform for RM#2?
The proposed reform for RM#2 includes removing the element of publishing beneficial ownership of bidding companies participating in public procurement due to legal impediments related to data privacy. Additionally, two new elements are proposed to be incorporated: (i) approval of a sustainable/green public procurement framework providing operational parameters, and (ii) approval of guidelines for climate/green budget tagging with mandated publication of results in an annex of the annual budget. These changes aim to enhance sustainable procurement practices and promote climate-conscious budgeting.
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17. What measures were introduced by the central bank and commercial banks in response to the COVID crisis?
In response to the COVID crisis, the central bank and commercial banks introduced several measures to support the credit market. These measures included a reduction of the overnight lending discount rate from 7 to 2 percent and a reduction of the minimum statutory holding requirement for Government securities from 17.5 to 5 percent of deposits. Additionally, the securities reserve requirement was discontinued under the new Central Bank of Barbados Act adopted in December 2020. Six-month moratoriums on loan repayment introduced by commercial banks were also implemented, with extensions and/or restructurings granted while respecting regulatory standards on loan classification and provisioning. The CBB has maintained its credit support measures and temporary regulatory guidance on loan classification was phased out at the end of 2022. Going forward, the priorities include unwinding support measures after a careful evaluation of economic and financial developments.
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18. What safeguards has the CBB established?
The CBB has established strong safeguards, implementing all recommendations from the 2018 assessment. They have significantly strengthened their safeguards framework, with legislative reforms in 2020 enhancing autonomy and governance arrangements. Financial reporting practices and the external audit mechanism align with international standards. The CBB is committed to addressing gaps in the internal audit function and cyber-resilience. They are also working to enhance their emergency liquidity assistance framework with IMF technical assistance. The CBB is continuing efforts to strengthen their AML/CFT framework, in line with their action plan agreed with the FATF to promptly exit the FATF's International Review Group process.
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19. What is Barbados' growth strategy in BERT 2022?
Barbados' growth strategy in BERT 2022 focuses on five pillars: incentivizing small-scale private sector investment in the green transition, incentivizing low-and middle-income housing, investing in skills training and education, preserving financial stability, and making Government an enabler for higher investment. The strategy also aims to establish Barbados as a logistics hub, targeted public investments for sectoral integration and climate resilience, and promoting a new, high-skilled, knowledge-based economy.
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20. What are the risks to the economic outlook?
The risks to the economic outlook include intensification of regional conflicts leading to higher and more volatile commodity prices, an economic slowdown in main tourism source countries (UK, US, and Canada) and erosion of purchasing power due to US dollar appreciation, and more frequent and intensified natural disasters. These risks can impact the economic recovery and pose challenges to achieving primary surpluses on a sustained basis. However, mitigating factors such as the authorities' track record, strong commitment to reforms, support from development partners, and public support for economic stabilization and reforms can help address these risks. Implementing structural reforms and enhancing the business and investment climate are top priorities to mitigate these risks and ensure sustainable economic growth.
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21. What is the target for Barbados' public debt to GDP ratio by FY2035/36?
The target for Barbados' public debt to GDP ratio by FY2035/36 is 60 percent. This target is part of the fiscal consolidation efforts to gradually reduce the public debt and strengthen fiscal sustainability. The authorities have increased the primary fiscal surplus in FY2022/23 and aim to further increase it in FY2023/24 while maintaining adequate social and capital spending. Improving resilience to natural disasters and climate crisis vulnerabilities is an essential part of the growth and macroeconomic stabilization strategy. The reform measures under the RSF, identified in collaboration with the World Bank and the IDB, aim to address long-term structural climate resiliency and adaptation challenges, reduce greenhouse gas emissions, and mitigate transition risks. These measures are grouped into three pillars: addressing immediate adaptation needs and resiliency priorities, reducing greenhouse gas emissions, and mitigating transition risks. The specific reform measures are clarified in Table 2 and elaborated below.
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22. What steps have authorities taken to modernize tax management?
The authorities have taken important steps to modernize and strengthen the framework for managing duty and tax exemptions, enhance tax compliance, and risk management. They have matched data from different government agencies to improve efficiency and transparency. These efforts aim to create fiscal space for climate investment and achieve fiscal consolidation goals. Additionally, the creation of a Fiscal Council to monitor the implementation of the authorities' fiscal strategy is a welcome step towards ensuring accountability and progress in the structural reform agenda.
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23. What reforms are needed to improve Barbados' monetary policy toolkit?
