Barbados needs to act quickly in laying off government workers and freezing wages to stem a decline in foreign reserves as tourism numbers falter, the International Monetary Fund said.
The Caribbean island’s debt reached 94 percent of gross domestic product in September, up from 60 percent in 2009, the IMF said in a report today. The economy shrank 0.7 percent last year and has contracted an average of 0.6 percent per year since 2008. While the government has begun firing 3,000 state workers to cut costs, the economy faces headwinds that could result in a crisis, according to the IMF.
“Downside risks are significant, and strong and prompt adjustment is crucial,” the Washington-based lender said. “The authorities face the challenging task of raising foreign reserves and reducing the fiscal deficit in an environment of low growth, high debt and a fixed exchange rate.”
Barbados’s debt challenges are echoed across much of the Caribbean, where governments are struggling in the wake of the global financial crisis to boost growth and control debt burdens. Since 2010 at least five nations, including Belize, Jamaica and Grenada, have defaulted.
Barbados dollar bonds have lost 8 percent over the past year, compared with a 2.6 percent loss for Central American and Caribbean debt, according to JPMorgan Chase & Co.’s CACI index. Yields on the country’s 2022 dollar bonds have climbed to 9.93 percent this week from 6.27 percent a year ago.
The government plans to freeze wages for two years as it seeks to cut 13 percent of the civil service workforce. The firing of an estimated 3,000 workers by the end of the first quarter is on track, said Nicole Laframboise, the IMF’s Mission Chief to Barbados.
“Authorities are committed to the current measures,” she told reporters on a conference call today. A debt restructuring “is not an issue up for consideration,” she said.
The outlook for the island’s $4.2 billion economy is aided by investment projects including a new cruise ship pier and hotel by Sandals Resorts. The government firings will help narrow the deficit almost in half to under 5 percent of GDP in the coming fiscal year, and there is “ample scope” to raise domestic tax revenue that has been undermined by waivers, exemptions and arrears on payments, the IMF said.
“The near term outlook will depend on vigorous and timely implementation of the proposed adjustment measures, and the consequences of policy slippage would likely be significant,” the report said.
To contact the reporter on this story: Eric Sabo in Panama City at firstname.lastname@example.org