The Freundel Stuart administration could soon be left with one of two hard choices to make if its sources of private sector financing continue to dry up.
So warns economist Jeremy Stephen, who is suggesting that the only feasible options left are for Government to go cap in hand to the International Monetary Fund (IMF) or some other international funding agency, or face up to a devaluation of the Barbados dollar.
Stephen was reacting to confirmation given today by some of the island’s major investment firms, including Sagicor Asset Management Inc, Royal Fidelity Merchant Bank & Trust and Fortress Fund Managers, that there was now a decreased appetite for Government securities out of fear that the country could soon default on its debt.
Principal and Consulting Actuary with Eckler Ltd Lisa Wade also warned today that given the current situation in which the Stuart administration was struggling to bring its finances in line amid an overall debt of about 140 per cent and a high fiscal deficit of about six per cent of gross domestic product, “either bills won’t get paid, or taxes would have to be raised”.
And with Barbadians already complaining about for heavy taxation and with more than 60 per cent of Government’s financing currently coming from the private sector, Stephen said the writing was already on the wall in terms of the direction in which the country was headed economically.
“It is either the IMF or some other form of international funding, or devaluation,” he told Barbados TODAY, explaining that “if Government cannot finance its activities it would have to devalue, or rather the Central Bank would have to print more money, which would force devaluation.
“You don’t want that all of this drags down the reserves below eight weeks because that’s staring devaluation in its face,” he added.
Stephen also explained that for the last eight years Treasury bills had been the most dependable source of Government financing, with insurance firms and commercial banks buying the majority of these instruments.
“So if you look at past Central Bank reports, the commercial banks and the insurance companies were propping up Government for years,” he said.
Stephen, who only last week publicly revealed for the first time that he was one of the major architects behind Cabinet minister Dr David Estwick’s controversial US$5 billion, United Arab Emirates (UAE) alternative financing proposal which never got off the ground, also suggested that Government could try to persuade the Central Bank to increase the mandatory amount of Government paper, which commercial banks are required to hold.
However, the University of the West Indies economics lecturer warned that this option would have far reaching repercussions and could redound to further contraction of the Barbados economy.
“That option has so many repercussions at this time where confidence is short. The banks could pass on the increased risk in the form of fees as well as an increased spread on the interest rate between loans and saving.
“You can have a reduction in loans as the banks focus more on high value clients, which would very well slow down consumption in the economy even further. So Government might be able to finance its activities, but they won’t be generating tax revenue because nobody would be really buying nor would there be as much construction. So it is coming up closer and closer to where [Government] is going to need the emergency capital from the IMF or some other sovereign source,” he stressed.