Former Governor of the Central Bank Dr DeLisle Worrell is convinced that Government needs to take a leaf out of the books of some economies in Europe and slash spending while seeking help from the International Monetary Fund (IMF), if it wants to get the economy on solid footing again.
And while he acknowledged there would be some pain for citizens if the Freundel Stuart administration went that route, Worrell believes it would be worth it in the long run.
In his June newsletter, the third in a series of personal economic letters he has focused attention on since his dismissal in February, Worrell pointed to Cyprus, Iceland, Ireland and Latvia, as examples for Barbados which is struggling with a wide fiscal deficit of about six per cent of Gross Domestic Product, due to Government’s continued high spending.
He noted that the four countries, like Barbados, were all small open economies that were highly integrated into international financial markets, with foreign banks and financial institutions, and financial links to major centres such as London and New York. Worrell suggested that they had even bigger issues than Barbados but still managed to overcome them with the right prescription.
“The adjustment problem faced by each country was of a far greater magnitude than what Barbados needs to deal with today . . . . What was common to all four countries was a deep cut in government expenditure on items other than infrastructure, and they all secured financial support from the International Monetary Fund,” he explained.
“The treatment for what ails our economy is a reduction in the costs of operation of Government and state enterprises, supported by financial assistance from the IMF and other international and regional financial institutions,” added Government’s former chief economic advisor.
“The lesson for Barbados is clear, and it confirms what we already know, based on our own experience in 1991.”
Worrell said while the suggested austerity measures would hurt the economy somewhat in the short-term, it would “reset the external balance, restore confidence, reverse the sentiment at credit rating agencies, and uncover the strong underlying competitiveness” in industries such as tourism, international business, manufacturing and renewable energy.
He noted that Ireland had slashed its consumption expenditure by as much as 7.1 per cent; Iceland’s consumption budget was cut each year from 2009 to 2012 for a total reduction of 13 per cent; while Cyprus reportedly cut its consumption expenditure by about 15 per cent between 2012 and 2014. In the case of Latvia, the government reduced its consumption expenditure by about 15 per cent between 2012 and 2014.
All those economies then managed to cut their deficit and they experienced growth of between 1.3 per cent and seven per cent, despite a short period of contraction in some cases.
Noting that the four European countries were of similar size to Barbados, Worrell said they were “all ahead of Barbados in terms of their standard of living and quality of life, and therefore legitimate role models for us”.
Like Barbados, he pointed out, they have maintained very high human development having – being ranked in the top 50 in the Human Development Index – despite having to make drastic cuts in government expenditure following the global recession.
Barbados was at the 54th position in the United Nations Development Programme’s 2016 Human Development Index and was the highest ranked Caribbean country.
While Worrell suggested that the focus should be on expenditure cuts, Minister of Finance Chris Sinckler last week announced more revenue-earning measures, including an increase in the National Social Responsibility Levy from two to ten per cent, an increase in the excise on fuels and a new two per cent tax on foreign exchange transactions.