IT TOOK the current Democratic Labour Party (DLP) administration over 18 months to admit that the country had a fiscal crisis.
While in denial, the Government was busy trying to offend local economists but embracing the teachings of the International Monetary Fund. There is an old Barbadian saying that speaks to sour grapes which is more than appropriate to describe the attitude of DLP leaders to the economics profession.
This country has been well served by a profession that is here to stay, notwithstanding the unwarranted attacks from likely and unlikely sources. Caribbean economics has never been as complex as that practised in more sophisticated countries and does not need to be, once some basic principles are adhered to – the most basic of which is to spend within the country’s means.
It is the failure to adhere to this basic principle, and not the international recession, that is responsible for the country’s most pressing economic problem. Since 2007, the Government has spent seven times more in new expenditure than it has collected in additional taxes; and there have been new taxes.
In three years, the Government moved a surplus of $115 million in 2007 to a deficit of $530 million in 2010. The international recession is not responsible for this unheard of fiscal indiscipline. Prior to 2008, Barbados experienced its largest current account deficit ever of a mere $21 million in 1987.
Forgive me for repeating this message, but if the facts are denied then Barbados’ future will be compromised.
This brings me to the proposed sale of the National Insurance Board’s (NIB) shares in the Barbados Light & Power Company (BL&P). I cannot advise an individual because the circumstances of each individual shareholder are unknown to me and in any case the long-term horizon of an individual is far different from that of a Government or, more particularly, a national insurance scheme.
It was reported that the NIB is proposing to sell the BL&P shares because the rate of return is only four per cent. Therefore it is better to invest in Government bonds. This would be a remarkable revelation, given that the Fair Trading Commission (FTC) awarded the BL&P company a rate of return of ten per cent on the basis of the evidence presented at the hearing.
The approved rate of return was granted on the evidence of equity (shares) costing the company 13.5 per cent more than doubled the cost of debt (borrowings).
The intention is for the company to use the cheaper debt to change its capital structure in the future.
The notion that the company’s shares yield a rate of return of four per cent is false. Between 1983 and 2008, the company earned net income (profit) of $557 million but paid out only $155 million in dividends. So the shareholders opted to reinvest $402 million in the company’s operations over the period.
There can be no better long-term investment in town for the NIB, given the monopoly nature of the BL&P and the long-term obligations involved in managing pensions and benefits on behalf of individuals. The NIB has a monthly surplus to invest, so it does not need cash.
The Government’s fiscal crisis cannot be solved with the sale of the shares; it is not central government’s money.
The sale would bring in foreign exchange. If there is a fear about the future prospects of the BL&P shares, then there should be even greater fear about the future real value of the rate of return on government bonds.
The real fear is the poor decision-making of the Government and its capacity to invest in denial.
