Barbados
and the International Monetary Fund
About the Country
The Problem
In the early 1900s the BOP (balance of payment) deficit increased sharply, meaning that more money was going out of Barbados than coming in. This was partially due to a drop in tourism and a large increase in the government budget deficit. There weren't enough foreign currency reserves to pay for the imports and other assets that people in Barbados wanted to buy from abroad. Inflation was on the rise, economic growth was slow-moving and unemployment was high. Barbados seeked for help from the IMF.
IMF
Barbados requested financial assistance from the IMF, which is normally granted if the government implements and economic reform program designed to eliminate the underlying problems over time. The IMF-supported program in Barbados focused on improving the economy through sound fiscal and monetary policies and on helping to make the country's businesses more competitive in the world. The government tightened the fiscal policy by drastically cutting its spending and improving the efficiency of the tax system. Wages of government workers were cut and some government workers were laid off. The central bank used monetary policy to raise interest rates. This action discouraged excessive spending and reduced inflation. In the private sector, a wage program which kept labor costs down, was implemented. the meant that Barbados could keep down the prices of its exports and compete better with other countries. All of these measures were designed to curtail inflation and improve long-term economic growth. This would attract more foreign currency to Barbados by increasing exports, tourism, and foreign investment and would help bring an end to the BOP deficit.
Results
Barbados and the IMF achieved their desired goals in a relatively short period of time. Reserves of international currency increased in 1993-1994 due to increased tourism from Europe and a drop in government spending. A program was initiated to revive the sugar industry to increase exports. Although there were initial declines in GDP due to decrease in the size of the government sector, GDP growth picked up by 1994-1995. Inflation fell to a rate of 1%. There is always a possibility that problems will arise again in the future because the Barbados economy relies heavily on tourism, which has its up and downs.