Photo courtesy: Andrew Hulsmeier
I have searched the latest Central Bank Review in vain for signs of progress in arresting the downward slide in our economic fortunes. Whether measured against the stated goals of the GOB as outlined in the statement of the Minister of Finance to Parliament in November 2013, or the more detailed and comprehensive program of the IMF outlined in a press conference in February 2014, we are so far failing to meet the targets necessary for reversal of the five-year old trend of widening fiscal and balance of payments imbalance, mounting debt, and economic stagnation.
While it is true that some of the targets will require time to create the desired impact, it is not too early to assess whether a more disciplined approach to implementation of the program is warranted. This review of the extent to which stated goals are being met will therefore look, for the most part, at four or five key indicators.
Foremost among indicators of progress is the fiscal deficit. The expected deficit for the fiscal year just ended (2013/14) was 9.6% of GDP. The actual deficit was 11.3% of GDP – 36% higher than the 2012/13 deficit of 8.3% of GDP. Until the fiscal deficit is brought under control, neither will the level of indebtedness nor the continued erosion in the level of foreign exchange reserves. In other words, the exchange rate will remain under threat. In monetary matters, perception is reality, so an adequate level of reserves is in part dependent on public perception.
Chief among the causes of the widening fiscal deficit was a precipitous fall in government revenue in the amount of $245 mil. The two juggernauts on the expenditure side –Transfers and Subsidies and Wages and Salaries — registered no reduction in outlays. For 2013/14, the Central government wages bill remained at 10.3% of revenues, the highest in the region. Indeed, total expenditure continued to rise even as total revenue continued to fall. Unless this trend is reversed, the entire adjustment program could be derailed.
The picture of progress in the prospects for debt and debt service reduction is no less disappointing. Empirically, a debt (gross) to GDP ratio of 90% or above is far more often than not associated with other unfavorable trends and outcomes. For individuals and countries alike, excessive indebtedness is both a cause and effect of wider economic and financial dysfunction. Barbados Gross Debt to GDP at December 2013 was a little shy of 100% (97.9%). Even more worrying is the fact that interest on the debt as a percent of revenue climbed from 23.9% in 2012/13 to 28.9% in 2013/14. Of every dollar in revenue collected, 30 cents goes to servicing the debt.
In the financial year 2012/13, the fiscal balance before payment of interest (the primary balance) left the princely sum of $8.0 mil to service debt and contribute to the financing of capital works. The entire debt service of $560 mil. (minus $8 mil) had to be borrowed. In the financial year just ended, the primary balance on current account was negative $203.3 mil. (-$203.3 mil.) before payment of interest on debt to the tune of $606.9 mil. This can hardly be described as being on the road to recovery. No wonder then that the rating agencies and our creditors are nervous. Time will tell what form this nervousness will take.
With negative savings on government’s current account, and dependence on borrowing to finance rising debt service and current expenditures (consumption), there is little space remaining for private borrowing on reasonable terms and conditions to finance government’s investment program. Until the investment program gets off the ground, growth is unlikely to resume. Moreover, the Central Bank’s review shows that, apart from borrowing from private capital markets, Government receives little by way of foreign project financing and nothing at all in the form of support for policy reform. As a result, the burden of policy reform has to be borne entirely by Barbados taxpayers and consumers.
The option of borrowing from multilateral sources (IMF, IDB, and CDB) would depend on a more unequivocal commitment to our program of policy reform in the form of disciplined implementation of its provisions. The record of implementation in the last few months – not to mention the absence of pronouncements of support for the program – does not inspire confidence that either the authorities or the public are fully committed to the program. In the words of Jeeves of P. G. Woodhouse fame, we are at an “armpass.” Ambivalence about its benefits leads to lackluster implementation. Poor implementation leads to dubious results and delayed recovery. The absence of progress in recovery undermines investor and creditor confidence.
Meanwhile, the investment program continues to languish for lack of funds, the economy continues to stagnate, the fiscal deficit continues to widen, and the debt burden to increase and undermine investor confidence in the policy environment into which they would be risking their funds. Since there is no financial support at stake, government feels free to amend and delay implementation of the existing program entirely at its own convenience.
I am convinced that the calculus of costs and benefits of the reform program has to be changed. Both the authorities and the public need a short-term (immediate) incentive in return for the present pain of austerity, however justified that austerity may be.
It is time to fully involve the IMF in a Stand-by arrangement. In addition to providing much needed financial support, this would open the door to more fruitful talks with the IDB and other multilateral lenders for lending of their own. It would also make it possible to get funds from the capital markets on more favorable terms and conditions. A formal IMF PROG would also restore private sector confidence and trigger new investments.