Barbados benefits from well-functioning institutions and social and political stability, reports the IMF. The country has some of the highest social and competitiveness indicators in the region and enjoys investment-grade rating on its sovereign debt. Its low crime rate, well-educated workforce, and attractive natural setting have helped make it a top destination for high-end tourism and a prime location for offshore financial services and real estate investment. While the longstanding peg to the US dollar has provided a positive effect on investment and growth, the IMF believes that some vulnerabilities arise from the high level of public debt and continued fiscal imbalances.

The global recession is severely affecting the Barbadian economy. After barely growing in 2008, real GDP is expected to contract by 3% in 2009 and to remain virtually flat next year, on account of weak performances in the tourism and construction sectors, according to the IMF. After peaking at 11.2% in September 2008, 12-month inflation is projected to decline to 3–4% by end-2009. The external current account deficit would narrow from 10.5% of GDP in 2008 to 5.25% in 2009, and remain below 6% in 2010. International reserves, which declined by almost USD100m in 2008, are likely to broadly stabilize during 2009, boosted by the recent placement abroad of a USD120m government bond and by SDR allocations of around USD90m. Reflecting a steady relaxation of fiscal policies, the nonfinancial public sector balance shifted from a small surplus in FY 2004/05 (April to March) to a deficit of 7.5% of GDP in FY 2008/09. Based on current policies, it is likely to widen to 8.5% of GDP this fiscal year, raising the public debt ratio to 11.5% of GDP by year-end, predicts the IMF.

In its recommendations, the IMF Executive Board observed that the current global shocks have put strains on the country’s economy. In addition, possible changes in tax regulations abroad could adversely affect Barbados’s offshore financial sector.

Directors encouraged the authorities to develop a credible medium-term fiscal adjustment plan and start with its implementation, as soon as possible. The IMF was of the view that, if left unchecked, the large fiscal deficits, combined with an uncertain foreign financing outlook, could result in a deterioration in investor confidence. A concerted adjustment effort, the IMF urged, is crucial to countering such a risk, by reducing fiscal financing needs, supporting the balance of payments, and placing public debt on a firm downward path. This would also enhance growth, the IMF notes, by strengthening confidence and attracting higher investment. To this end, the Executive Board encouraged the authorities to commit early on to decisive fiscal measures, particularly in the area of expenditure restraint. They considered that it would also be important to develop contingency plans, in the event that the economic recovery was delayed and fiscal pressures persisted.

The IMF observed that Barbados’s banks appeared to be well capitalized. Noting that prudential indicators remain favorable, the Fund advised that the authorities carefully monitor the incipient rise in nonperforming loans, although it did note that they remain at a relatively low level. On banking supervision, the board recommended that the authorities review the implementation of certain Basel II standards, particularly regarding the self-regulation by commercial banks. They commended the authorities for moving ahead with implementing the recommendations of the 2008 Financial Sector Assessment Program Update, adding that quick and decisive action should be taken to resolve the problems of CLICO-Barbados. The board added that there was a need to develop contingency plans, should the current approach of selling the subsidiaries of CLICO-Barbados to private investors prove unsuccessful. The IMF recommended that this approach would mitigate any impact on the public finances, and protect the financial system and investor confidence.