The failure to take care of Barbados’ fiscal problems, notwithstanding the preparation of the first fiscal strategy document in 2010, now threatens the previously solid reputations of some of the country’s major institutions – the labour unions, the Central Bank, the National Insurance Scheme (NIS) and the credit unions.
Currently, the labour movement is fighting public perception that it has been weak and very accommodating with the Government. It is a perception that will persist. The movement accepted that a public sector job is more valuable than a private sector one. This view sought to justify the creation of public sector jobs in a declining economy to counter job losses in the private sector.
Such a view is predicated on increasing taxation in the face of less aggregate spending. Both households and businesses are asked to sacrifice their already reduced spending power to allow the Government to spend more. This is a case of economic ignorance parading as political savvy. Such thinking has a short shelf life.
The failure to take care of the fiscal problems benefited the labour movement as public sector jobs were created at the expense of existing workers for short-term political gain.
In accommodating the Government’s excessive spending with the printing of money, in the form of advances and holdings of treasury bills, the Central Bank’s ability to earn profits has been strangely compromised in recent years. History shows that the Central Bank has been most profitable during periods of economic recession. The question is, why is it now making losses?
The bank’s foreign investments have earned less income over the last three to four years, but this does not explain the losses of the bank. It is clear that domestic activities are mainly responsible for the losses.
In 1992, the bank made its biggest profit of $30.2 million, followed by $15.0 million in 1993. The numbers reveal that most of the increase in income came from interest earned on advances to both commercial banks and the Government in particular. In addition, interest was earned from the purchase of treasury bills.
Of the $25.8 million in income from advances earned by the Central Bank in 1992, advances to the commercial banks accounted for just $7.3 million. This means that advances to the Government made up a significant portion of the residual. It is true that the level of interest rates was higher in the early 1990s but there is clear evidence to show that interest rates
have been deliberately suppressed to reduce the cost of debt to the Government.
The Government is not only being accommodated by the bank through the excessive printing of money, but the cost of debt is being contained. Unfortunately, this is affecting the profitability of the bank.
In the circumstances, the bank has to be recapitalised by its only shareholder, the Government, which does not have the wherewithal to do so, unless it issues some form of securities.
The failure to take care of the fiscal problems has not benefited the Central Bank, which is now finding itself in need of restructuring.
The National Insurance Scheme has carried its fair share of the burden of financing Government spending since it was reformed. Unfortunately, it is too restricted in the amount of foreign investment in which it can engage and therefore has to rely too heavily on local investments. The Government takes advantage of this reality, but there has to be a limit to taking so many eggs from one basket.
Given the concerns raised about the investment portfolio of the NIS in the past, it is again unfortunate that the current fiscal problems have been pursued without reference to the implications for the most critical “financial” institution in Barbados.
The progress, not so easily won since Independence, is being seriously threatened by an administration that failed to see the bigger picture. It is now the case that the youngest among us will not have access to an educational system that appreciated its role in redressing social imbalance, and a health system that minimised the ability to pay as a way of giving us access to the most precious social good on earth.
Put the consequences for our major institutions, including the University of the West Indies and the Queen Elizabeth Hospital, of the current fiscal crisis together and then imagine a shattered credit union movement on top of it all.
Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.