Reforms are needed to enhance Barbados' monetary policy toolkit and raise the economy's growth potential. A review of the central bank's monetary policy toolkit under the fixed exchange rate regime is underway, informed by IMF technical assistance. The authorities have conducted a stocktaking to inform future reform steps to enhance the business environment, stimulate private investment, and boost competitiveness. Progress on reforms will be overseen by a newly established Growth Council. Advancing the digitization of government services, enhancing trade and business facilitation, and developing regulatory frameworks for green investment are important elements of this reform agenda. Higher fuel import bills and inflation following the Russia-invasion of Ukraine highlight the need to expeditiously transition to renewable energy. Barbados remains committed to reaching its 100 percent renewable energy target by 2030. The independent Fair Trade Commission (FTC) has published Feed-in Tariffs (FITs) for independent power producers (IPPs) for a range of renewable energy technologies. The GOB has established a licensing system for IPP renewable energy projects accompanied by a guidance note on the licensing and approval process for investors in March 2022. It is important for Barbados to expeditiously implement the licensing process and accelerate private sector investments into renewable energy projects.
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24. What are the key reforms implemented for climate change adaptation?
The authorities have implemented important reform measures set for the first RSF review to increase adaptation to climate change. These reforms, supported by the RSF arrangement, are expected to create an enabling environment that mobilizes private sector resources for climate-related projects. Concerted efforts to mobilize and scale up climate financing are underway, supported by development partners. Building an affordable, green, and climate resilient housing stock is a priority. The government's housing agenda aims to build 10,000 houses in five years, financed in part through renewable energy technology. The government intends to place solar PV panels on the roofs of small homes to facilitate a basic income for all owner-occupied houses. Under one model, land will be provided, and large local contractors will construct the houses and infrastructure. Under another model, infrastructure will be provided, and small-and medium-sized local contractors will construct the houses. In a third model, affordable climate-resilient and energy-efficient housing solutions will be provided to low-and middle-income earners using renewable energy technology. For those who can't participate in any of the HOPE schemes due to low income, the NHC is constructing new housing units for rent-to-own. Work has already started to meet this demand.
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25. What is the Roof to Reef (R2R) initiative?
The Roof to Reef (R2R) initiative is a national roadmap towards the resilient development of Barbados. It presents an island-wide integrated public and private investment program founded on principles of sustainable development and climate crisis resilience. The initiative includes a rapid roof replacement program to assist homeowners in replacing non-hurricane resistant roofs, replacement and maintenance of water mains, reservoirs, and other climate-resilient water and sanitation sector infrastructure. It also aims to protect coral reefs and marine environments, provide protection against water table pollution, and systematically re-site utility infrastructure underground. The government has approved amendments to the Planning and Development Act to improve the climate resilience of roads through improved drainage and other interventions.
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26. What is the purpose of adopting green PFM practices in Barbados?
The purpose of adopting green Public Financial Management (PFM) practices in Barbados is to support the inclusion of climate priorities in all aspects of the budget cycle, including budget preparation, budget execution, fiscal reporting, oversight, and auditing. This holistic approach aims to strengthen the budget process and financial system from a climate standpoint, enhancing structural, financial, and post-disaster resilience. Enhanced green PFM requires risk assessments that quantify the macroeconomic and fiscal impact of the climate crisis, helping to identify green PFM reform priorities and improve the country's resilience to climate-related challenges.
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27. What are the risks of a synchronized global growth downturn?
A synchronized global growth downturn combines global and idiosyncratic risk factors, causing recessions in some countries, adverse spillovers through trade and financial channels, and market fragmentation. This can lead to a sharp decline in economic growth, impacting various sectors and economies worldwide. The downturn may be triggered by factors such as tight labor markets, supply disruptions, commodity price shocks, and geopolitical events like the war in Ukraine. These risks highlight the importance of implementing structural reforms and fiscal consolidation to enhance fiscal sustainability and improve the business and regulatory environment, thereby increasing investors' confidence and mitigating the impact of a global slowdown or recession.
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28. What factors contribute to medium-term risks in debt sustainability?
Medium-term risks in debt sustainability are assessed based on the projected primary balance path. Factors such as fiscal adjustment, new financing, and exceptional measures like debt restructuring play a role. Sovereign stress can occur without unsustainable debt, and various measures can remedy such situations. Debt sustainability assessments are optional for surveillance-only cases and mandatory for cases with Fund arrangements. The mechanical signal of the assessment is deleted before publication, and qualifiers indicating probability of sustainable debt are also removed before publication.
