A MAJOR WEAKNESS of the International Monetary Fund’s (IMF) Standby Arrangement programme is its lack of focus on economic growth. It is the most common adjustment programme available to middle-income countries.
It is used to stabilise the economy over a period of 12 to 24 months. An essential feature of this type of arrangement is performance clauses and phased disbursements of financial resources.
The performance clauses are designed mainly to control the printing of money by the Central Bank as a way of protecting the foreign reserves. The focus of which is to reduce the fiscal deficit. For the last eight years, the Barbados Government has been trying to reduce the deficit to an acceptable level. This has not yet happened.
If the Government decided that it was implementing a home-grown fiscal adjustment instead of going to the IMF, then to make a real difference, it was expected that greater emphasis would have been placed on growing the economy. This did not happen. The emphasis was on the fiscal numbers. Yet Barbadians now have to repay double the national debt at the start of 2009.
It is important to take a step back to put Barbados’ present economic situation in context. Since Independence, there have been five economic recessions (greater than one per cent decline in real annual GDP) in Barbados – 1974-75, 1981-83, 1990-93, 2001 and 2009. The third and the last have been the most challenging. What made the 1990-93 crisis challenging was the very poor state of the foreign reserves. This was never the case in 2009 and beyond.
In fact, it is argued that the lack of foreign reserves forced the then Government to go to the IMF in 1992. In similar vein, the adequacy of foreign reserves in 2009 gave the Government the comfort of not going to the IMF for assistance.
As a consequence of its decision, the most recent crisis has been plagued by the persistently poor fiscal condition of the Government. The ongoing effort to tax its way out of the problem is the major reason for the failure of the economy to adequately recover. This must be demonstrated by looking at: (1) how long it took the economy to come out of recession in the past, and (2) the time it took to get the economy back to its size at the start of the recession.
Over the last 45 years, the evidence shows that the time needed for the economy to return to growth ranged from one to three years. In the two earliest recessions, the economy returned to growth in two years. In the third recession in the early 1990s, it took three years. In the weakest of the recessions in 2001, the return to growth took one year. It may be surprising to some, but the Barbados economy grew, though marginally, in 2010 after going into recession in 2009.
The equally important issue of how long it took for the economy to get back to its size at the start of the recession is overlooked in the recent analysis. In the second recession that lasted from 1981 to 1983, it took until 1985 for the economy to get back to its 1981 size. While in the third recession, the 1990 economy size was reached in 1996. Seven years after the last recession in 2009, the Barbados economy has not yet reached its size of 2009.
The first two economic recessions were accompanied by high inflation, resulting from the first and second international oil shocks in 1973 and 1979, respectively. Unlike the first oil shock, the second triggered double-digit inflation rates between 1979 and 1982, which coincided with high interest rates in both the local and international markets. All the recessions were characterised by fiscal and foreign reserve problems.
The failure of the Government to target economic growth in the aftermath of the 2009 recession remains a mystery. It was suggested at the time that there was a need for an economic stimulus, which was rejected. A mere $90 million stimulus was rejected. A few months later, the Government economic spokesmen were advocating a stimulus of $600 million that has not yet come to pass.
On reflection, the egos of the economic advisers might have got in the way with respect to the notion that they can control the desires of politicians. Recently, Minister of Finance Chris Sinckler made his position on printing money and protecting the foreign reserves quite clear to his chief adviser. The spat will continue.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: [email protected]
