Following economic growth of 1.6 per cent in 2016, the 2.0 per cent growth during the first three months of this year is a welcome development. Together with low inflation, a falling unemployment rate and an increase in the foreign exchange (FX) reserves (an increase that was a bit larger than the increase recorded at the end of the first quarter of 2016), there are signs that the Barbados economy has begun a genuine recovery.
This is underscored by the fact that the tourism-led growth was broad-based – i.e. there was growth in many of the major sectors of the economy. Regrettably, ominous dark clouds hang over the economy. Despite the increase in the net international reserves (FX reserves), at 10.7 weeks’ import cover, the reserves are still lower than a year ago. Moreover, the prevailing fiscal crisis, characterized by unsustainably high fiscal deficits, burdensome debt and crippling interest payments, is a noose around the country’s neck. Serious challenges are confronting the Government and people of Barbados.
Despite a modest improvement in the fiscal deficit, the pace of reduction needs to be accelerated and sustained. The Government of Barbados (GOB) should be prepared to cut about $100 million from Transfer and Subsidies, including cuts to grants to public institutions and non-profit agencies. It should also be prepared to reduce domestic debt interest by $100 million; and cut goods and services by close to $50 million. Given the poor state of public finances, it would be prudent to maintain the wage freeze while keeping the number of central government employees stable and placing a moratorium on emoluments.
Discussions should also be entered into with the unions to pave the way for (i) a system of merit-based emoluments, (ii) promotions weighed more towards merit and achievements rather than seniority, and (iii) contracts for new permanent secretaries and new employees, with the possibility of appointments after two years once performance targets are met. The time has come for public sector and parliamentary pension reform. Employer-employee contributory pensions should be on the table as a medium-term objective. Any changes to the conditions of work and remuneration in the civil service should be aimed at achieving much better value for money, improved public services and more effective public administration.
There has been a lot of talk over the years about restructuring the Barbados economy. What is more urgent is restructuring (reforming) government. Barbados so desperately needs a system of government that better serves the people of Barbados and better facilitates both foreign and domestic business.
The Stuart administration has finally recognized that privatization has to be a part of the solution for restoring fiscal sanity. However, privatization will not be enough, as it is both insufficient and unsustainable. In order to achieve lasting progress and restore fiscal deficits that are no larger than two per cent of gross domestic product (GDP), the GOB also has to successfully implement its much overdue programme of merging, restructuring and dissolving relevant statutory corporations. Success in that regard will help to achieve some of the expenditure cuts mentioned earlier.
No new taxes are needed but greater tax efficiency is. To further revenue growth, I encourage authorities to continue unabated to improve tax collections and guarantee timely tax refunds. I agree with the recommendation of the International Monetary Fund (IMF), former Prime Minister Owen Arthur and the McCaskie-led Fiscal Committee of the Social Partnership that the Government should broaden the Value Added Tax (VAT) base and reduce the rate to 15 or 16 per cent. Some of you may recall that from as early as 2012, I have advocated a restoration of the VAT rate to 15 per cent. This measure can be designed in a manner that is revenue neutral but the resulting efficiency is likely to result in higher VAT receipts.
As a precursor for restoring sustainable economic growth and development, Barbados needs a credible strategy to achieve a minimum of $500 million in foreign direct investment (FDI) a year. In this regard, it is important to recognize that the country’s credit rating is hurting its attractiveness to investors. Poor administrative procedures, substandard business facilitation and the lack of a credible economic policy framework are also hampering the country’s investment attractiveness.
The GOB, as currently constituted, does not appear to have enough credibility to guide Barbados along a path of overcoming its debt crisis and ushering in a period of sustainable growth and development. This is why I also support those who have recommended that the Government should enter an IMF programme now. In addition to cheaper access to financing, the IMF offers Barbados fiscal discipline, credibility and the technical expertise that can be blended with local knowledge to create a structural adjustment programme that can restore Barbados to prudent fiscal management, debt sustainability, growth and development.
That credibility certainly could be leveraged to attract FDI and negotiate a reduction in the interest rate obligations on existing and new domestic debt. Yes, I am again recommending debt restructuring and/or refinancing. In terms of economic management, the Stuart administration has not done itself any favours. Since 2010, it has often taken action too belatedly or only after its back was against the wall. That has made for bad policy making. Its economic policy has been to reactionary – characterized by some policy announcements not well thought through and others implemented long after they are needed. Some examples are the introduction of University of the West Indies (UWI) tuition fees, the solid waste tax, restructuring of statutory corporations, and more recently privatization and the restoration of the ten per cent that was cut from the salaries of parliamentarians.
(Carlos R. Forte is a Commonwealth Scholar and Barbadian economist with local and international experience. Email: C.R.Forte@gmail.com)