The Executive Board of the International Monetary Fund (IMF) has officially signed off on the Barbados Economic Recovery Plan and the terms and conditions whereby Barbados has entered into an IMF Extended Fund Facility (EFF) with access to US$290 million.
So what’s next? Barbadians across the island are going about their daily lives with the IMF’s EFF program being a news headline or a topic of discussion in lunchrooms or rums shops. The austerity that comes along with an IMF Extended Fund Facility will be more than a news headline and a debate topic. Barbadians for the next four years at least, and possibly a few years beyond, will feel the impact of an austerity program such as the one we have found ourselves with.
Many may ask, what really is an IMF EFF program? Essentially, it is a financial facility afforded to governments that provides assistance, in support of a comprehensive program that includes policies of the scope and character required to correct structural imbalances over an extended period. EFF’s are usually given to governments for periods not exceeding three years; Barbados has been approved for a four-year EFF program. Four-year EFF programs are only approved in special circumstances based on, among other things, the prolonged nature of the adjustment required to restore stability in its macroeconomic indicators and the assertive assurance of the ability and willingness of the Government to implement deep and sustained structural reforms.
As noted earlier, Barbados has been approved for the maximum number of years within an IMF EFF program, with the assurances that Government will administer deep and sustained reforms to correct fiscal and macroeconomic imbalances. Repayment periods for EFFs are between four and a half to ten years, making it more attractive for governments which face medium-term structural economic challenges.
One of the key prior conditionalities of the IMF EFF program is that the Barbados Government must maintain a primary balance of six per cent of GDP. That is, for the next four years, our country’s fiscal balance (surplus), net of interest payments, must be around BDS$600 million and this must be maintained at that level throughout the four-year period and possibly beyond. The only other country that has had a higher primary balance target in an IMF program is Jamaica at a primary balance of seven per cent of their GDP.
To achieve this fiscal benchmark, Government has to either increase taxes, decrease expenditure or undertake a mixture of both. To put this into perspective, the Government of Barbados reported primary balances of 2.2 and 3.3 percent of GDP, or fiscal deficits of BDS$513 million and BDS$429 million in 2016/2017 and 2017/2018, respectively. How does Government move from a deficit of half a billion dollars, to a surplus of approximately BDS$400 million by April 2020, while maintaining a minimum standard of service? That is the challenging task in the coming months.
To achieve the target of attaining a fiscal surplus of approximately BDS$600 million in the next four years, Government has already begun to implement a suite of taxes which Barbadians are already feeling in their pocket. Taxes such as VAT on overseas credit card transactions have yet to be ironed out, which could have a significant impact on both personal and commercial spending behaviour, and this notwithstanding the recent increases in personal and commercial tax rates. Heavy or burdensome taxation could have the opposite impact of its intended purpose. Implementing taxes on an economy that is experiencing low growth, and in our case, for an extended period, could possibly place a further drag on aggregate economic activity.
On the other side of the discussion, Government must reduce expenditure to levels which bring, particularly, state-owned-enterprises (SOEs) into financial order and prudence. Government has aimed at reducing transfers to SOEs by BDS$115 million by the end of the 2019/2020 financial year.
The IMF EFF program will impact everyday Barbadians by Government being required to attain a fiscal surplus of BDS$600 million, by increasing revenue or decreasing expenditure for the next four years in order to receive scheduled disbursements of the US$290 million. This balancing act will lead to downsizing of certain public operations to increase efficiencies, layoffs, decreased disposable income and the termination of social programs.
This leads to the precarious position of implementing an austerity program which corrects the macroeconomic imbalances without pushing the economy into a depression or causing increasing social vulnerability. The fallout of decreased financial resources whether from taxation or debt restructuring will have ripple effects on our economy. Moreover, the possible social implications of our austerity program have yet to be discussed publicly.
To counteract the deep structural reforms we have signed onto, it is very important that there is a robust economic growth and development strategy that provides a strategic plan of how we intend to grow the economy. To increase GDP in the short term, Government must either significantly increase foreign investment and/or increase the net trade balance (increase exports) as the measures under the austerity program will decrease private and public consumption. The rate at which Government increases investment and/or exports must also be at a higher rate than the decline in personal and Government consumption of goods and services. Since an increase in exports is not a practical short term solution, a plan to attract substantial foreign direct investment may be in the country’s near future.
Colin Bullock, in his reflection of Jamaica’s IMF EFF program in 2016, puts it frankly, “Defining a growth strategy relative to the imperatives of adjustment is not an IMF programmatic priority. The IMF is not a development bank and has no seminal mandate for growth facilitation. IMF programmes do not directly stimulate growth in the immediate term. Sharp fiscal adjustment to reduce the burden of public debt and debt servicing creates fiscal space to enhance the capacity of government to facilitate growth in the medium to long term. The challenge is how to get there (fiscal space) from here (sharp adjustment out of debt) where sharp adjustment is a near term brake on growth.” He goes on to further state, “An IMF programme, by its essential purpose and nature, contains neither a comprehensive growth strategy nor a programme for comprehensive social transformation and empowerment.”
Given Jamaica’s long-standing history with the IMF since the 1970s, Mr Bullock’s words should provide sobriety to the journey we are about to embark on. In our sobriety, every effort should be made for research-driven policies to be put in place to navigate the uncharted road ahead. To start, Barbados should delve into the intricacies of our Caribbean neighbour’s experience and academically and intellectually draw on the lessons learned to ensure our country prevails from the journey.
All is not lost in this undertaking; Barbados is at a pivotal moment in its history where what we do now as a country will be the foundation for the next 20-30 years. As the saying goes “necessity is the mother of all inventions”. Our innovation and ingenuity will truly be tested in the coming years.
Crystal Drakes is an economist and Opposition Senator.