Trinidad Newspaper Guardian Business – wrote an article Is Barbados Insolvent
To say that the Barbados Government is bankrupt is hyperbolic and makes for sensational headlines and is essentially filtering the truth. The Moody Caa3 rating forces the country to pay a minimum rate of ten per cent on the world market for loans, there is little appetite to take up any such rate, and thus the local options have been preferred. The Government is working with its finance partners on a short-term debt consolidation package that would give it the room it needs to have major capital works projects being initiated have an effect. It is also working to reduce its exposure through a critical evaluation of all the entities currently depending on Central Government for financing. All decisions we assume will be underpinned by the firm understanding of the social contract government has with its citizens and crucial support for youth and the indigent.
This is not to absolve the previous administration of mistakes made, sometimes initiatives are tried and they do not work out as required. As Edison responded to the question of his 1,000 attempts before developing the light bulb; ‘I have not failed, I have found a 1,000 ways it does not work’. If we want to speak about spectacular failures, we should look no further than EDUTECH.
The net point is that the previous administration took a bad situation and was only able to marginally improve on it. In fact, some may say that they have compounded the problem by not articulating a cogent and cohesive policy position that could be construed to be positive. I am in total agreement that, at this stage, we should negotiate with the IMF for a long-term solution. This will restore some measure of investor confidence and hopefully move us from the Moody’s Caa3, now Selective Default (SD) rating we currently endure. My reason for the IMF option has more to do with the discipline of executing the initiatives than the reserve policy though both are important.
I think it important that we understand the ethos of the problem in order to avoid repeating what now appears to be a cyclical issue. The period 1991 -1994 was even worse for the national economy than the current situation as the government was forced to go to the IMF after GDP contractions of -4 per cent (1992); -5.8 per cent (1993) and +0.8 per cent (1994). The IMF shoring up of the reserves at the time was not contingent on a devaluation of the currency and there is no reason for that to be the case now.
The Barbados economy has been almost stagnant over the past twenty years, with an average growth of 1.4 per cent per year between 1995-2013; a much lower rate than comparative markets that showed an average rate of 3.2 per cent . This aggregate was masked by two periods of robust growth (1997-98 and 2005-06) when growth averaged 5 per cent a year and also two periods of contraction in 2001-2002 and from 2009 until 2015.
The lesson learned here was that the growth was not sustainable and came at great expense with a crippling debt annuity.
Under the Arthur administration of 1994-2008, Government revenue increased from $1.64B with expenses of $1.06B; to $2.46B with $2.6B in expenses; essentially starting with a current account surplus of $58.1M, and leaving in 2008 with a deficit of 137M. [See Current Account table below.]
In addition to carrying a large Current Account deficit, public debt increased as shown below. Material to this debt and current account deficit was the largest expansion of central government in the history of Barbados with several new ‘parastatal’ entities being established. Resulting in an additional $500M in Transfers and Subsidies between 2002 and 2008, and a further increase of $100M in public sector salaries over the same period; in effect saddling any incoming government with $600M in recurring operational cost. [See summary of Gov’t Operations – Appendix 1.]
This action during the 2002-2008 period essentially reversed all the measures taken by the Erskine Sandiford administration to solve these very same problems in the early 1990’s.
As shown in Appendix 2; from 2008 to 2016 government revenue declined by $200M, (Corporate Tax – IBC’s and large entities being purchased by foreign firms) which has been buttressed by the new taxes to show a recovery to 2008 figures, of $2.5B. Government expense, on the other hand, has increased at a mean of two per cent per annum over the same period for the same period, making today’s current account deficit $729M.
In the past, the deficit was financed by robust Foreign Direct Investment (FDI), especially since 2005, remittances and a surplus on the services account. The fiscal deterioration, in summary, is largely due to significant fall-off in revenues and unchecked expansion in outlays on transfers and subsidies. As you can see below, the Stuart administration has done little or no capital expenditure during the nine-year period, being constrained to service debt and maintain almost all of the public sector employees by ‘printing’ money to maintain it, when the reality is they could not afford to do it. The alternatives they felt, were far worse.
The decision facing the Stuart administration was – do we cut $800M out of the cost, which would include cutting the public sector staffing by 25 per cent ? Taking a look at the unemployment figures that endured during the 1994 period, my guess is that they decided that printing money was the lesser of two evils. (See unemployment below). The unemployment has remained stubborn increasing from 7.4 per cent in 2007 to 10 per cent today.
Barbados Unemployment 1992-2013.JPG
It’s the 800-pound gorilla in the room that will not be ignored so how do we fix it?
Like I said earlier, we need to have the IMF as a partner, not a dictate, to assist with the shoring up of the reserves and there is no shame in that. This gives us the latitude to make sensible, informed decisions about our strategic future, rather than be forced into poor decisions for short-term gain.
There are systemic structural issues that we must address nationally to move forward and position ourselves as stated as the prime impulse of the DLP by the founders; item 3 of 22 principles: “ the sound, orderly and rapid development of Barbados and its people in the shortest possible time”. We need to achieve sustainable growth, unlike the jumps we had in 1997 and 2005, followed by contraction and a debt drag that still chokes us today.
These are built on three main pillars;
(a) A balanced national Budget; (b) Creating a workforce for theFourth Industrial Revolution -the Digital Age; that is able to contribute to the island’s growth and diversification (c) Economic diversification; the country must have at least three economic contributing lines of similar size.
Thus we have to change the following:
(1) We must have a smaller, more efficient public sector that is primarily a regulator and facilitator. The Government must relieve itself of all entities that trade in services and commodities. This is to be done sensibly and with input and support from IDA’s with the view of expanding the private sector and not merely giving leading firms an opportunity to consolidate.
(2) The remaining public sector must be driven by technological efficiencies to increase productivity, accountability, and evaluation for service improvement. Unions need to embrace the urgent need for staff evaluation not for victimization but as a scientific tool for organizational improvement.
(3) Our educational system must evolve to produce technology grounded, creators and problem solvers. We must mold our educational platforms to perform R&D for the private sector, thus solving real issues as our students learn, allowing for the creation of new commercial opportunities.
(5) Simplifying and sanitizing the legislative framework that underpins the infrastructural renaissance.
(4) Finance for start-ups, FDI and scientific study to support new entrepreneurial pursuits are to be pushed through our overseas Embassies and High Commissions.
(5) Town planning must be reformed to support rather than hinder business development; being polymathic in maintaining the technical requirements while driving the commercial national development.
(6) Immigration must be reformed to better support the faster integration of new talent in areas of growth, retirees and critical staffing for short-term projects or start-ups.
(George Connolly is CEO of Business Technology Solutions Firm and a former candidate of the Democratic Labour Party.)