Government’s proposed $600 million stimulus package may end up doing more harm than good, says a retired economics expert.
Barbadian Charlie Skeete, a former senior economic adviser of the Inter-American Development Bank in Washington, has given this assessment of the plan aimed at spurring economic growth on the island.
Speaking during the recent Estimates Debate in the House of Assembly, Minister of Finance Chris Sinckler said a stimulus package of that magnitude was on the drawing boards, but Skeete, a former Barbados Ambassador to the United States and the Organization of American States, told the SUNDAY?SUN there was a real “danger that the stimulus package could be politically popular but be at best of marginal value in economic cost-benefit terms”.
At worst, cautioned the former Permanent Secretary in the Ministry of Finance, the proposal, if implemented, could “negatively affect” the country’s foreign reserves, trigger a ballooning of the already large domestic and foreign debt, and widen the fiscal and current account deficits.
“A stimulus is like marriage; it shouldn’t be undertaken lightly,” stressed Skeete.
“The context in which the proposed stimulus was presented to Parliament and the public by the Minister of Finance is in itself a cause for concern.
If a stimulus programme is not well designed and well implemented, Barbados can end up in a situation in which it is worse rather than better off. As far as I am aware, no attempt was made to justify the size of the package or the merits of the individual components, and what their likely economic impact would be.
“Funds for the financing of a stimulus package have to come from somewhere,” Skeete said.
“In practice, governments borrow for this purpose. As a result, expenditures generated by a stimulus package can negatively impact the ability to pursue prudent debt and liquidity-reserve policies.
“Is the Government aware of the impact the planned programme would have on reserve levels and on debt servicing capacity? Barbados is a small open economy in which substantial import leakages are unavoidable, whether expenditures are for investment or consumption purposes.
“There is also the question of implementation capacity to ensure that execution of the project is carried out with minimal waste and corruption.”
He said that for the last five years the average real rate of growth in gross domestic product had been zero or negative.
“In other words, the economy has been in prolonged recession. On the one hand, the stagnation in incomes and output could justify stimulus. On the other hand, prolonged recession suggests that what is wrong with the economy cannot be fixed by stimulus, and that what is needed is a more fundamental reform of incentives and institutions.”
Skeete was concerned about the resort to stimulus in the context of the recent performance of the Barbados economy and the fiscal and debt management situation of the country. He was concerned that Government was sending mixed messages about the country’s fiscal and debt situation at a time when the public has come to accept the need for restraint.
As evidence of this, Skeete cited the approved Estimates of Expenditure and Revenue for 2013-2014 that envisaged current and capital spending of $3.8 billion but anticipated revenue collection of $2.6 billion, leaving the country with a $1.2 billion deficit to be filled by further borrowing. By contrast, as recently as 2011-2012 actual total expenditure was $3.4 billion and revenue collection amounted to $2.5 billion.
“What these numbers indicate is that revenue has not been performing well at all,” he said. “There hasn’t been a significant growth in revenue in recent years. The deficit for 2013-14 is to be financed by a mix of foreign and domestic borrowing. This current situation must be considered against a background of an economy that is not growing and hasn’t grown for the past five years.
“Indeed, one can argue that the deficits we have been running are a form of stimulus,” he said, but was quick to add, “I don’t know whether the Government will succeed with the projected borrowing targets.”
Hence, his reluctance to endorse Sinckler’s proposal.
