Although Barbados passed its third review under the Extended Fund Facility program with the IMF in June 2020, COVID-19 has triggered a revision of the fiscal targets.
Since April 2020, Barbados has shown signs of flattening the epidemiological curve. Strict social distancing measures and comprehensive contact tracing efforts seem to be yielding results. The growth rate of new confirmed cases fell substantially since mid-April 2020 and has since remained low. However, four new confirmed imported cases amongst passengers from a repatriation flight in mid-June 2020 brought the total cases to 105 as of July 20, 2020. Total deaths are 7 and the number of tests is 9,495.1 Despite high testing capacity by regional standards, the recently confirmed imported cases from repatriation flights is a reminder that there is still an imminent threat of new outbreaks as borders reopen.
The government’s closing and reopening strategies have been phased. Upon confirming the first set of positive cases in mid-March 2020, the authorities rolled out a strict set of containment measures, including setting a 24 hour curfew on April 3, 2020 and a halt on all commercial travel since the end of March 2020. On April 30, 2020, the Prime Minister announced and commenced a phased reopening strategy. Phase 2 started on May 4, 2020 with the reestablishment of a larger range of services, the scale back of the curfew and the reopening of some public spaces such as beaches. Phase 3 began on May 18, 2020 allowing the resumption of a wider range of services and on Monday June 15, 2020 all remaining workers returned to work. Repatriation flights commenced in June 2020, and commercial flights resumed on July 12, 2020. The authorities have also launched a new 1-year visa to promote long-term visitors who can work from Barbados during the pandemic.2
COVID-19 has worsened Barbados’ economic recession. Tourism activity came to a halt in March 2020, which together with a stop of domestic economic activity due to the curfew, has worsened the country’s economic recession. Following a contraction of 0.1 percent in 2019, the economy contracted 3 percent in the first quarter of 2020 and is expected to fall by 11.6 percent in 2020 (Figure 1). Such a shock will greatly affect the fiscal targets set under the Extended Fund Facility (EFF) with the International Monetary Fund (IMF), which Barbados has been implementing since October 2018.
The halt on key sources of economic activity is resulting in a dramatic rise in unemployment. Unemployment claims to the National Insurance Scheme (NIS) reached 41,836 on May 27, 2020, roughly one-third of the workforce.3 In order to ensure there is enough liquidity to meet the growing demand for unemployment benefits, the government will buy up to BBD$250 million in bonds currently held in the NIS. However, the full extent of the impact on the NIS’s financial position remains uncertain. Figure 2 shows the share of households reporting income losses by source. Based on this figure, middle-income households (those earning between 1 and 4 times the minimum wage), have been the most affected by the economic shock: Between January and April 2020, 51.5 percent of middle-income households reported job losses, compared 49.4 percent of low-income households and 38.7 percent of high-income households. In addition, 37.8 percent of middle-income households reported business closures, compared to 25.8 percent and 33.4 percent in low- and high-income households, respectively. Rental losses were more prevalent amongst high-income households (13.9 percent of households in high-income households, compared to 9.3 percent in middle-income households and 3.2 percent in low-income households).
