Economist and former Central Bank Governor Dr DeLisle Worrell is urging Government to use funds received from multi-national agencies to address the country’s balance of payments problems and its deteriorating competitiveness.
Worrell made the recommendation in his first newsletter for 2019, in which he indicated, “In order to cure this underlying cause of the loss of foreign reserves, foreign purchases will have to be further reduced.”
“Government has the tools to reduce spending on foreign purchases, by increasing tax rates or cutting its own spending. Given that the burden of taxation was increased in 2018, the focus in 2019 will probably be on further expenditure reduction,” said Worrell.
He explained that the dwindling foreign reserves over the last five years was as a result of Government’s excessive spending, which was greater than the foreign exchange inflows by more than $100 million each year.
“In order to pay for the extra purchases, the Central Bank of Barbados provided foreign exchange from its reserves, which declined every year as a result,” he said.
Therefore, pointing to the need for foreign purchases to be further reduced in order to correct the country’s balance of payments issues, Worrell acknowledged that the reserves recently received a major injection, which should be used to give the public service a “makeover”.
“We recently got a loan from the bank, and now our savings are looking better. However, if we keep spending more on daily expenses than we’re making from our salary, we will eventually use up the money we borrowed and be no better off. In short, the loans from the international financial institutions are not a solution; they offer an opportunity,” said Worrell.
After entering a US$290 million Extended Fund Facility agreement with the International Monetary Fund (IMF) in September last year, Barbados received its first injection of about US$49 million.
This was followed by promised $150 million and $200 million injections from the Caribbean Development Bank (CDB) and the Inter-American Development Bank respectively, which resulted in the reserves reaching just over $1 billion last month.
Worrell said while the inflows of foreign exchange may increase, it would also require effective policies to increase Barbados’ external competitiveness in order to attract more direct foreign inflows.
“The financial support of the IMF, IDB and CDB has provided Government with a window of opportunity, which should be used to address the imbalance of foreign spending and inflows, and the deteriorating competitiveness of our economy. A makeover of the public services, to raise the delivery of services to standards comparable to those of Canada, the US and the UK, is key to the achievement of both these objectives,” said the economist.
Pointing to the island’s fall in the global competitiveness report in recent years, Worrell said this was mainly due to “weak government institutions and deteriorating government finances”.
He maintained that investor confidence can be expected to be revived when there is evidence of public sector reform, improved public services, and prudent Government finances.
“Early resolution of Government’s default on US dollar debt is also essential to restoring investor confidence,” he added.
Government has so far embarked on a Barbados Economic Recovery and Transformation (BERT) programme, which included job cuts that should result in savings of more than $29 million, and ongoing restructuring of state entities to make them more efficient.