Tuesday’s release of the Central Bank of Barbados’ (CBB) review of Barbados’ economic performance for the first nine months of 2016 left Barbadians with a lot to chew on. The good news is that after years of economic recession or stagnation, the economy is estimated to have grown by 1.3 per cent so far this year. The Central Bank attributed this outturn to growth in tourism (up three per cent), business and other services (up three per cent), and construction (up five per cent).
It is encouraging that the economy may be finally on the upswing. With Barbados’ nominal value of goods and services produced annually (nominal Gross Domestic Product or GDP) declining in four of the last six years, Real GDP growth in excess of one per cent, though modest, is a welcome development. It signals that the economy may be finally embarking on a genuine recovery. Despite this good news, however, I would suggest that Barbadians receive it with cautious optimism rather than euphoria.
It is important to note that the evidence clearly suggests that lower oil prices, which Barbadians have been benefiting from, have been a boon for the economy. The economic growth reported for the period January to September, the improved current account position of the Balance of Payments and the Foreign Exchange Reserves Cover, can also be attributed to the relatively lower energy costs that Barbados has been experiencing. This view, especially with respect to the economic growth, is supported by the CBB’s report of negative inflation during the last nine months.
Other positive highlights from the CBB’s review are as follows:
–– Barbados’ Current Account deficit of the Balance of Payments fell to 2.5 per cent of GDP compared with 6.1 per cent of GDP a year ago;
–– Net capital inflows were steady, though still below historical levels;
–– Barbados’ import cover of foreign reserves was steady at 14 weeks, on account of low oil prices; (Caveat: Net International Reserves have actually been on a declining trend);
–– The general price level was reported to have declined by 1.2 per cent, no doubt due to low oil prices;
–– Tourism spending has now caught up with arrivals i.e. on an upward trajectory;
–– So far this year, domestic exports are trending higher than the first nine months of last year; and
–– Average loan rates are lower due to the Central Bank of Barbados’ monetary accommodation of central government – 6.8 per cent compared to 9.6 per cent in 2008. It is likely that the lower mortgage rates have been a stimulus for residential construction.
The bad news is that the Government’s level of debt remains worryingly high and is rising. Moreover, the fiscal deficit (i.e. the extent to which Government expenditure exceeds Government revenue) continues of be stubbornly high. This is unsustainable and places Barbados’ future development at considerable risk. It is clear that the fiscal policy of the Stuart administration is only succeeding in stifling economic growth and dampening import demand. Existing measures are not having the desired impact on deficit reduction.
It is time to change course! The Central Bank knows this. The Governor of the Central Bank has hinted as much. “The pressure of Government’s ongoing cash flow needs is reflected in the failure to narrow the gap between the Barbados and US three-month Treasury Bill rates . . .” –– a euphemism for saying that Government has failed to sufficiently reduce its fiscal deficit. The CBB has had to create $114 million so far this year to help finance the Government’s fiscal deficit.
Against this background, it is shocking that the CBB did not report figures for the most recent fiscal deficit as a percentage of GDP. This is a glaring omission. However, what is clear from Table 4 of the report is that the fiscal deficit so far this calendar year is higher than it was during the same period last year –– $241.9 million this year compared to $151.5 million. Government revenues are lower than they were during the same period last year, and Government expenditure is higher than during the same period last year.
The higher expenditure is largely due to domestic interest payments (Table 4 of the report). What cannot be disputed is that a fiscal adjustment of at least $114 million is needed to restore any semblance of prudence to Government’s financial management. In addition to this malaise, the International Business and Financial Services Sector, a major source of Barbados’ foreign exchange earnings, economic prosperity, and Government revenue has declined this year. Foreign Direct Investment (FDI) levels are still too low (See Table 1, Capital Inflows). Barbados needs at least $400 million to $500 million in annual capital inflows.
The Barbados economy still faces significant headwinds, namely the fiscal drag of a high debt burden, less than optimal FDI, high taxation and public expenditure, and a slow growth external environment –– primarily among its large industrial trading partners i.e. USA, UK, Canada and the EU. This can be largely attributed to a failure to act decisively and a crisis of confidence in the economic stewardship of Barbados.
The options for fixing the core problem facing Barbados have narrowed. Indeed, I can see no viable way out without a policy of privatization, debt refinancing, strategic expenditure cuts, an ease in taxation and of course more robust FDI. Given where we are at, the question can no longer be, “Should the Government privatize or not privatize?” The million dollar question is, “What should a programme of privatization look like?
On the subject of questions, I have two for the Governor of the Central Bank:
1. What has informed the selection of Barbados’ tourism competitors in Figure 2 of the report? Peer jurisdictions such as The Bahamas, St Kitts and Nevis, St Barts, Antigua and Barbuda, St Lucia, Martinique, St Thomas, Grenada, Aruba, France, Spain, Greece and islands in the Pacific Ocean are notably absent from the chart.
2. With respect to “Figure 6: Gross Government Debt –– International Comparison” of the report: What is the context for selection of the countries that Barbados is being compared with? What point is the CBB trying to make? With the exception of perhaps Singapore, many of the countries are either countries with major floating tradable currencies and/or a strong industrial base, or they are slow growth economies. They are either more economically resilient than Barbados or they are stuck in economic stagnation.
(Carlos R. Forte is a Barbadian economist and Commonwealth Scholar. Email: firstname.lastname@example.org)