Although Barbados reached its primary fiscal target under the EFF in FY2019/20, this objective has been revised to accommodate for the economic shock. Despite lower than projected revenues, an expenditure adjustment resulted in the achievement of the agreed primary fiscal balance of 6 percent of GDP in FY2019/20.4 Due to COVID-19, the primary fiscal targets for FY2020/21 and FY2021/22 have been revised to 1 percent of GDP and 3.5 percent of GDP respectively.5 The authorities are increasing borrowing, particularly from multilateral institutions, to meet the country’s growing financing needs. Prior to COVID-19, the completion of the debt restructuring supported a reduction of the debt-to-GDP ratio from 158.3 percent of GDP in 2017 to 122.2 percent of GDP in 2019. The debt-to-GDP ratio is now forecast to rise to 133.6 percent of GDP in 2020 mainly as a result of growing external debt (Figure 3). US$370 million in budget support and additional funds through a contingent line are being provided by the Inter-American Development Bank (IDB), IMF and CAF in 2020.6 The IMF also disbursed US$49 million in balance of payments support following a successful third review under the program in June 2020. On the domestic front, the authorities rolled out the Barbados Optional Savings Scheme in May 2020 to provide additional fiscal space for capital spending. Through this program, a portion of civil servants’ salaries will be converted over 18 months into 4-year maturity bonds with a 5 percent interest per annum.7
COVID-19 has also triggered a shock to the external sector. In 2019 the current account deficit narrowed as a consequence of strong tourism performance, lower international oil and food prices and reduced import demand resulting from fiscal consolidation. However, COVID-19 has also triggered a shock to the external sector, mainly due to the dramatic drop in tourism receipts in 2020 which will be partially counteracted by lower oil prices and imports as tourism activity remains subdued. The current account deficit is thus expected to widen from 3.1 percent of GDP in 2019 to 10.2 percent of GDP in 2020 and the trade balance is projected to fall from 3.2 percent of GDP in 2019 to -4.4 percent of GDP in 2020. FDI slightly increased in 2019, to 4.7 percent of GDP. The effect of the halt of construction activity during the curfew and the impact of COVID-19 on source markets for investment will further reduce FDI to an estimated 1.2 percent of GDP in 2020.
International reserves have increased substantially throughout the course of the economic reform program. In 2017, prior to the onset of the economic reform program, gross international reserves stood at 5.3 weeks of import cover (Figure 4). In April 2020, they had increased to approximately 24 weeks of import cover. This was the result of policy-based lending from the IDB and the Caribbean Development Bank, balance of payments support by the IMF and a moratorium on repayments to international commercial creditors during the negotiation of the foreign debt restructuring. Keeping an adequate level of reserves is required for Barbados to maintain its exchange rate peg (BBD2=USD1), which has been in effect since 1975. Throughout the pandemic, the fall in foreign exchange earnings stemming from the halt in tourism services will likely results in a drawdown of foreign exchange reserves.
COVID-19 is having a dramatic effect on livelihoods in Barbados. As seen in Figure 5 the number of households earning below the minimum wage between January and April 2020 more than doubled, increasing the share of poor or vulnerable population. Prior to COVID-19, overall household poverty had increased, from 15.1 percent in 2010 to 17.2 percent in 2016. Whereas extreme poverty had decreased from 6.8 percent to 3.4 percent during the same period.
Barbados has channeled support to the population through its broad social protection system. Barbados ranks 56th out of 189 countries in the Human Development Index (with a score of 0.813), above other countries in the region such as Jamaica (96th) or The Bahamas (60th). High human development indicators are supported by a strong social protection system, which is divided into: i) social insurance; ii) social safety net programs and; iii) public health and education services. Although the coverage is widespread, the organization of social assistance projects is complex and largely uncoordinated, characterized by many small-scale programs that make limited use of technologies for the selection and monitoring of beneficiaries. The authorities have strongly relied on these programs to mitigate the impact of COVID-19 on livelihoods. As seen in Figure 6, the coverage of existing and new programs increased between January and April 2020, particularly for lower-income households. Support to households has been increased through the Welfare Department programs, the NIS and through the creation of new programs such as ‘Adopt Our Families’ program. However, the social protection system was not designed to be adaptive and scale up so drastically in times of crisis. This is likely creating strains on the social system, which will prevail in the next few years.
1 Data retrieved on July 13, 2020 https://gisbarbados.gov.bb/covid-19/
4 The fiscal year runs from April to March.
5 Prior to COVID-19 this target was set at 6 percent of GDP for both years.
6 This includes US$180 million policy-based loan support from the IDB, $90 million budget support from the IMF and US$100 million credit line from CAF. This figure does not include the balance of payment support provided by the IMF under the EFF nor the IDB’s contingent credit line for natural disasters.