There’s apparent consensus on one aspect of Barbados’ economy: it’s in crisis. Stunted growth accompanies fiscal and balance of payments deficits. Recurring sovereign debt downgrades persist despite austerity measures (layoffs, increased taxation, delayed attention to public utility provision) accompanied by Central bank and, reportedly, National Insurance Scheme accommodation supporting government expenditure.
It’s useful, perhaps instructive, to compare Barbados to Greece in its recent crisis – almost GREXIT – upon first confronting debt default on private banks’ loans before fighting ‘Official Europe’ and the International Monetary Fund (IMF) over continuing austerity measures to qualify for a bail-out. Greece borrowed heavily during heady days of Wall Street-led casino type operations of questionable lending and dicey derivative creation precipitated by an unfettered amorality allowable under deregulation.
European banks – French, German and Greek – had for years established loans with Greece that experts considered reckless. Even then, European officialdom perceived Greece as plagued by “tax evasion, corruption and oligarchic habits”, purveying economic statistics of questionable reliability. For instance, published debt to Gross Domestic Product (GDP) estimates of 6-8 per cent turned out doubled – 12.5 per cent. Unsurprisingly, Greece’s credit rating plummeted – in Bajan speak – through the eddoes!
Barbados’ problems began emerging in 2009. Two accidents, rather, crashes occurred. First, the 2008 Wall Street Meltdown – Great Recession. Shortly thereafter – the January 2009 CLICO crash. Their mention together doesn’t imply cause and effect.
What policy response? To the first, there was none. The Great Recession, it was argued, wouldn’t impact Barbados. Why? Possibly because much of Barbados’ tourism source market is not the USA. Considering globalization interconnectedness, non-response was a mistake.
The second misfortune triggered no clear remedial policy. Consider the Statutory Fund shortfall CLICO’s meltdown revealed – a sum in excess of BDS$300 million – a mere fraction of total exposure. Imagine Barbadians’ financial loss. More importantly, what negative economic impact was likely to and did occur?
Imagine a household head with holdings of $1.5 million in Executive Flexible Premium Annuity (EFPA) plus an ongoing insurance policy. Prudent conservative Barbadian onto a good thing! LG – life’s good. One pleasant Sunday morning, financial health evaporates! Apart from depression and suicidal thoughts, s/he must adjust.
Plans morph to indefinite hold, or abandoned. New income generation stalls, rippling impacts across the economy. Taxable income declines, expectations and confidence in the future among many deteriorate. Fiscal and balance of payments deficits worsen as UK policy and flagging economic conditions exacerbate declines in tourism receipts.
Layoffs reduce income levels while Value Added Tax (VAT) rate increase drives up consumers’ everyday costs at their moment of reduced capacity. Policy related to VAT increase appears inaccurately modeled. So, with falling income and employment levels, increased rates fail to generate projected revenue increase – disposable income, after all, governs consumption expenditure.
Apparently, no consensus solution exists. Current responses suggest further tax increases, privatization of state entities, approach to the IMF and devaluation. The latter seem separate responses; they are, however, one and the same. They offer immediate relief: funds at low interest to improve the balance of payments. Devaluation is projected to cut imports, increase exports with particular reliance on tourism receipts.
Privatization offers potential revenue generation enabling immediate fiscal deficit reduction. Problem is crisis conditions guarantee government asset sales yield fire sale bids. It is sub-optimal strategy to sell assets on an ad hoc basis when in fiscal trouble. Appraisers term this ‘forced sale’. Privatization works best when proactively developed, preferably in time of plenty.
Taxing already shrinking incomes shall create independently or in some combination: hardship for financially incapable among the population; private sector opposition including further postponement of investment projects populating the drawing board; likely outcry against previous generous tax breaks provided private sector interests hoping to address this very problem.
Who likely faces the burden of adjustment in this scenario? PAYE bread winners feel this first? Perhaps. Absent details, forecast hazardous.
Comparison with Greece becomes interesting. First, Barbados’ debt pales compared to Greece. Greek official and private debt exceeded 175 per cent of GDP at €323 billion. Austerity previously froze wages, increased taxes and took the axe to pensions. The Troika (European Commission, European Central Bank and International Monetary Fund) insisted Greece privatize state assets, extend austerity measures to health-care and welfare. Devote Greek income primarily to debt service.
Finance Minister Yanis Varoufakis figured differently. Greece should embrace manifest insolvency. He presumed debt forgiveness allowing “a proper resolution – to an agreement that involves debt restructuring, less austerity, redistribution in favour of the needy, and real reforms.” After a Greek referendum rejecting Troika conditions prompted no change, he resigned proclaiming he “… shall wear the creditors’ loathing with pride.” Think by analogy: Greece – intensive care; Barbados – emergency room.
Finance Minister Sinckler insists devaluation shall trigger his resignation. As a bald statement of intent, his thinking and meaning are unclear. Does he, as a policy matter, reject devaluation? Is Cabinet contemplating it? Does he fear political implications of devaluation, believing he may be unable to achieve IMF support without it? Does he have economic performance indicators unavailable publicly that render IMF support unnecessary, driving an ultimate show of confidence – willingness to risk all – knowing that outcome is impossible?
If the latter, who believes him? If investors and consumers are in disbelief, will there be a response similar in conclusion to Greek attempts to change their ‘politics’?
More questions than answers!
(Wilberne Persaud is a consultant economist. He can be contacted via email at [email protected])