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29. What is collateralization in debt?
Collateralization in debt refers to the process where a borrower grants liens over specific existing assets or future receivables to a lender as security against repayment of the loan. This means that if the borrower defaults on their payment obligations, the lender can rely on the collateral to secure repayment. Collateral can be related to the project financed by the loan, such as oil revenue receipts in the case of borrowing to finance a budget deficit. However, collateral can also be 'unrelated' to the project, meaning it has no direct connection to the project being financed. The concept of collateralization is important in understanding the risks and security involved in lending and borrowing.
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30. What is the impact of pension expenditure on GFN-to-GDP ratio?
Continued pension expenditure under the current system can lead to larger GFNs and an upwards debt trajectory in the long run. This confirms the need to reform the current public pension system to maintain long-term sustainability. Permanent adjustment in the pension system is necessary to keep pension assets positive. Historically, Barbados has received extensive CD, with a good implementation record and critical public buy-in for reforms supported by effective communication from the government and the CBB. IMF technical assistance covered fiscal issues, including tax and customs reform, public financial management (PFM) legislation, fiscal rule frameworks, enhancing SOE performance and oversight, restructuring of the Ministry of Finance, and pension reform. LEG and MCM have provided technical advice in terms of Central Bank Law Reform, Debt Management, and Modernization of the National Payment System. STA (with CARTAC assistance) has an ongoing TA portfolio to strengthen capacity in national accounts and price statistics. The IMF's resident representative office will remain a key channel of engagement on CD going forward, in close coordination with CARTAC and CD providers at headquarters.
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31. What measures targeted for reform measure #1?
The measures targeted for reform measure #1 include amendment of the Planning and Development Act to enhance climate resilience of roads, Parliamentary approval of the Water Re-Use bill to address water scarcity, and operationalization of the Barbados Environmental and Sustainability Fund (BESF) to enhance marine protection. Additionally, the Government has included a fiscal risk statement focusing on climate change risks in the FY2023/24 budget and approved Procurement Act Regulations to enhance the efficiency and effectiveness of public expenditure and support green procurement.
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32. What economic transformation did Barbados undertake?
Barbados embarked on a comprehensive economic transformation to restore macroeconomic stability and achieve sustainable and inclusive growth. The government took office in May 2018 and addressed fiscal and external imbalances that threatened public sector sustainability and currency peg viability. The Barbados Economic Reform and Transformation (BERT 2018) plan was prepared, focusing on fiscal adjustment through public sector restructuring and modernization, along with comprehensive debt restructuring. Additionally, the government requested a four-year IMF arrangement under the Extended Fund Facility (EFF), approved on October 1, 2018, and provided 341 percent of quota in the amount of SDR 322 million.
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33. What impact did the COVID-19 pandemic have on fiscal consolidation in Barbados?
The COVID-19 pandemic interrupted fiscal consolidation in Barbados, but public debt started to decrease from FY2021/22. Prior to the pandemic, Barbados achieved significant progress in implementing BERT and restoring macroeconomic stability through comprehensive sovereign debt restructuring, fiscal consolidation, and structural reforms. These efforts created essential fiscal space, allowing the government to respond flexibly to the pandemic. Enhanced IMF support and over US$1.5 billion in policy-based loans from international development institutions further supported Barbados' efforts in dealing with the COVID-19 pandemic. The IMF's policy endorsement also served as a catalyst for raising international reserves to US$1.6 billion by end-March 2023, from a low of US$220 million in 2018. The quantitative performance criteria (PCs) and indicative targets (ITs) are shown in Table 2 of the MEFP, while structural benchmarks are listed in Table 1 of the MEFP.
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34. What are the key fiscal policy priorities in the BERT 2022 framework?
The key fiscal policy priorities in the BERT 2022 framework focus on strengthening customs and tax administration, streamlining expenditure efficiency, and balancing fiscal and debt sustainability goals with growth and resilience objectives. The Government of Barbados (GOB) has made progress in enhancing revenue and expenditure efficiencies. Taxes on income were reduced, while consumption taxes were widened under BERT 2018. Corporate income taxes (CIT) were also reduced, but the CIT framework will evolve further as Barbados complies with the OECD's principles. The GOB remains open to broadening the revenue base, including reforming the tax and duty exemption regime and allowing temporary tax and price accommodations to expire as the supply shock dissipates. On the expenditure side, the GOB aims to improve the performance of State-Owned Enterprises (SOEs) to reduce CG transfers and adopt measures to provide space for productive capital investments. Data on key fiscal policy priorities will be reported monthly, with a lag of no more than two weeks from the end-of-period.
