IMF says Barbados inflation could hit 9% this year

Barbados’ inflation rate is expected to reach 9% this year from 4% last year, while economic growth will slow to 2 1/4% from 3 1/4% last year, the International Monetary Fund said in a press release on Tuesday. The IMF also said that it expected to see a rise in the current account deficit to 8½ percent of GDP from 7¼ percent the previous year.

The projection comes after an IMF mission visited Barbados for its annual consultation and met with top government officials, as well as private sector and labour leaders.
WIth an already high public debt reducing options available to the government, the IMF said there were “significant challenges arising from a weaker external environment and mounting international price pressures for food and fuel.”

However, Governor of the Central Bank of Barbados, Dr. Marion Williams, said yesterday the bank was forecasting an inflation rate of about one percent below the IMF’s projection, or about 7.9% for 2008.

She said inflation was being driven by the price of imports, notably a doubling of the price of oil between 2005 and mid-2008, and food prices, which had increased by 60% on average. Noting that the forecasts for the UK and US this year were 3.3% and 3.4% respectively, Dr. Williams said that since those two countries were the island’s major trading partners, it was reasonable to question why Barbados inflation rate was expected to be so much higher than theirs, and she said it came down to rising transportation costs. Also, she said, the “baset of goods” tallied up to determine inflation rates in a developing country like Barbados had 40% more food content than similar baskets used for developed countries, and in a situation where food prices were climbing Barbados’ inflation rate would go up faster.

Dr. Williams, however, did not take issue with the IMF’s projection of GDP growth for the country of just over 2% for 2008.

The IMF team said the government’s fiscal policy should help vulnerable groups while working to reduce the public debt ratio over the medium term. At the same time, monetary policy should aim at reducing future inflation, and incomes policy should place “wage moderation” on the front burner. The IMF also wants to see increases regulation and supervision in the financial sector along with more regulation and supervision of cross-border transactions.

Meanwhile, Dr. Williams, who was speaking at a government-hosted consultation on the economy, agreed on some of the IMF’s recommendations, sayng that there was a need to keep wage increases in line, ensure more competition in retail, target price support for key groups, and for consumers to change their behaviour in terms of unnecessary spending.

Dr. Williams hinted that the bank, which has lowered interest rates twice since late last year, would determine any upcoming movements in interests based on the level of wage increases granted, as the bank did not want to further increase demand for consumer imports.

Here is the full statement form the IMF’s website:

Statement by the IMF Mission for the
2008 Article IV Consultation Discussions with Barbados
Press Release No. 08/140
June 17, 2008

An International Monetary Fund (IMF) mission headed by Christina Daseking, Deputy Division Chief in the Western Hemisphere Department, issued the following statement at the end of its discussions in Bridgetown today:

"An IMF team visited Bridgetown during the past two weeks to review recent economic and financial developments and discuss economic prospects and policies, as part of its routine annual consultation with Barbados. The team met with officials in the Ministries of Finance and Economic Affairs, Labor, Transport, Social Care, and Foreign Trade, the Central Bank of Barbados, and representatives of the private sector and labor, and the opposition.

"The discussions were held against the backdrop of significant challenges arising from a weaker external environment and mounting international price pressures for food and fuel. Given these factors, the mission projected a slowdown of economic growth this year to 2¼ percent from 3¼ percent last year, a temporary spike in inflation to 9 percent from 4 percent in 2007, and a rise in the current account deficit to 8½ percent of GDP from 7¼ percent the previous year. With the government's options constrained by high public debt and the exchange rate peg to the U.S. dollar, the mission recommended a coordinated policy response, involving the government, the central bank, and the social partners to share the burden of a necessary adjustment:

·fiscal policy should focus on creating space for targeted support to vulnerable groups, while bringing the public debt ratio on a firmly declining trend over the medium term;

·monetary policy should aim at containing future inflation expectations;

·incomes policy should support fiscal and monetary policies by promoting wage moderation within the established tripartite framework, thereby preserving price stability and protecting employment; and

·financial sector policies should focus on further strengthening financial sector regulation and supervision and improving cross-border cooperation among regulators and supervisors.

"On its return to Washington D.C., the team will prepare a staff report that is tentatively scheduled to be discussed by the IMF's Executive Board in late July. It is expected that the staff report will soon thereafter be published, including on the IMF's external website."