(BARBADOS TODAY) – The International Monetary Fund (IMF) has refused to rule out the possibility of a devaluation of the Barbados dollar should the country enter a fiscal programme with the lending institution.
IMF Director for the Western Hemisphere Alejandro Werner told Barbados TODAY that devaluation would have to be a choice for Government to make. The Barbados dollar is currently pegged at BD$2 to US$1.
The Central Bank of Barbados and several noted economists have raised concerns about the future stability of the currency due to the country’s dwindling foreign exchange reserves.
At the same time, the Freundel Stuart administration is coming under increasing pressure to enter into a formal arrangement with the IMF in order to drag the local economy out of its present state of virtual disrepair.
Suggesting that the international financial market was losing confidence in Barbados, Werner said Government would have to consider its competitiveness while building “a programme that is consistent and sustainable” when it ponders devaluation.
“If one country, and this is more theoretical, chooses to have one part of the economic system being more rigid, because you choose to have rigidity in the exchange rate regime then you have to have other parts more flexible to accommodate the adjustments that are needed in an uncertain world through these other components of this economy.
“So that would be our position vis-à-vis the exchange rate regime. That is the choice of the country and then the country has to work on a macro financial programme that makes their fiscal situation, external account and their exchange rate regime consistent with that choice,” Werner told Barbados TODAY in an interview on the fringes of the 2017 IMF High Level Caribbean Forum at the Pegasus Hotel in Kingston, Jamaica.
The IMF official revealed that the lending institution was keeping a close eye on the performance of the local economy in light of the recent austerity measures implemented by the Stuart administration.
He gave two thumbs up to the measures, which included a dramatic 400 per cent rise in the controversial National Social Responsibility Levy from two per cent to ten per cent of the customs value of imported and locally produced goods, which Minister of Finance Chris Sinckler said raked in $50 million in the first three months since its implementation on July 1.
As part of a $542 million austerity package aimed at wiping out the fiscal deficit, Sinckler also announced in his May 30 Budget, an increase in tax on fuel, as well as a two per cent tax on all foreign exchange transactions, all of which took effect between July and September 1.
The IMF director said it was “an important fiscal programme to contain the loss of reserves” and rising debt, which he said “has led to a significant deterioration of financing conditions for the Government of Barbados, that has also triggered an important loss in [foreign] reserves and that obviously generated an important fragility to which the Government has reacted”.
He told Barbados TODAY the Freundel Stuart administration and the IMF were “continuously exchanging views”, and that the international lending agency was “giving advice and we are following closely the implementation of the Government’s programme”.
Werner also suggested that the international financial market was losing confidence in Barbados due to the debt situation.
The country has suffered multiple downgrades by international ratings agencies worried that it would no longer be able to service its debts.
“When you are in the middle of a fragile period and when you are in the middle of a situation in which financial markets are losing their credibility in the authorities, it is very important to act rapidly and send a signal that the major concerns, that are in this case the external sustainability due to loss of reserves and the fiscal sustainability due to the increase of debt to GDP [gross domestic product] ratio, are being contained. And then maybe there is a change in policies on the way to fix things here and there within the context of this broad envelope that look to contain these two imbalances: the fiscal and the external [debt],” he explained when asked about the possibility of Government abandoning the current policy given its record of coming up with new programmes without allowing previous ones to run their course.
A team from the IMF is currently wrapping up its annual Article IV Consultation in Barbados. Werner, who was not able to give a detailed report on the meeting just yet, said he was aware that “the mission is having very constructive dialogue in the field”.