In the recently released Central Bank of Barbados review of the Barbados economy, the Central Bank Governor Cleviston Haynes reported that he expected the Barbados economy to grow by between 1.25 per cent and 1.75 per cent for 2020. The International Monetary Fund (IMF) had previously indicated that it expected the Barbados economy to grow by 0.6 per cent in 2020.
The large differential between the two forecasts has generated a lively debate among local observers and economists. Prof Emeritus Michael Howard (in many ways our Senior Economist), and Dr Simon Naitram, Cave Hill’s young titan (congrats on achieving your Doctorate with no corrections), have openly questioned the Central Bank’s forecast.
Economics textbooks provide a simple equation for Gross Domestic Product (GDP): GDP = C + I + G + (X -M) where:
C = Consumption, I = Investment, G= Government, X = Exports and M = Imports.
The Barbados Economic Recovery and Transformation (BERT) program is anchored by the target of achieving a Debt-to-GDP ratio of 60 per cent by 2033. According to the just released Central Bank report, Barbados’ Debt-to-GDP ratio currently stands at approximately 114 per cent of GDP, down from a high of around 175 per cent of GDP in May 2018.
The debt reduction to date has largely been a result of the debt restructuring itself which saw the write-off of the principal on certain bonds and treasury bills held by the Central Bank of Barbados and the National Insurance Scheme, as well as certain bonds held by foreign or external creditors. Since we are unlikely to see further write-offs of principal, future reductions in the Debt-to-GDP ratio will have to be driven by a combination of the repayment of principal on existing debt, constraints on new borrowing and growth in GDP.
In order to generate the funds needed to pay down the principal on debt and move towards the Debt-to-GDP ratio of 60 per cent target by 2033, the government is mandated to generate a Primary Surplus (Government Revenue – Expenditure excluding interest payments) of six per cent of GDP.
One of the major implications of achieving a Primary Surplus of six per cent of GDP and a Debt-to-GDP ratio of 60 per cent by 2033, is that net government expenditure, the G component in our GDP equation, is unlikely to be a major contributor to GDP growth in the near to medium term. The constraint on G is also likely to suppress consumption (C), while as a Small Open economy with limited natural resources, imports typically exceed exports. The implication, therefore, is that growth in the economy must come from Investment (I), especially private sector investment and/or increased exports (X).
So where is the growth going to come from? The reality is that achieving and maintaining a Debt-to-GDP ratio of 60 per cent and a Primary Surplus of six per cent of GDP leaves Government with limited fiscal space to directly stimulate the economy, and the private sector is now required to lead the growth charge. The level of growth we achieve in Barbados is now highly dependent on private sector investment, whether domestic or foreign, in a way it was not before. The philosophy underlying the BERT program is that the Government will lay the wicket and the private sector scores the runs.
The Central Bank’s forecast is likely based on the expectation that major construction projects will take place in 2020, providing much needed private sector investment (I), and support the tourism industry in driving growth in GDP. Dr Naitram is questioning whether the private sector as currently constructed and the types of investments being made can deliver this level of growth in a sustainable manner.
My own view is that construction projects will likely drive growth in 2020 and depending on the pace of project implementation, growth may exceed 1.0 per cent. However, construction projects have a finite life and reforms along the lines suggested by Dr Naitram are needed for this growth to be sustained. The investments in the pipeline appear to be linked to expanding accommodation capacity in the tourism and hospitality sector. However, the evidence of the last five or six years is that growing tourist arrivals is having a smaller and smaller marginal impact on GDP growth.
It’s over to private sector investment, but investment in the traditional areas is only going to generate limited growth, and genuine innovation and entrepreneurship are going to be needed for sustainable growth. Private sector investments that can increase tourism value added and non-tourism investments are needed for high and sustained growth.
C. Justin Robinson
Professor of Finance
UWI, Cave Hill.