Thursday, April 18, 2024

WHAT MATTERS MOST: Fiscal deficit still a serious threat


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The Barbados economy has been poorly managed in the aftermath of the world economic recession that was in evidence in the last quarter of 2007 and worsened in 2008.

Over the period, the foreign reserves were consistently reported as adequate. It was the one positive that Barbadians heard and the one thing that prevented the country from going to the International Monetary Fund for a formal programme.

When the foreign reserves fell significantly in the first seven months of 2013, it was suggested that the reasons for the fall were unknown. However, there was no denying that the home-grown fiscal strategy put in place in 2009/2010 was poorly conceived and had to be revised because the targets were not being met.

The truth is that the foreign reserves were holding, notwithstanding the failure of the Government’s fiscal strategy. There were two major reasons for the stable reserves: the country’s import bill contracted significantly in response to the fall in economic activity, and the country was still able to borrow from abroad.

In the meantime, the Central Bank of Barbados found an alternative way to print money that would take longer to erode the foreign reserves.

As a consequence, the impact of such new money was slower in the sense that the foreign reserves started to deteriorate in 2013, some four years after the implementation of the fiscal strategy. It was stated that the reasons for the deterioration were unknown. It is impossible for the policymakers not to know the sources of the decline in foreign reserves, given that a daily position of the bank’s important assets and liabilities is made available to them.

After the reserves came under severe pressure last year, the Minister of Finance delivered a new 19-month fiscal adjustment strategy to the Parliament of Barbados in August 2013. The bold objective of reducing the fiscal deficit by a whopping $760 million for the coming fiscal year 2014/2015 was pronounced.

In spite of the draconian measures he imposed, the fiscal deficit was reported to have improved by a mere $5 million after ten months of the programme.

Last week, the governor of the Central Bank told a CIBC world markets panel discussion on the Caribbean that there was no evidence of an economic recovery as yet. Indeed, there is increasing evidence that the economy is contracting and this would be consistent with the newly stated objective of protecting the value of the Barbados dollar.

In fact, the governor correctly proposed that “the Barbados adjustment strategy is to protect the value of the Barbados dollar by aggressive measures to contain aggregate spending in line with foreign exchange availability”. To contain aggregate spending means reducing economic activity in the short term. Therefore the aggressive measures are not intended to cause economic recovery. They are designed to dampen consumption which is the major source of aggregate spending in an economy.

The governor also talked about significant future investment over the next three years. The difference now is that the investment is tourism-related. Over the last four years, the previous investments of which he spoke did not materialise so the narrative has changed.

Prior to 2013, the primary focus was not the foreign reserves but rather how to finance the galloping fiscal deficit. The truth is this still has to be the primary focus in the foreseeable future as the means by which the fiscal deficit is financed is still the most serious threat to the country’s foreign reserves.

Another major problem has emerged, that is, Barbados is in a growth trap and there needs to be an increase in aggregate spending, while switching new public sector spending from consumption to investment. The latter has to be constrained by the amount of annual debt servicing payments.

The time has come for recognising that the aggressive measures are going to push the Barbados economy to rock bottom by the end of the current fiscal year.

The notion of economic recovery is inconsistent with such measures that are designed to dampen domestic spending and imports.

The cries of the people and the private sector are already being heard.

Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.

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