IMF Urges Barbados To Tax Its Citizens More
December 16, 2010 2 Comments
Barbados is being encouraged to not only make its recent 2.5% value added tax (VAT) increase permanent, but also to go up by another 0.5%.
This advice has been handed down by the International Monetary Fund (IMF) in its staff report on its annual Article IV Consultation with public and private sector officials in Barbados, which concluded on September 24 this year.
In the report released yesterday, Wednesday, the IMF applauded the Barbadian government’s November Budget move to increase the VAT to 17.5% (now the highest in the region). However, the Executive Directors of the IMF, on whose recommendations the staff report is based, advised that it should not be reduced to its previous 15% after the promised review in 18 months by government. Instead, the IMF said that not only had VAT receipts for the year been weak, but preliminary data showed that receipts were coming in weaker than expected for the new Budget period, which would place government’s planned adjustments for the coming year at risk.
The Executive Directors of the IMF urged government to improve its revenue collection strategies – advocating that VAT be increased to 18% and for the many tax exemptions and zero-rated concessions to be eliminated. The IMF also suggested that government should increase the island’s highly attractive 2% maximum corporate tax for international business entities by a further percentage point while reducing tax exemptions over the medium-term.
The IMF directors noted that the global crisis severely impacted the Barbados economy, especially its key sectors—tourism, financial services, and real estate. The economy is expected to rebound gradually but downside risks persist mainly from the uncertain global economic environment.
The report also commended the authorities for adopting a Medium-Term Fiscal Strategy aimed at generating a balanced budget and reducing the high public debt-to-GDP ratio. However, the directors emphasized that to place public debt on a sustainable path, additional measures will be necessary. They encouraged efforts aimed at streamlining government operations, while continuing to rein in current spending. They noted that prioritizing expenditure would also make room for moderate increases in capital spending to support medium-term growth.
The staff report also stated that the directors observed that while the Barbadian dollar’s 2:1 peg to the United States dollar has provided a valuable anchor to Barbados, its real exchange rate may have become somewhat overvalued, and they called for decisive fiscal adjustment to improve Barbados’ foreign reserves if it was to safeguard the viability of the peg.
The IMF directors welcomed the authorities’ efforts to improve the supervision of nonbank financial institutions, an area of weakness highlighted by the recent demise of two insurance companies. They called for timely action to consolidate nonbank financial supervision into the Financial Services Commission and underscored the need to resolve the problematic insurance companies to lift market uncertainty and provide clarity on contingent fiscal costs.
They also acknowledged the relatively good business environment in Barbados, but raised concerns over the country’s weak and declining productivity growth. They encouraged Barbadian authorities to further streamline government agencies and procedures, and look for ways to broaden growth sources, as a means of offsetting declining productivity levels.