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35. How does BRA modernize tax administration?
The Barbados Revenue Authority (BRA) modernizes tax administration by developing and implementing a compliance improvement plan for its Large Taxpayer Unit, scaling up audit activity, and increasing capacity for electronic filing and digital payments. These efforts have resulted in improved 'on-time' filing and payments compliance rates. Additionally, BRA utilizes third-party data to enhance the accuracy of the taxpayer base. The Government of Barbados (GOB) prioritizes enhancing compliance, risk management, and audit capacities within core revenue agencies, including BRA and Barbados Customs and Excise Department (BCED). Net International Reserves (NIR) are defined as the difference between reserve assets and reserve liabilities with a maturity of less than one year.
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36. What are reserve assets in compliance risk management?
Reserve assets are readily available claims on nonresidents denominated in foreign convertible currencies. They include the CBB's holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the Fund. Excluded from reserve assets are sinking funds' assets, assets pledged or collateralized, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. These interconnected initiatives are crucial in facilitating compliance risk management by ensuring the availability of liquid assets that can be easily converted into foreign currencies, thereby reducing the risk of non-compliance with international financial regulations.
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37. What is the stock of CG arrears at the end of March 2023?
The stock of CG arrears at the end of March 2023 is $261 million, which includes recently discovered legacy arrears. This represents a significant decrease from the $1.2 billion stock at the end of June 2018. The BRA has been actively working on updating its IT systems and processes to ensure timely processing and issuance of tax refunds, as well as retiring the stock of legacy arrears. The decline in arrears stock is a positive outcome of these efforts, indicating improved efficiency in tax refund processing and management. The BRA has also completed the verification of a stock of legacy tax refund arrears discovered in its pre-Tamis IT systems during the last half of 2021, with the total arrears outstanding (inclusive of the legacy arrears) estimated at $296.9 million at the end of April 2022. To address these legacy claims, a commission has been set up to develop a program in accordance with available fiscal space. The BRA is currently in the process of vetting the stock of taxpayer arrears owed to the Government, estimated at more than 10 percent of GDP, and is engaged in offsetting its net tax payable and receivable stocks. The GOB remains committed to settling outstanding arrears over the coming years, in accordance with its fiscal space, and continues to settle approved refunds within six months of the filing date. Reserve liabilities include all foreign exchange liabilities to residents and nonresidents with a maturity of less than one year, as well as all liabilities outstanding to the IMF, including EFF/RSF disbursements used for budget support.
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38. How was the Customs (BCED) administration reformed?
The Customs (BCED) administration was reformed to facilitate trade, improve risk management, and stakeholders' engagement, and strengthen revenue collection. The organizational structure was overhauled, and a Strategic Plan covering 2020-2023 was developed. The Internal Audit Division was strengthened with the creation and implementation of terms of reference and a risk-based work plan. Key Performance Indicators (KPIs) were developed for all units and are progressively being used. Operational dashboards were developed for the Trade Operations and Compliance and Enforcement Directorates and are being used for management decision making. Additionally, the NIR target will be adjusted based on the surplus or shortfall in program loan disbursements from multilateral institutions and budget support grants relative to the baseline projection.
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39. What led to the decline in NIS contributions?
From 2008 to 2019, Barbados experienced a significant decline in population, nine years of negative economic growth, declining employment levels, and negative real wage growth. These factors contributed to a decrease in the number of persons making NIS contributions. The government's struggle to finance large deficits resulted in selling more government bonds to the NIS and its funds, leading to an over-concentration in government bonds by 2018. The 2018 debt restructuring exercise stabilized public finances but caused investment losses for the National Insurance and Severance Funds. The COVID-19 pandemic further strained the Fund due to high unemployment and severance levels. Combined recapitalization and reform measures are essential to safeguard the NIS's operations over the medium term.
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40. What is the importance of reducing government subventions to public entities?
Reducing government subventions to public entities is essential to sustain medium-term fiscal viability and boost growth potential. It allows scarce public resources to be redirected towards critical productive investments. In Barbados, subventions to public entities are relatively high at 6 percent of GDP, indicating significant inefficiencies in operations. The SOE sector, which provides an array of public services, is predominantly commercial and mostly loss-making. This situation entails substantial opportunity costs to growth and poses a material risk to Barbados' balance sheet. Therefore, reducing government subventions can help improve the efficiency and financial performance of public entities, ultimately contributing to the country's economic growth and stability.
