Washington---14 Sept. 2006:

Recent developments Barbados’ economy continued to grow in 2005, but macroeconomic imbalances worsened. GDP growth is running at about 4 percent, but inflation of more than 6 percent and the widening of the current account deficit to 12½ percent of GDP are raising vulnerabilities, particularly in
the context of the exchange rate peg. The fiscal position was relatively stable in 2005/06, but government debt remains above 80 percent of GDP. Credit to the private sector has continued to grow at fast pace, but strong capital inflows have financed the external deficit and prevented a further loss of gross international reserves (GIR) in 2005.

Policy discussions The discussions focused on the need to address macroeconomic imbalances and achieve sustainable growth. The outlook for near-term growth is auspicious, as the private and publicxsectors intensify preparations for the 2007 Cricket World Cup (CWC).

However, Barbados faces risks associated with the large current account deficit, as well as with high oil prices and elevated levels of debt. These could weigh negatively on growth, especially in the aftermath of the CWC. The mission recommended a tightening of policies to reduce risks of overheating, protect the exchange rate peg, and bring public debt to safe levels. Monetary policy was tightened in 2005, but credit to the private sector has continued to grow at a fast pace.

The staff recommended
a further increase in policy rates, but the authorities expected the increases of 2005 to eventually achieve the desired reduction in credit growth. The nonfinanial public sector deficit is expected to widen by 2½ percent of GDP in 2007/08 (to about 3 percent). The mission recommended that this fiscal expansion be avoided, and to bring the debt-to-GDP ratio to under 60 percent by 2011. The authorities preferred a more gradual path of fiscal consolidation.

The mission supported the objective of maintaining the currency peg, provided that macroeconomic imbalances are corrected and structural reforms to enhance competitiveness are strengthened. Weaknesses in competitiveness could compromise external adjustment in the medium term. The mission argued that competitiveness could be best fostered by structural reforms, including trade liberalization, privatization, and the rationalization of
sectoral incentive programs—including limiting support for the sugar adaptation strategy to commercially viable activities.

The authorities agreed on the need to keep a watchful eye on banks’ asset quality and a recent fall in their net foreign asset position. Official banking indicators appear sound, but large capital inflows combined with rapid domestic credit growth could pose risks to the soundness of the system. The authorities also agreed on a gradual opening up of the capital account, and reported a number of measures to strengthen the financial sector regulatory
framework and to develop financial market infrastructure.


Source: imf.org