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1. Restructuring domestic law sovereign debt—domestic debt for short—poses a different set of benefits and challenges compared to a restructuring of external sovereign debt.1 Unlike external debt, the sovereign can restructure its domestic debt through changes in domestic law.2 Furthermore, restructuring only domestic law debt may offer a way of limiting the external reputational consequences of debt restructuring and perhaps avoiding loss of access to external debt markets. At the same time, a DDR must confront the fact that sovereign exposures of domestic banks and pension funds disproportionally take the form of domestic rather than external debt. This provides a channel for sovereign stress to spread to other parts of the economy, with potentially serious adverse effects on economic activity as the costs of such distress reverberate across creditors and the financial system.3 The burden of adjustment for domestic residents increases further with fiscal consolidation to restore debt sustainability.
2019 Article IV Consultation, Second Review Under the Extended Arrangement, Request for Completion of the Financing Assurances Review, and Modification of Performance Criteria-Press Releases; Staff Report; and Statement by the Executive Director for Barbados
The Role of the Fund in Governance Issues - Review of the Guidance Note - Preliminary Considerations - Background Notes
The economy appears to have turned the corner but a disappointing fiscal outcome has not eased concerns about debt sustainability. After protracted stagnation following the 2008 financial crisis, there was a moderate recovery in 2015 and growth is set to pick up. Notwithstanding adjustment efforts, the budget deficit remained high, mainly reflecting delayed implementation of reforms. The large funding requirements were mostly met by the central bank, the National Insurance Scheme, and growing arrears. Continued large deficits pose risks to the fixed exchange rate.
This 2011 Article IV Consultation highlights that the difficult global economic conditions continue to hit Barbados with growth at anemic levels. The current account deficit has widened in recent times owing to higher oil and food prices. Executive Directors commended the authorities for adopting a revised Medium-Term Fiscal Strategy aimed at generating a balanced budget. They emphasized that fiscal consolidation should focus on expenditure reduction, including lowering the wage bill, reducing transfers to public enterprises, and minimizing tax exemptions.
The global crisis has hit Barbados front and center. The broad economic weakness has hurt the labor market, while inflation remains stubbornly elevated. The major challenge ahead is to put public debt on a steady declining path to support both domestic and external stability. A decisive fiscal adjustment is the best way to protect the exchange rate peg while the current monetary stance is broadly appropriate. Banks remain healthy, but tighter regulations are needed. Supervision of nonbank financial institutions needs to be revamped.
Barbados has some of the highest social and competitiveness indicators in the region and enjoys investment-grade rating on its sovereign bonds. The staff report for Barbados’s 2009 Article IV Consultation highlights economic developments and policies. Balance-of-payments pressures have increased, despite a narrowing in the current account deficit. In the absence of corrective measures, reserves are projected to decline to close to two months of imports over the medium term, which could lead to pressures on the currency peg.