THE ECONOMICS AND POLITICS OF THE 2013 IMF CONSULTATION WITH BARBADOS
by Walter Blackman
The Barbadian economy is small, fragile, and open. Because of its openness, it has always been, currently is, and will always be susceptible to the effects of exogenous shocks.
The Barbadian society is materialistic and consumer oriented. Society is defined here as individuals, businesses, and Government combined.
The continual clash between economic capacity and societal need has naturally demanded a sensible response of balance and equilibrium from policymakers throughout the years. Those administrations, which recklessly put the Barbadian economy into a state of disequilibrium to satisfy their political needs, were voted out of office.
If we adopt the government’s philosophical attitude of putting the society first, then we can attempt to trace how our current economic problems developed.
A young man goes into a shop and orders whiskey. His friend goes to town and purchases a refrigerator. Both of them spend Barbadian dollars, but the country uses foreign currency to purchase the products they bought. When we add up all of the spending by individuals and businesses, the foreign currency the country has to pay becomes quite significant. When we add in government, the foreign currency requirement becomes gigantic.
The fiscal objective of a responsible Government is to achieve equilibrium. That is, to spend what its revenue can support. If the government records a deficit, expenditure needs to be cut to fall back in line with revenue. If no action is taken, then the deficits widen.
Widening fiscal deficits not only mean that Government is spending more Barbadian dollars than it has collected, it also means that Government is crowding out and suppressing the business sector by borrowing most of the available investment dollars to pay for its excesses. Furthermore, excessive amounts of foreign exchange must be used up to pay for all of the goods and services the government is purchasing from abroad, including fees paid to foreign consultants and advisors who perform work that Barbadians can do.
To continue our trace, let us assume that the society has BDS$8 billion available to purchase goods and services. Let us assume also that 70 per cent of this money supply will be spent, and that we import 80 per cent of the products we consume. Let us prudently add a foreign reserves buffer representing three months of imported supplies into the mix. When we do the math, we find that having BDS$8 billion available (the money supply) creates a need for US$2.8 billion (foreign reserves). Where is this foreign exchange coming from? Who is planning for it? What strategies have we put in place to consistently generate it?
The Central Bank of Barbados (CBB) and the foreign reserves of Barbados have been required to come in at the back end to bear whatever economic and financial pressures have been created through the “society first” approach.
Having seen the damage created by the government’s “society first” approach, the IMF is recommending that we adopt an “economy first “approach. Now, the focus is switched towards the country’s economic and financial capacity, and the fundamental question then becomes: If we have only US$1 billion in foreign exchange, how much Barbadian money should be “supplied” to society? The answer is roughly BDS$ 2.9 billion.
Under this approach, when we compare the desired BDS$2.9 billion needed to keep the system in balance, against the actual BDS$8 billion that has been made available to satisfy society’s needs, then we can clearly see the disequilibrium that has been created and the immense pressure that has been brought to bear on our foreign reserves. This is the heart of our country’s fiscal and monetary problem and almost every recommendation from the IMF is aimed at dealing with it.
The money supply must now be gradually choked off to reflect foreign exchange capacity. This means that the spending power of individuals, businesses, and government must be reduced. Regardless of whatever the society wants, limited economic and financial capacity will be the new constraints that must be respected.
What are the political ramifications emerging from the IMF consultation report?
Relying upon the CBB to finance government’s widening deficits could never be a sustainable strategy. The Governor of the Central Bank has maintained this position all along, so we can reasonably conclude that the Minister of Finance has been disregarding the Governor’s advice. To immunize the country from such a risk, the IMF is recommending that the Central Bank Act be amended to prevent the Ministry of Finance from overruling the Central Bank.
Our current system forces the Governor of the Central Bank to accommodate or facilitate the wishes of the Minister of Finance, seemingly beyond reasonable limits. To use Dr. Courtney Blackman’s words, our system turns the Governor of the Central Bank into “a creature of the Minister of Finance”. There will come a time though, at which point the Governor should resign or be removed, before he is pressured politically to put the discipline of “equilibrium” economics at risk. To correct this unsatisfactory state of affairs, the independence of the Governor of the Central Bank needs to be established, and he should be delivering his reports from and to The House of Assembly.
With the IMF poised to play a major role in the medium-term economic management of Barbados, the difference in perspectives between Owen Arthur and Mia Mottley now produces a more tactical, rather than personal, flavour.