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41. What reforms prioritize CBB's operational capacity?
The GOB prioritizes reforms to enhance the CBB's operational capacity to execute monetary policy and safeguard financial sector soundness. These reforms aim to strengthen the Central Bank's autonomy, mandate, and decision-making structures. The amended Central Bank Law, passed in December 2020, limits CBB financing to the Government in line with international best practice. This includes reducing the limit on the Ways and Means account to 7.5 percent of CG revenues and restricting the purchases of Government securities on the primary market to a declared national emergency. These measures aim to reduce the risk of Central Bank financing placing pressures on foreign exchange reserves, thereby supporting the exchange peg and macroeconomic stability.
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42. What improvements did the CBB make to its safeguards framework?
The CBB significantly strengthened its safeguards framework, including its legal framework, governance arrangements, and financial reporting practices. They have implemented all previous recommendations identified during the 2018-2022 EFF arrangement. The CBB is committed to addressing gaps identified in internal audit and cyber security. They are also looking to establish an Emergency Lending Assistance framework, with the support of Fund technical assistance. Additionally, the Ministry of Finance and CBB have prepared an updated Memorandum of Understanding that clarifies their respective responsibilities for servicing financial obligations to the Fund under the new EFF and RSF arrangements.
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43. What is the role of the Financial Oversight Management Committee (FOMC)?
The Financial Oversight Management Committee (FOMC) plays a crucial role in managing the financial system in Barbados. It is responsible for producing the annual Financial Stability Report and collaborating in the monitoring of the financial system. The FOMC consists of the Central Bank of Barbados (CBB), the Financial Services Commission (FSC), and the Barbados Deposit Insurance Corporation (BDIC). These authorities work together to ensure the effective oversight of the financial system and to identify and manage risks to the financial system. The FOMC's efforts contribute to the overall stability and resilience of the financial sector in Barbados.
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44. What are the components of Net Domestic Financing?
Net Domestic Financing consists of various components such as budgetary accounts, grants and transfers to public institutions, and liabilities of public-private partnerships (PPPs). It represents the total financing available to the government from domestic sources, including loans, grants, and other forms of financial assistance. Understanding the components of Net Domestic Financing is crucial for assessing the fiscal health and sustainability of a country's economy. It helps policymakers and researchers analyze the sources and uses of domestic funds, identify potential risks, and develop strategies to ensure long-term financial stability.
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45. What factors contributed to Barbados' strong track record under the previous EFF program?
Barbados' strong track record under the previous EFF program can be attributed to their unwavering dedication to reform priorities, strong support from International Financial Institutions (IFIs), and robust public support of their home-grown BERT plan. This commitment to reform, coupled with the backing of IFIs and public support, has allowed Barbados to consistently achieve its performance criteria and targets. Additionally, Barbados has successfully met all quantitative performance criteria and indicative targets, including the primary balance target, social spending floor, external debt arrears, and public debt targets. The country has also achieved targets on net international reserves and net domestic assets of the Central Bank of Barbados (CBB). Furthermore, Barbados has implemented all five structural benchmarks, with one delayed. The authorities have taken significant steps to modernize tax and duty exemptions, enhance the sustainability of the National Insurance Fund, improve the business environment, and develop a revised pension law for civil servants. Looking ahead, Barbados has requested modifications to future performance criteria and indicative targets to reflect updates to the macro framework and resetting of structural benchmarks. The country has also successfully implemented a package of reform measures (RM) for the first review under the RSF, including amendments to the Planning and Development Act, the Water Re-use Bill, and the operationalization of the Barbados Environmental Sustainability Fund. These efforts demonstrate Barbados' commitment to reform and its ability to achieve its program objectives.
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46. What fiscal improvements occurred in FY2022/23?
In FY2022/23, Barbados achieved a 2 1/2 percent of GDP primary surplus, improving from a deficit of 1 percent of GDP in the previous year. This was due to reduced COVID-related expenditure, effective expenditure management, and increased revenue collection. The fiscal position improvement allowed the authorities to meet the fiscal target and accelerate debt reduction. The FY2023/24 budget plans for a primary surplus increase to 3 1/2 percent of GDP, supported by fiscal consolidation and economic recovery. The government has also introduced a fiscal rule and established a Fiscal Council to enhance fiscal transparency and accountability.
