Wednesday, April 17, 2024

WHAT MATTERS MOST: Worst managed crisis

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A comparative analysis of Barbados’ economic crises of 1982-83, 1992-93 and 2013-15 reveals among other things that: (1) 1992-93 was the worst crisis; (2) the current crisis is the worst managed and (3) it is possible to avoid devaluation of the Barbados dollar.
The most fundamental political difference however is that solutions to the first two crises focused on reducing government expenditure without slaughtering specific social programmes.
When the crises are evaluated on a set of seven objective economic criteria, the finding is clear that the 1992-93 crisis grappled with the worst levels of foreign reserves, economic growth, unemployment and salaries and wages’ increases.
In contrast, the current crisis has the lowest inflation, the highest level of foreign reserves’ coverage, the lowest fall in economic growth and the lowest unemployment rate. In 1982-83, public sector workers received salary increases and the country’s national debt was at its lowest.
Two things distinguish the current economic crisis from the previous two: the size and structure of the fiscal deficit, and the level of the national debt.
Typically, fiscal deficits are realized from the size of the government’s capital works programme. It is now the case that the fiscal deficit is almost $900 million, before a capital works programme is considered. This is the change in the structure of the fiscal deficit that is a direct result of poor economic management and even poorer political judgement.
The continued effort to characterise the current economic crisis as the worst is done without reference to an objective set of criteria and this is designed to push the blame onto the international economic environment rather than poor domestic policy choices.
Unlike the two previous crises, the management of the current fiscal/economic crisis started in 2010 with the first Medium-Term Fiscal Strategy document which failed miserably in its execution. This was followed by a revised strategy which failed even more miserably.
The most recent attempt at executing a fiscal strategy occurred in August 2013 and by December it was updated after the visit of the International Monetary Fund (IMF) team to conduct the Article IV consultation. Having prevented the IMF from conducting a similar consultation in 2012 just prior to the general election of 2013, it was discovered that the economy was in much worse shape than was being revealed by the Government.
By the end of the fiscal year 2014-15, it would have taken the Government over five years to implement a fiscal strategy programme. However, the proposed size of the fiscal deficit of 6.7 per cent of GDP would be as large as the fiscal deficits at the start of the economic crises in 1982-83 and 1992-93. This more than anything else demonstrates the lack of quality leadership in the current fiscal crisis confronting Barbados.
In 1981, Prime Minister Tom Adams held a Press conference that attracted about a dozen journalists and took questions on the state of the Barbados economy, especially the fiscal condition at the time. He led the country successfully through the process that was designed to cut the deficit and prevent the printing of money at the Central Bank from eroding the foreign reserves.
In 1991, Prime Minister Erskine Sandiford took charge of the economic crisis and clearly outlined that he was prepared to address the issues, with the condition that the dollar would not be devalued. History will be very kind to his efforts at restoring stability to the country’s finances. Unlike the current administration, he never pursued a programme of cutting vital social services associated with developing our human capital, yet he succeeded in reducing government expenditure.
Given the history, no government should ever be able to repeat what was done over the last five years to this country’s finances. The current fiscal condition could have been avoided if attention was paid to the way previous governments managed our fiscal crises. Instead, the current administration buried its head in the sand and played all politics by putting the responsibility on the international economic environment alone.
The country now confronts the challenges of raising foreign exchange reserves and reducing the highest ever fiscal deficits in the face of low economic growth, high national debt while maintaining a fixed exchange rate.
The IMF observed that “while adjustments in these circumstances often rely on currency devaluations, staff encountered universal support across all stakeholders for maintaining the current exchange rate peg”.
The 1992-93 programme proved successful on the back of an internal devaluation that came with costs and sacrifice.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email mascoll_clyde@hotmail.com

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