Owen Arthur appears to believe that the BLP should wait until the Freundel Stuart administration has signed a structural adjustment agreement with the IMF, after it has administered the unpopular medicine in an environment of economic decline, and then vigorously attack it when it is faced by dissent on the inside, and public anger on the outside. In short, Owen believes that the same stick that licked Sandy can be used again to cut Freundel’s backside. At the same time though, Owen must be acutely aware of a liability that he is carrying on his political balance sheet. The Government’s limited financial options today have been created by a monstrously high level of public debt. The Arthur administration contributed significantly to the piling up of that debt during its 14 years of existence.
Mia Mottley must be thinking that Owen’s approach carries some risks. Suppose the Freundel Stuart administration signs a structural adjustment programme with the IMF, meets all the prescribed targets, satisfies all of the conditionalities, and by 2018 has the Barbadian economy showing signs of growth thanks to a buoyant world economy? Having provided no alternative solutions to the country’s monetary and fiscal problems when the crisis had reached its zenith, Mia would see her task of capturing the government under such a scenario to be relatively more difficult. As far as she is concerned, it would be much better and easier to exploit the government’s vulnerabilities now and create conditions conducive to triggering its political downfall. Once she becomes Prime Minister, to her mind, the Barbadian electorate could be easily made to understand that it was the DLP political vagabonds and tricksters who indulged in excesses and lies and forced the country into the arms of the IMF. Thus, she will predictably plead the case that the Mottley administration has no choice but to administer the bitter IMF medicine.
Looking through the eyes of the Prime Minister, the situation is becoming dire. The IMF consultation report gives his administration a failing economic grade for making a worse public debt situation worst, for widening the fiscal deficit, and for putting the foreign reserves of Barbados under severe pressure. The economy of Barbados seems now to be in more danger than a tethered bald-pooched cat trying to escape the knife of an impatient Korean cook. Certainly, this cannot be the outcome that the government is paying so many advisors, consultants, and ministers to produce.
The economic and financial policies pursued by the Minster of Finance have resulted in failure, disappointment and now despair. Astonishingly enough, he has also admitted that investors have been pulling their money out of Barbados because they have lost confidence .The time has now come for the PM to allow his Minister of Finance to retire hurt. New economic advisors, financial consultants and innovative ideas must be sought to take the country beyond the medium term. Most importantly, the leader of the society must now become the leader of the economy.
The IMF has stated categorically that even if we succeed in meeting the cut in the money supply slated for 2014, “foreign reserves would remain below desired comfort levels and Barbados would require external financing in later years to maintain reserves above a notional threshold of three months of import”. This statement, to my mind, is the nearest anyone can come to suggesting that a structural adjustment agreement between Barbados and the IMF is now practically unavoidable. The twin devils of procrastination and indecisiveness look like they are about to deposit a weakened Barbadian government upon the doorsteps of the borrower of last resort.
The IMF is also warning us that because of a much higher debt burden and limited financial options on the part of the Barbados government at this time, any prescribed solutions, when compared to those of the 1992 agreement, will be much, much more devastating.
The urgings of Mr Ryan Straughn, Professor Michael Howard, and others for the Government of Barbados to approach the IMF earlier, when it had more wiggle room, must now be unanimously accepted as wise and visionary.
Yet, tough though the road ahead appears to be, the Government of Barbados must continuously seek to pursue policies that would stimulate economic activity. Barbadians are being exhorted and encouraged by government to become entrepreneurs on one hand, but are being frustrated and thwarted in their entrepreneurial pursuits on the other. One obstacle to entrepreneurial undertakings, frequently mentioned, is the length of time it takes to secure building permission from the Town Planning Department.
Given the scarcity of land in Barbados, government has already taken the road that led to high-rise public apartments. If we apply this thinking at the residential level, then we have reached the point where we can easily allow three-storey residences (2 floors for living, one for entrepreneurial pursuits). Government can now get involved in the process by highlighting safe and desirable building structures and designs. Plans for 1-3 storey buildings that satisfy government’s requirements would now be categorized as “prototype plans” and permission for building can be granted in a matter of days. Our masons, electricians, plumbers, and carpenters would welcome the work.
(Walter Blackman is a pension actuary, licensed by the federal government of the United States.)