With the Barbados economy continuing to falter, the Central Bank of Barbados (CCB) today said it was contemplating calling on the private sector to voluntarily provide funding of between US$60 and US$70 million to top up the island’s dwindling foreign reserves.
In reviewing the performance of the economy during the first quarter of 2018, Governor Cleviston Haynes acknowledged that a similar strategy was employed in the early 1990s and again in the early 2000s when the situation was also dire.
Without going into too much detail on the proposed strategy, Haynes said the bank would “allow some corporate entities, particularly the financial sector with large investment balances, to invest some of those balances abroad on the condition that should the country need them in the future that those funds would be returned to assist”.
Any hopes that the fiscal adjustment measures introduced in the last Budget would help spur the economy were dashed today when the CCB reported on the January to March period and also gave its projections for the rest of the year.
Rocked by a decline in real output in the tourism sector, a slowdown in construction activity, the late start to the 2018 sugar harvest and reduced domestic demand as a result of the May 2017 budgetary measures, the economy declined by 0.7 per cent per cent in the first quarter of 2018, according to Haynes.
And he was no more optimistic about the immediate future, forcasting a sputtering economy for the remainder of the year, as he revised downward his earlier outlook.
Government’s top economic adviser predicted that an estimated downturn in tourism in the first quarter and ongoing delays to the start of several projects, would result in growth of between -0.25 and 0.25 per cent at best, down from his prediction in January of between 0.5 per cent and one per cent.
“The outturn is likely to be influenced by the speed and nature of the fiscal adjustment policies and the quantum of new investment. However, the outlook for growth requires an overall policy framework that includes measures to strengthen the business environment, promote competitiveness, spur innovation and encourage emerging sectors, such as alternative energy,” Haynes said today in his quarterly economic review and outlook.
In addition, Government’s massive overall debt climbed to a worrying 151 per cent of gross domestic product (GDP) during the quarter, up from the 145.9 per cent at the end of last year, he said, citing as a key reason the restructuring of CLICO International Life and the establishment of the new insurance companies to take over that business.
Haynes said all but one of the fiscal measures implemented last year, including the onerous National Social Responsibility Levy – which was introduced at two per cent in 2016 but increased to ten per cent last year – as well as the Value Added Tax and asset sales, had failed to rake in the projected revenues for the review period.
The only exception was the two per cent fee on foreign exchange, while the fiscal deficit fell from 5.7 per cent of GDP to 4.2 per cent for the financial year ending March 31, 2018, due to a slight decrease in Government spending during the first three months of the year, he explained.
However, it was not all gloomy news as the international reserves grew, albeit slightly, by $14 million to reach $423 million or 6.9 weeks of import cover, still a long way below the recommended 12 weeks.
Haynes said the economy remained challenged and required “decisive stabilization measures” that would place the public finances on a sustainable path, alter the trajectory for the international reserves and create the conditions for strong durable growth.
Therefore, he said, the immediate priorities of the incoming Government following the May 24 general election would be to address the fiscal deficit and shore up the reserves.
“Addressing the public finances remains a priority so as to stabilize and ultimately grow the economy. Our efforts to date have not resulted in bringing the fiscal deficit to a manageable level. The demand for local Government securities has declined and the excess of external debt service over external borrowings continues to create added financing pressure,” he said.
“The impact of these developments in recent years has been a build-up of domestic arrears and increased reliance on Central Bank financing. The current borrowing requirement for fiscal year 2018/2019 therefore needs to be reduced,” Government’s top economic adviser said.
Haynes stressed the need for the implementation of medium-term strategies that would result in a reduction in the fiscal deficit, strengthening the public finances and the creation of access to external funding.
“In addition,” he advised, “we need to create the fiscal space to enable infrastructural development that promotes long-term growth. In these circumstances, improving the outlook requires Government’s fiscal strategies to embrace durable expenditure reforms, including for state-owned enterprises and improved tax administration.”
The economist stopped short of recommending turning to the International Monetary Fund for assistance, stressing it remained one of the available options “which we have to consider”.
“If we don’t go that route then we have to identify other sources of foreign exchange,” he said, adding that external funding would be necessary for infrastructure projects.
“Right now we are on the cusp of an election and one would envisage that immediately thereafter whoever is in charge of the Government will make a decision on the route they want to take,” Haynes said.