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47. What measures did the government take to address imported inflation?
The government took temporary measures to address imported inflation by temporarily reducing VAT on fuel, electricity, and some consumption goods. This was done to mitigate the social impact of imported inflation. The high reliance on imports led to inflation increasing to nearly 7 percent in February 2023, up from 2.2 percent in February 2022. However, it is expected that inflation will moderate to 5 percent by the end of 2023, driven by a projected decline in US inflation and easing global oil prices. The exchange rate peg to the US dollar has been a key anchor for macroeconomic stability since 1975, and the authorities continue to implement policies to support the peg and maintain adequate international reserves balances. International reserves reached US$1.6 billion at the end of March 2023, covering over 7 months of imports, which is about 250 percent of the Fund's reserve adequacy metric. The Central Bank of Barbados (CBB) is committed to prioritizing reforms to bolster its operational capacity and ensure the stability of the financial sector. The CBB has established strong safeguards, including enhancements to its legal framework, governance structures, and financial reporting practices. Efforts are ongoing to enhance financial sector monitoring through the recently modernized Central Bank Law. The banking system is adequately capitalized, and the asset quality of banks and credit unions is improving. Liquidity remains stable, and the credit quality of banks and credit unions has improved. Non-performing loans continue to decline, and credit to the private sector has experienced notable growth of nearly 4 percent, marking a significant departure from the downward trend observed since 2019.
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48. What measures has Barbados implemented to enhance beneficial ownership transparency?
Barbados has implemented several measures to enhance beneficial ownership transparency. These measures include inspections, risk rating exercises, and the enforcement of sanctions on companies. The Financial Intelligence Unit has also issued guidance and conducted training to address low reporting levels. These efforts aim to enhance transparency and accountability by ensuring that information about beneficial ownership is accurately reported and available to relevant authorities. Overall, enhancing transparency and promoting good governance are overarching priorities for the government of Barbados.
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49. What are the key priorities identified to improve business competitiveness?
The key priorities identified to improve business competitiveness include providing a regulatory and legislative environment to foster investment opportunities and climate resilience. The authorities have also established a Growth Council to sustain the reform momentum. Additionally, growth-enhancing reforms such as accelerating small-scale private sector investment in the green transition, advancing the housing agenda through climate resilient housing, investing in skills training and education initiatives, improving service delivery and public service effectiveness, enhancing competitiveness at ports of entry, addressing food security, reducing food import bill, maintaining domestic tourism sector competitiveness, and updating the Companies Act to align with international best practices have been identified for near-to-medium-term implementation.
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50. What initiatives does Barbados have for climate resilience?
Barbados has implemented several policies to build structural resilience and transition away from fossil fuels towards renewable energy. These include the development of a national climate resilient strategy-Roofs to Reefs Initiative, constructing 10,000 energy efficient and solar powered houses, incentivizing small-scale private sector investment in green transition, adopting green PFM practices, and establishing a Blue-Green Investment Corporation. The government also plans to table the National Comprehensive Disaster Risk Management Policy and complete the Climate Public Investment Management Assessment (C-PIMA).
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51. What are the recent changes in Barbados's monetary policy and how have they impacted inflation?
Recent changes in Barbados's monetary policy include the adaptation measures undertaken under RM#1, such as the rebasing of the reference basket used to calculate the Retail Price Index (RPI) to update the spending pattern of consumers. This resulted in a decline in measured headline inflation from 12.3 percent to 5.7 percent year-over-year as of end-2022. Additionally, the government temporarily cut VAT rates on electricity from 17.5 percent to 7.5 percent and introduced VAT exemptions on essential consumption items. These measures have had a small fiscal cost, estimated to be about 0.1 percent of GDP. The weakness of the CBB's balance sheet is also a constraint on monetary policy, but the authorities plan to address this over the medium term. The CBB has few instruments at its disposal to manage monetary and credit conditions due to the abundance of liquidity and excess reserves in the financial system. The government has also begun a review of their monetary policy toolkit under the fixed exchange rate regime, which is planned to be addressed over the medium term. The Barbados Statistical Service (BSS) recently completed a rebasing of the reference basket used to calculate the RPI, adopting a July 2018 reference basket compared to a July 2001 reference basket previously. This change in the weight of food and non-alcoholic beverages in the index resulted in a decline in measured headline inflation. The government has also planned to table in Parliament a National Comprehensive Disaster Risk Management Policy in the coming months (RM#3).
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