Economic Growth, Debt, and Fiscal Adjustment: Barbados’ Tripartite Challenge

The concepts of economic growth, public debt, and the government’s fiscal balance are strongly intertwined. In Barbados, low growth and recurring fiscal deficits have led to rapid accumulation of debt, which at over 155 percent of GDP in 2017 and the first half of 2018, has been the highest in the Latin American and Caribbean region. In response, the Government of Barbados is carrying out a set of ambitious reforms, including a fiscal consolidation program and debt restructuring. Yet, given the important role of economic growth on the required fiscal adjustment and on the debt-to-GDP ratio, it will be key to ensure that the design and scope of the adjustment support a balanced approach, reducing debt without undermining growth. This paper reviews and explains the recent debt trajectory in Barbados. It then discusses the potential effects of real GDP growth on the debt-to-GDP ratio and the required fiscal adjustment going forward. In so doing, it highlights the importance of a balanced approach between fiscal adjustment and growth stimulus for a sustainable debt path.