Barbados and Ireland are rarely mentioned in the same breath in economic matters.
Ireland, a member of the European Union (EU) with a population of 4.5 million and a US$207 billion economy, saw a 0.4 cent slump in 2010 and has been struggling ever since, while Barbados, a high income country like Ireland, has a US$4 billion gross domestic product (GDP)?that has been in and out and now back into a recession in recent years.
Both countries had the same challenge: recession, high debt, a wide deficit and persistent double digit unemployment, forcing Wall Street analysts to link them if only to show what’s possible and how fortunes can change.
But as the experts discuss possible solutions, they are also advising Bajans that if they hope to emulate Ireland by turning around their economic fortunes, then they may have to swallow some bitter medicine of austerity and endure the severe pain the Irish felt when budget cuts and higher taxes became a tough fact of daily life in order to get their European state back on a growth path.
“The challenges the [Barbados] economy faces right now are going to be compounded by the fiscal consolidation the Government has to undertake “if it is going to return” the economy to equilibrium, said Aaron Freedman, Moody’s Investment Services lead analyst for Barbados.
“That’s one of the reasons why Barbados has been so reluctant to do this (austerity) in the past because it knows how delicate the state of the economy is right now. Barbados is caught between a rock and a hard place and in that respect it is very similar to countries in Europe where you need austerity to reduce the deficit and slow down the growth in debt levels and stabilize them and, hopefully, ultimately to reduce them.”
A European country the Moody’s analyst had in mind was Ireland which was forced to turn to the International Monetary Fund (IMF), the European Central Bank and the EU, the troika as Wall Street calls them, for financial assistance, much like Greece and Portugal. The help came with strings attached: strict conditions that slowed down demand for goods and services and increased unemployment which at one stage had reached 14 per cent.
Does that mean Barbados may have to follow in Ireland’s footsteps by going to the IMF and other international financial institutions and accepting an austerity plan?
Freedman said the answer would depend on the nature of any IMF deal.
“It could potentially help,” he said. “If we look at Europe and we take the examples of Ireland and Portugal, it was international support, including the IMF and the European Union; they provided the needed support and it came with very strict conditions attached to it. Those conditions were very painful and continue to be painful. But at the end of the day, Ireland appears to be in the process right now of regaining market access and that happened in large part because of the support it received and to the adjustments that it made. I don’t want to say that Barbados is in Ireland’s position. Ireland was in a crisis situation and I don’t know that Barbados can yet be said to be in a crisis situation. But that doesn’t mean that a similar solution cannot help it as well.”
Late last month, the IMF sought to keep the pressure on Ireland by warning against slackening off of the austerity plan. Minister of Finance, Michael Noonan had said that this month’s budget might not be as stringent as planned but after disbursing its latest aid tranche, the IMF should maintain its fiscal consolidation programme to protect its regained access to financial markets.
Ireland’s Central Bank is now predicting growth in GDP of 0.5 per cent this year and two per cent next year, down 0.2 per cent and 0.1 per cent, respectively, from earlier projections. It has seen the jobless rate fall to 13.3 per cent, the lowest rate since March 2010. It expects personal spending to contract 0.4 per cent this year but rise by a similar amount in 2014. Investment is also expected to rise this year and in 2014. Exports are also expected to increase by less than 2 per cent in 2013 but by 6.6 per cent next year.
The Central Bank warned that Ireland’s economic recovery was “extremely fragile”, hence the reason it was “carefully optimistic” about the future.
The economic picture in Barbados is different. The island has slipped back into recession. Its tourism industry is sliding, a major bank is planning layoffs and business closures are continuing.
But Freedman, who saw some of Ireland’s troubles in Barbados, isn’t optimistic about the island’s near term chances of recovery and has warned that its credit rating may be downgraded again if things get worse.