Barbados’ new government has announced a three-phase five-year package of austerity and stimulus measures aimed at avoiding a devaluation of the Barbados Dollar. The measures follow a rapid post-election visit by an IMF team to establish the levels of support and actions necessary to address the dire economic state of island’s economy.
Introducing the emergency package of measures, the Prime Minister, Mia Mottley, told Parliament that the new measures contained in a far-reaching ‘Barbados Economic Recovery and Transformation Plan’ will be introduced in three phases.
Phase 1 will focus on a review of tax revenue, the imposition of new domestic and international user fees, the removal of three statutory corporations from the Consolidated Fund, greater tax compliance, and a broadening of the tax base on overseas visitors. The objective will be to reduce the fiscal deficit in the first year of the plan.
Phase 2, starting later this year, will focus on expenditure reduction on Central Government and State-owned enterprises; review the framework within which the country’s International business sector will operate; and deliver a programme of measures intended to stimulate growth.
Phase 3 will determine what expenditure is essential, what is highly desirable and what is optional. This in part will involve a national dialogue to determine how Government meets future social needs.
The full extent of the wide-ranging changes to taxation and the way in which government will in future fund its domestic activities and what is proposed for VAT, income tax, corporation tax, VAT on goods and services ordered online, and offshore companies, can be read in the full in budget presentation. This can be found at https://www.caribbean-council.org/barbados-budget-presentation/
Significant new level of taxes on visitors
Among the specific measures on taxation and fees on visitors are changes that will make the cost of a vacation in Barbados significantly more expensive. These include an Airline Travel and Tourism Development fee of US$75 for visitors travelling outside CARICOM or US$35 within CARICOM, in addition to existing departure and other travel taxes; a new tax on Airbnb-type accommodation; the doubling to 15% of VAT on room rates from 1 January 2020; adjustments to the island’s room rate levy; and a 2.5% product levy on all direct tourism services.
Mottley said that the recovery and transformation plan was carefully balanced, would reduce the fiscal deficit in a full fiscal year by Bd$183m (US$9.2m), and would raise the primary surplus from 4% to almost 6%. Combined with a further Bd$200m (US$100m) of fiscal adjustment in phase 2 and 3, the fiscal consolidation before debt restructuring would be Bd$330m (US$165m) when the measures are in full force. This, Motley said, would reduce the country’s US$15bn (US$7.5bn) national debt to sustainable levels in 5 years.
The Prime Minister’s statements followed extensive discussions with the country’s Social Partnership group that includes business and the trades unions, a request to the IMF to provide liquidity support for the country’s international reserves, and their help in providing an independent assessment of the new government’s recovery plan.
Third most indebted country in world
Mottley said that the country’s debt to GDP ratio, when arrears are added to contingent liabilities, was close to 175%. This she said put Barbados amongst the most indebted countries in the world. “The only countries with higher debt-to-GDP ratios are Greece and Japan”, she said, noting that the options they pursued to resolve their fiscal challenges were not available to Barbados.
Using sometimes dramatic language she told Parliament: “If we are to save our way of life and the value of our dollar, action is both immediate and urgent. Our nation stands on the brink of the biggest battle we have had to face in our 52 years. If we shy away from this battle now our debt will devour us.”
Explaining the nature of the challenge facing the country in relation to its debt, Mottley said that servicing the country’s debt was consuming more money than the entire central Government’s wage bill. “It consumes more than our education and health budget combined”, she said. Unless this was addressed, she said, the island’s young would leave, investment will fade, and the economy would ‘fossilise’.
Previous government’s action condemned
She roundly condemned the outgoing government for not addressing the seriousness of the situation, delaying elections, damaging the country’s reserves, and for leaving the election until almost the last moment. She also suggested that many decisions taken in the closing months of the DLP government would be investigated and that some of what had been agreed with investors and others will be set aside or renegotiated.
In a June 7 statement the IMF had said that Barbados was in a precarious economic situation. ‘International reserves have dwindled to US$220m, while central government debt is unsustainable.
The fiscal deficit has decreased over the last few years but remains large, at about 4 percent of GDP in FY2017/18’, it reported.
Private sector expresses support
Commenting on the emergency budget, the Chairman of the Barbados Private Sector Association (BPSA) Charles Herbert has said that “by and large” his organisation was supportive of the government’s budgetary measures. He told online publication Barbados Today that he was especially encouraged by the level of consultation and input from the private sector. “We are encouraged by the level of consultation and input that we were allowed to have into the budget. Describing it as a good start he noted that it was only the first step in the programme of fiscal adjustment.
However, he expressed concern about the impact on visitors. “If there is any concern that we have, it is that the Budget transferred quite a bit of the burden for revenue on the tourists coming to Barbados. We don’t think this is going to reduce our arrivals but that is just the riskiest aspect of the Budget”, he was quoted as saying.
Also reacting, the former Minister of International Business, Commerce and Small Business Development, Donville Inniss, said that Barbadians should take note of the term “mini Budget” as a “big Budget will come in October when it becomes clear what measures the IMF is proposing. Nonetheless, Inniss, who is vying for leadership of the opposition DLP said “I am not going to sit here and wish bad for this country. I have to live here. If we are going to swim we will swim together and if we are going to sink, we will sink together”.
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