Naitram urges restructuring of main economic engine

President of the Barbados Economic Society (BES) Simon Naitram is raising an alarm that the tourism sector could prove to be a net user of foreign exchange more than it is a contributor, given the economic performance so far this year.

Reacting to the Central Bank report, which showed a major decline in economic activity of about 27 per cent over the last three months, Naitram said three things stood out to him most – the performance of the international reserves and tourism’s estimated contribution, government spending and the overall impact of the pandemic on the economy.

In his report yesterday, Central Bank Governor Cleviston Haynes said due to the 27 per cent decline in economic output in the second quarter of the year, the economy declined by almost 15 per cent over the first six months.

This was due to the effects of the COVID-19 pandemic.

Haynes also reported that the international reserves grew significantly, by $536 million, largely due to borrowings from the Inter-American Development Bank and the International Monetary Fund.

Government spending rose almost eight per cent, to reach $570.7 million for the first six months.

Naitram, who recently called on authorities to urgently restructure the tourism industry, told Barbados TODAY the “big” decline in economic activity was expected given the current circumstances.

However, pointing to the increase in foreign reserves, he said this was “an entirely surprising figure”.

“Why? The Central Bank reported a $536 million increase in the foreign reserves—of which $438 million was an inflow of borrowed funds. That’s a net increase of almost $100 million in a period where tourism activity fell by more than 50 per cent,” he said.

“If tourism really is our main foreign exchange earner, then there should have been a similarly large decline in foreign reserves. While there may be other factors at play including supply chain disruptions and decreased domestic demand, the data seems to suggest that tourism could actually be a net user of foreign exchange rather than a net earner. This may be due to the structure of the tourism industry, with a heavy reliance on foreign ownership, an internationally-based payments model, and an import-oriented business model,” he explained.

Shifting his focus to the modest increase in government’s expenditure, Naitram said such an increase could be considered a good thing generally, but given the crisis situation facing the country “spending forms an important part of the policy response” and it was expected to be higher.

The economist said: “In particular, we expected increased spending on policies  aimed at keeping small businesses alive in order to limit permanent scarring from the pandemic.

“The small increase in spending raises the concern that policy implementation might be stalled, or that the policies may not be easily scalable. This should sound alarm bells for the planned public and private capital works projects, which will need to get off the ground quickly,” he added.

He said the country was now slowly getting a clearer image of the effects of the pandemic, the health and economic risks, and the trade-off between those risks.

Naitram is hoping that better policy decisions would be taken in coming months to limit any further economic fallout.

“As we get better information and a better understanding of the situation, it will hopefully help the Government and the Central Bank to make better policy decisions about how to limit the economic damage from the COVID-19 pandemic during the second half of what has already been a long 2020,” he said  marlonmadden@barbadostoday.bb