Perhaps the most encouraging news from the Central Bank’s review of economic performance in 2014 is that the Primary Balance (the balance before payment of interest on the debt) for April – December 2013 fell from $203.2 million to $7.0 million for the same period in 2014. In this connection there were notable decreases in spending on wages and salaries and on transfers and subsidies. Although playing a less critical role, increases in revenues contributed in no small measure to this improved fiscal performance. Instead of a steady decline, revenues increased by 7%.
For me this is evidence that the fiscal consolidation program is achieving results. The 2014 April to December estimated fiscal deficit fell by $149 million from the 2013 April to December level of $689.5 million. Total Revenue for April to December 2014 increased by $95.3 million compared with the same period in 2013. Current Expenditure decreased by $57 million for the same period in 2013 and 2014. It is important to note, however, that while we are at the end of calendar year 2014, we are not yet at the end of the 2014-15 fiscal year. This means that unless the strictest discipline in government spending is maintained, we will end the 2014-15 fiscal year with a deficit far exceeding the 7% target. Achieving this target would go some way in vindicating those who claim that recent rating downgrades were not justified. Failure to achieve them would delay the prospect for reversal of recent downgrades by at least another budgetary cycle.
Restoring macroeconomic balance to an economy that has been in decline for the last five years may be compared to going on a strict diet after prolonged dietary excess. The benefits of corrective action may be considerable and the discipline necessary, but it is not fun. The social and economic costs in lost incomes and employment are felt immediately, while most of the benefits will be realized in the medium and longer term. We should not be surprised then that growth is illusive or negligible and that unemployment continues on an upward trend. For those who at this point are tempted, for whatever reason, to declare victory and go home, I would urge reflection on the following:
- Between December 2013 and 2014, foreign exchange reserves fell from $1.14 billion to $1.05 Billion.
- Nominal GDP increased by 1.2% between calendar 2013 and 20114, while the interest on the debt grew by 9.8% April-December 2013 compared to the same period in 2014.
- The ratio of interest payment on the debt to Total Revenue was 32% for calendar year 2014.
- For the financial year 2013-14 the fiscal deficit was 12.3%.
- The Gross Public sector Debt/GDP Ratio was 107.7%.
- Even with a much improved Primary Balance, Government will have to continue to borrow to pay the interest on the debt.
The above are not projections or hoped for results from actions taken or yet to be taken. They are recorded in the most recent published data. They describe an economy marked by macroeconomic imbalances that are unsustainable and that present worrying risks to investors and creditors. Our survival will depend on obtaining financing for current consumption and for the investments necessary for a return to growth. The terms and conditions of such financing will depend on our demonstrated ability to sustain a program of fiscal discipline and efficiency in producing goods and services.
To complicate matters further, there are two competing narratives on where we are and respective outlooks vying for public attention: (a) the Central Bank focus on preliminary evidence that the fiscal consolidation program is yielding results, and (b) and the reality, as Standards & Poors puts it, of “large fiscal deficits, a high debt burden that continues to rise, and narrower financing options.”
I would be remiss if I did not include reference to the statement to Parliament made by the Minister of Finance on December 15, 2014 on the way ahead. From that statement I must conclude that the Minister saw, in the words of the Jamaica Sca song, “two roads before [him]” and concluded that he did not have to “take [his] choice.” The following are key points from that statement as reported in the Press and grouped by topic:
Duration of the Reform Program
Is it my imagination or are these conflicting statements?
- The budget will be presented in April 2015 at the end of Government’s 19-month stabilisation programme.
- The reform programme has been extended until April 2016.
The Fiscal Deficit
- The targets have largely been reached in the attempt to reduce the fiscal deficit to 6.6 per cent of GDP by the end of March 2015. There will be no new taxes.
- There will be smaller expenditure cuts.
- There will be more efficient tax collection.
- A tax amnesty is being offered across all tax categories.
- The Municipal Solid Waste Tax will be revisited.
- Government can’t tax or cut our way out of a recession.
If the target fiscal deficit of 7% of GDP is to be reached, the Minister will have to double down on spending discipline and revenue enhancement, and not the other way round.
Reform of State Enterprises
- There will be reform of some state-owned enterprises.
- This will be done in four clusters: (1) Urban and Rural Development and National Housing Corporation; (2) National Sports Council, Wildey Gymnasium and Kensington Oval Management Inc.; (3) Barbados Tourism Investment and Needham’s Point Development; (4) Needham’s Point Management Inc. and Hotels and Resorts Inc.
- This will be done with a full consultation of the Social Partnership.
This element of the reform program bids fair to drag on indefinitely.
- There will be a national discourse on education, health care and environmental management.
- The year 2015 promises to be an exciting turn around for Barbados.
- The Minister concluded by saying Barbados was not yet out of the woods and we must stay the course.
Growth prospects depend heavily on investment financing, much of it from external sources. The willing ness of foreign creditors and investors to provide the hoped-for financing will depend on the demonstrated ability of Government to sustain the reform program, especially in the area of fiscal discipline. We are indeed not yet out of the woods.
Two coins in the fountain.
Which one will the fountain bless?