IMF recommends two-year wage freeze for Barbados

The International Monetary Fund (IMF) has recommended a two-year wage freeze as Barbados seeks to deal with a subdued economy.

In a statement issued on Monday night following a two-week visit to the island, an IMF delegation, headed by Therese Turner-Jones, advised adoption of a wage freeze for the next two years to curb current spending and signal wage restraint in the economy generally to help boost competitiveness and lower inflation expectations.

"Further, the government should look to improve targeting its social spending to the most vulnerable parts of society given its limited fiscal space," said the Fund.

"Importantly, under a fixed exchange-rate regime, tightening the fiscal stance is essential to guarantee external sustainability and strengthen reserves, especially in light of the lower reserve accumulation so far this year, and the precarious global outlook."

The IMF said it is encouraging the engagement of the social partnership, a long-standing and effective Barbadian institution, to begin a national dialogue on the appropriate and sustainable level of social entitlements.

According to the IMF delegation, the Barbadian economy has achieved modest growth only in the face of the prolonged global recession.

It said that real gross domestic product (GDP) growth will be tepid at around 1.0 per cent this year despite higher tourist arrivals, as overall economic activity is subdued.

"Similar to earlier forecasts, downside risks are mounting, especially as Barbados' main trading partners face heightened uncertainty, while commodity prices, especially in food and fuel, continue to be at high levels," the IMF delegation noted.

It said it "expects negligible growth for at least the next 12 months, as tourism and offshore financial services only gradually improve in the hostile external environment".

The IMF delegation said that during its visit, discussions focused on challenges facing the authorities in light of the low growth, high debt scenario in the context of some increase in unemployment," and welcomed efforts by the authorities to revise the medium-term fiscal strategy, suggesting that public enterprises should be included in the calculations.

"While recent measures to bolster revenues, including the hike in the value added tax rate were bearing fruit, losses in state-owned bodies continue to be a drag, especially on the overall borrowing needs of the public sector, which has become heavily dependent on the National Insurance Scheme (NIS).

"While noting that in the current weak economy, fiscal consolidation will need to consider the need to keep priority social spending intact, additional measures will be needed and implemented quickly if the debt-to-GDP ratio is to stabilise from its high level and be further reduced over the medium term," the IMF said.

The IMF said overall, the Barbadian banking system shows resilience with excess liquidity and well capitalised institutions.

However, the economic slowdown is beginning to impact some loan portfolios and non performing loans have crept up, which will require higher provisioning if this trend persists.

The IMF said that the newly established Financial Services Commission of Barbados should immediately turn its attention to creating a fully functional regulatory environment with priority on the insurance sector, especially against the backdrop of the failure of insurance company CLICO, which is yet to be resolved.

The IMF said it is encouraging the authorities to choose a course of action promptly and to exploit private sector-led solutions that minimise fiscal costs.

The IMF said it also shares the authorities' concern for the need for a regional mechanism for coordination of crisis resolution in future events to ensure regional financial stability.