BES: Where’s the growth going to come from?

Describing the Central Bank’s growth prediction for the economy as “a bit optimistic”, President of the Barbados Economic Society (BES) Simon Naitram today questioned what avenues are being created to ensure more sustainable long-term growth.

He told Barbados TODAY given the low levels of public sector investments, the high dependency on one main sector, the country had a lot of catching up to do.

Naitram said: “Real gross domestic product per capita in 2019 remained nine per cent below 2008 levels.

“Make no mistake, Barbados has a lot of lost ground to make up.”

Matram was reviewing Wednesday’s Central Bank outlook in which Governor Cleviston Haynes predicted the economy will grow by between 1.25 per cent and 1.75 per cent for 2020. He added that should projects get off the ground this year and be were sustained, he could boost that growth forecast further.

The Central Bank Governor also noted that a lot of the economic performance would depend on the development of new revenue streams.

But stopping short of pouring cold water on the growth projections, Naitram agreed that the island needed new revenue streams to ensure sustainable growth

The BES president said: “The Central Bank’s prediction for economic growth between one and 1.75 per cent in 2020 appears to be a bit optimistic, particularly given the reality of our continued fiscal consolidation.

“Even then, this growth is expected to be driven by one-off events rather than reflecting a return to long-run growth.

“This report confirms that the long-run potential growth rate of the Barbadian economy remains very close to zero.”

He said the tourism industry, which recorded its fifth straight year of growth, was the only one sector showing material growth.

Naitram said: “The problem is that this sector appears to be sufficiently isolated from the rest of the economy, such that there have been no significant spillover effects to the rest of the real economy.

“The tourism sector has grown 35 per cent over the past six years, while the rest of the economy has not grown at all in that time.

“It then bears noting that the majority of the investment projects that we are hoping will come on stream this year are tourism-related projects.

“The evidence of the past six years suggests that these, if and when they materialize, are unlikely to have significant long-run spillover effects for non-tourism sectors.”

Pointing to the need for urgent diversification, Naitram said new investment, particularly in new technology, would be the main way to raise the potential growth rate of the economy.

“Think of it like a car. Without modifications, it has a very limited top speed,” he said. “If you want it to go faster, you have to invest in upgrading it.

“Unfortunately, government investment is now below 2017 levels. And the construction sector — which we can think of as a proxy for private investment — and has shrunk almost 11 per cent in the past two years.

“There’s no sign of an expansion of Barbados’ productive capacity.”

He also expressed concern that the level of taxation on financial institution’s assets could be forcing them to continue to hold tremendous amount of liquidity.

Said Naitram: “Commercial banks are holding onto more and more cash.

“And there was no increase in lending to businesses in 2019. It seems like a good time to review the wisdom of a tax on financial institutions’ assets.

“This tax increases the cost of capital and disincentivizes lending and deposit accumulation.

“And, it appears we have made no progress on creating new non-bank financial infrastructure to get around the banks.”

It was in 2016 that then Minister of Finance Chris Sinckler increased the Bank Asset Tax from 0.2 per cent to 0.35 per cent in an attempt to raise more than $14 million in annual revenue.

This came a year after the removal of the minimum deposit interest rate of 2.5 per cent. marlonmadden@barbadostoday.bb