Economic Growth Debt and Fiscal Adjustment: Barbados ...

Economic Growth, Debt, and Fiscal Adjustment: Barbados' Tripartite Challenge

Zubin Deyal Laura Giles ?lvarez Kimberly Waithe

Country Department Caribbean Group

POLICY BRIEF N? IDB-PB-310

February 2019

Economic Growth, Debt, and Fiscal Adjustment: Barbados' Tripartite Challenge

Zubin Deyal Laura Giles ?lvarez Kimberly Waithe

February 2019

Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library Deyal, Zubin. Economic growth, debt, and fiscal adjustment: Barbados' tripartite challenge / Zubin Deyal, Laura Giles ?lvarez, Kimberly Waithe. p. cm. -- (IDB Policy Brief ; 310) Includes bibliographic references. 1. Debts, Public-Barbados. 2. Fiscal policyBarbados. 3. Economic stabilizationBarbados. 4. Barbados-Economic policy. I. Giles, ?lvarez, Laura. II. Waithe, Kimberly. III. Inter-American Development Bank. Country Department Caribbean Group. IV. Title. V. Series. IDB-PB-310

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Economic Growth, Debt, and Fiscal Adjustment: Barbados' Tripartite Challenge

Zubin Deyal, Laura Giles ?lvarez, and Kimberly Waithe Inter-American Development Bank

Abstract Economic growth, public debt, and the government's fiscal balance are strongly intertwined. In Barbados, low growth and recurring fiscal deficits have led to rapid accumulation of debt, which at over 155 percent of GDP in 2017 and the first half of 2018, has been the highest in the Latin American and Caribbean region. In response, the Government of Barbados is carrying out a set of ambitious reforms, including a fiscal consolidation program and debt restructuring. Yet, given the important role of economic growth on the required fiscal adjustment and on the debt-to-GDP ratio, it will be key to ensure that the design and scope of the adjustment support a balanced approach, reducing debt without undermining growth. This paper reviews and explains the recent debt trajectory in Barbados. It then discusses the potential effects of real GDP growth on the debtto-GDP ratio and the required fiscal adjustment going forward. In so doing, it highlights the importance of a balanced approach between fiscal adjustment and growth stimulus for a sustainable debt path.

JEL Codes: E62, F43, H63, H68 Key Words: growth, debt, fiscal balance, Barbados, economic development, debt sustainability, fiscal adjustment, policy

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Table of Contents 1. Introduction ................................................................................................................. 3 2. Literature Review ........................................................................................................ 4 3. Low Growth, Rising Debt and Barbados's Fiscal Reform ............................................ 5 4. The Drivers of Debt in Barbados ................................................................................. 8 6. Conclusion ................................................................................................................ 12

References ............................................................................................................... 14

Figures

Figure 1.1: Real GDP ..................................................................................................... 3 Figure 1.2: Debt-to-GDP ratios ....................................................................................... 3 Figure 2.1: The debt-to-GDP ratio and economic growth, 2015 and 2017....................... 4 Figure 3.1a: Real GDP growth, Barbados....................................................................... 6 Figure 3.1b: Fiscal and primary fiscal balances, Barbados ............................................. 6 Figure 3.2a: General government debt ........................................................................... 7 Figure 3.2b: Short-term and long-term domestic debt .................................................... 7 Figure 4.1: Cumulative drivers of debt ............................................................................ 8 Figure 5.1: Debt-to-GDP ratios projections ................................................................... 10 Figure 5.2a: Deviations in the 2027 debt-to-GDP ratio.................................................. 11 Figure 5.2b: Deviations in the 2033 debt-to-GDP ratio.................................................. 11 Figure 5.3a: Required primary surplus to reach 80 percent of GDP by 2027 ................ 12 Figure 5.3b: Required primary surplus to reach 60 percent of GDP by 2033 ................ 12

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