Let us begin with the good news. There is a return to positive – or at least not zero or negative — growth. The rate of inflation is less than half that reached as recently as 2012. Foreign exchange reserves, the Central Bank’s preferred indicator of economic stability and health, are stable when measured by weeks of imports they can finance. Tourism, on which so much of our employment and growth prospects depend, is showing modest signs of recovery and growth. Finally, the fiscal deficit is officially pronounced to be 7.2 percent of GDP at the end of the 2014/2015 financial year, compared to 11.2 percent of GDP at the end of the previous financial year. On the other hand, the rate of unemployment is rising, the sugar industry has all but collapsed, and the construction and distribution sectors are stagnant. There is grist for the mills of both the sceptics and the believers.
This confused picture should come as no surprise. We are after all in the midst of a reform program that requires discipline and intestinal fortitude if its goals are to be met. Indeed, two of the three main challenges to macroeconomic stability cited by Standards & Poor’s in its rationale for the December 2014 downgrade (a high debt burden that continues to rise and narrower financing options) show, at best, little or no signs of abating. The third (large fiscal deficits) are not yet at levels hoped for by rating agencies, private or official lenders, or the Government of Barbados.
In his August 2013 Budgetary Proposals announcing the reform program to deal with unsustainable levels of macroeconomic instability, the Minister of Finance stated that “it is the aim of government over a 19-month period, to cut the deficit to a target that falls below 3.0 percent of GDP by 2014/2015, and thereafter continue to keep the deficit on a sustainable path.” In an article published in Euro Money in January 2014, the Governor of the Central Bank stated, “Projections are for a deficit of 5% of GDP for fiscal year 2014/15, when the budget cuts will have full effect.” Subsequently, government set a target of between 6 and 7 percent of GDP at the end of 2014/15 as the target for the fiscal deficit. In December 2014 the 2014/15 target was further revised to 7.2% of GDP.
Quite wisely, the Minister of Finance has extended the implementation deadline for the fiscal consolidation program to March 2016. This is a necessary course of action since it is of the utmost importance that the fiscal deficit is brought down to sustainable levels. Investor confidence, and therefore growth prospects, borrowing options (both domestic and foreign), and the ability to maintain adequate levels of foreign exchange reserves, all depend on the ability of government to restore fiscal health. But in economics as in medicine, all remedies come with side effects. Because of weakened demand, the short-term effect of fiscal consolidation is slower growth than would have occurred if fiscal excess had been allowed to continue.
The end of the 19-month period initially chosen for implementation of the reform program would seem a good time to ask ourselves, not only if there is progress in achieving fiscal targets, but what the actual contraction in the output of goods and services has been, compared to what was estimated as necessary for achievement of those targets. The cumulative impact of the program is 2.3 percent of GDP, compared to at least 5 percent of GDP. Why then, you may well ask, continue on this path — especially since there are those who argue that restoration of growth would make austerity unnecessary, and perhaps simultaneously provide a solution to the problem of high indebtedness.
As is almost always the case in the choice of policy options, optimal outcomes depend on context and circumstances. Maintenance of the fixed exchange rate regime depends on adequate levels of foreign exchange reserves. With prolonged under performance of the tourism and international business and financial services sectors, government resorted to foreign borrowing to bolster reserve levels. As borrowing terms became less favorable with rapidly increasing debt levels, payment of interest on the debt accounted for an ever increasing proportion of current expenditures and have become a drag on the fiscal account. The stage has now been reached where an ambitious investment program that would revitalize growth prospects is almost entirely dependent on private financing. Even if the projects are commercially viable, how much of this financing can be obtained without government guarantee – and therefore higher government indebtedness — is open to question.
Policies and actions to revitalize our main foreign exchange earning sectors are vital to recovery, but are not a substitute for fiscal discipline. In this connection, it cannot be too strongly emphasized that restoration of investor confidence is a sine qua non for a return to growth. Barbados has many advantages and attractions for investors. At this time, however, a stable macroeconomic environment is not one of them. Without it, we will be going forth into the world to compete for investment flows with one hand tied behind our back.
Foremost among policy options are measures that would bring the trend of an ever-increasing debt service burden as well as a Debt to GDP ratio in excess of 100 percent more in line with levels that would restore financial market confidence and increase government savings. Rationalization of the extensive and duplicative network of government enterprises/statutory bodies and our social programs in health and education – however laudable on grounds of employment creation and social mobility – will work to our detriment if they are wasteful and pursued without due regard to efficiency and fiscal discipline.
The plain truth is that fiscal consolidation/austerity (call it what you will) was undertaken out of necessity and not by choice. We are behind in our implementation deadline, in achievement of our targets, and the amount of remedial medicine that needs to be taken for achievement of our stated goals. We are in recovery, not recovered.