The man who helped guide Government’s monetary policy for a number of years until he was fired earlier this year, has struck the proverbial dagger through the administration’s latest attempts to breathe life into the dying economy.
Former Governor of the Central Bank of Barbados Dr DeLisle Worrell today described the tax measures announced by Minister of Finance Chris Sinckler in his May 30 Budget as “harmful to the economy”.
Worrell said the much hated National Social Responsibility Levy (NSRL), which was increased from two per cent to ten per cent of the customs value of imported and locally produced goods, was nothing more than a “temporary stop-gap” measure which will do nothing to improve the island’s worrying fiscal deficit.
In addition to the NSRL, Government also raised the excise duty on petrol and introduced a two per cent tax on foreign exchange transactions as part of austerity measures to clear a $537 million fiscal deficit.
“Foreign reserves can be expected to fall further, and debt levels will continue to rise,” the former central banker warned in his economic strategy document entitled, The Barbados Economy: The Road to Prosperity, published today.
“The economic impact of such a large increase in the tax burden will be severe. A contraction of real output may be expected in 2017 as a result. The National Social Responsibility Levy (NSRL) and foreign exchange fee are at best, a temporary stop-gap; when they are removed the underlying deficit will re-emerge and will have to be addressed,” he warned.
Worrell said by imposing these taxes without addressing the issue of low productivity, Government had shifted the resources “from the more productive private sector to the less productive public sector”, hence dealing a blow to competitiveness and economic growth.
He estimated that the NSRL and foreign exchange fee would yield no more than $330 million, “taking into account the fact that the new taxes will cause a rise in prices” resulting in a reduction in the purchasing power of residents.
The International Monetary Fund (IMF) said this week that there was little to no chance that the austerity measures would achieve their desired targets.
More tellingly, the Ministry of Finance, in the draft Barbados Sustainable Recovery Plan 2017 produced in collaboration with the Social Partnership, has also admitted that the burdensome tax was likely to perform weaker than earlier expected.
The fired central banker contended that the May 30 Budget failed to address the causes of the deficit and the slide in foreign reserves, stating that the problem had its roots in “overstaffing and low productivity” in the public service.
Hence, Worrell presented his own formula for fixing the economy, including a public sector reform package, cutting 4,500 jobs from the public service, with separation packages to be funded by international financial institutions, and a ten per cent cut in transfers to state-owned enterprises, all over a three-year period.
He also recommended an aggressive programme of divestment of carefully selected public assets, temporary freezing of all public works, except those funded by foreign finance, and final approval and the commencement of work on major tourism projects.
Additionally, Worrell said the strategy should include negotiating with the IMF, the Inter-American Development Bank, the Caribbean Development Bank and other international institutions “for financial support for a five-year programme of structural adjustment, the centrepiece of which would be conditionalities on the implementation of fiscal reform”.
The economist, who had served as head of the country’s monetary regulatory agency since 2009, was dismissed back in February after he disclosed that the Central Bank was printing in excess of $50 million monthly to fund public sector wages.
He assured that his recommended strategy would result in economic growth of about 1.9 per cent in the first year, rising to three per cent in the fifth year, and increased productivity, while foreign reserves would recover to almost 12 weeks of import cover by the end of the first year, rising to 27 weeks by the end of the fifth year.