The Barbados Economic Society (BES) is warning the Mia Mottley-led Government that its current dependency on the Central Bank of Barbados for financing is unsustainable.
The warning came in a statement issued in response to this week’s Central Bank review of the island’s economic performance for the first half of the year.
The BES pointed out that a major concern over the last five years has been the persistent decline in the country’s stock of foreign exchange reserves, which fell from 20 weeks of import cover at the end of 2012 to about seven weeks of cover during the first quarter of 2018.
“Since then, the Government’s decision to suspend interest and principal payments on foreign Government debt has stabilized reserves at seven weeks of import cover, pending the completion of comprehensive debt restructuring negotiations and access to International Monetary Fund (IMF) and other development banks’ financing,” it noted.
However, the BES cautioned that in the interim, Government has lost complete access to most private sources of financing and was therefore primarily dependent upon Central Bank financing to fund its deficit during the second quarter of the year.
“This source of funding is unsustainable. Thus, the Government should match expenditures with tax revenues to eliminate the need for additional domestic borrowing in the medium-term,” the BES advised.
It further warned that even though the Prime Minister’s June 11 mini Budget aims to achieve this objective, additional expenditure cuts were necessary to reduce the country’s 155 per cent of GDP debt burden over time.
The BES also cautioned Government of the need for an “amicable completion” to its debt restructuring negotiations with creditors, as well as prioritized cuts in its recurring, non-interest expenditure.
“If executed correctly and in conjunction with entry into an IMF programme, these measures should begin to restore investor confidence in Barbados and reverse the upward trend in the Government’s debt.
“Any subsequent rebound in economic growth will depend on a
reversal of downward trends in domestic and foreign investment since austerity measures will likely keep household consumption subdued in the short-term.
“Access to foreign financing should also boost foreign reserve levels in the near- to medium-term and therefore provide some
buffer against external shocks,” the BES suggested.
In its latest report, the Central Bank said the economy contracted by 0.6 per cent during the first half of the year, despite a 3.4 per cent increase in long-stay visitors.
During the six-month review period, total spending by tourists increased by a mere 1.4 per cent.
Several indicators also point to a reduction in both domestic and foreign direct investment. In particular, construction output fell by four per cent with Government spending 16 per cent less on capital projects between April and June 2018.
However, spending on fuel imports increased while capital and intermediate imports fell by 7.3 per cent and 4.7 per cent respectively.
Private capital inflows, which capture physical investment by non-residents, also fell by ten per cent between January and June 2018 and have continued on a steady downward trajectory since 2014.
Consistent with weaker economic activity, the average unemployment rate increased marginally to ten per cent by March 2018. This coincided with a modest increase in commercial banks’ ratio of nonperforming
loans to total loans relative to the end of 2017.
Further, despite low deposit rates and falling lending rates, commercial banks’ holdings of excess funds increased over the past two years on account of faster growth in domestic deposits relative to lending to the private sector.
“Commercial banks’ profitability has therefore declined over this period, and this trend will likely continue for the foreseeable future given the Central Bank’s negative projection of economic growth for 2018 and the planned restructuring of commercial banks’ holdings of Government securities,” the BES said.