Government has put a pause on reducing its massive debt to gross domestic product (GDP) ratio as it seeks to address a number of economic and social challenges brought on by the COVID-19 pandemic.
And while noted regional economist Dr Justin Ram welcomed the move, saying it “makes sense”, he also suggested that the Government may have to engage in more borrowing and shift expenditures as it seeks to keep the economy stable.
The original plan of the Mia Mottley-led administration was to achieve a debt to GDP ratio of 80 per cent by financial year 2027/2028, and 60 per cent by financial year 2033/2034.
Delivering her Throne Speech on Tuesday, to mark the reconvening of Parliament, Governor General Dame Sandra Mason said given that the International Monetary Fund (IMF)-backed Barbados Economic Recovery and Transformation (BERT) programme provided some measure of flexibility, the initial debt target would be put “on pause” until 2022.
“My Government will hold to the course of long-run debt reduction, strong public finances and reforms to financial transparency and accountability, but for the next two years we will need to pause on debt reduction. We can only return to the level of surpluses we were running previously and our downward path on debt, when tourism returns,” she said.
“Partly as a result of the trust that we built up in the first two years of not shying away from tough decisions and sharing the burden, our development partners, including the IMF, recognise the scale of the challenge of COVID and that these are exceptional times requiring exceptional action,” Dame Sandra added.
When the Barbados Labour Party (BLP) came to office in mid-2018, the country’s debt to GDP ratio was a whopping 175 per cent, making Barbados the fourth most indebted nation behind Japan, Greece and Sudan.
However, by the end of June this year, that had been reduced to 124.7 per cent.
In addition to tackling high debt, the Government was also seeking to correct a fiscal deficit, agreeing under the BERT plan to instead run a fairly high primary surplus of six per cent of GDP for financial year 2020/2021.
However, on the heels of the COVID-19 pandemic, that too was revised and the new target is now one per cent of GDP.
The Governor General did not indicate whether, after the two years of the pause on debt reduction, the targets of 80 per cent debt ratio by 2027/2028, and 60 per cent by 2033 would remain.
In an interview with Barbados TODAY, Dr Ram explained that the Government had managed to reduce its interest on debt as part of the restructuring exercise, and this was an important variable in tackling the build-up of debt.
Other variables at play, said the former Director of Economics at the Caribbean Development Bank, are the GDP growth rate and the primary balance.
He said the Government was currently faced with a situation of low GDP growth rate, especially due to the pandemic, and reforms were therefore necessary to improve that.
Additionally, the economist said, it was necessary for the Government to revise the high primary balance target of six per cent, noting that it was an indication that “they can’t do all of that right now because their priority must be to support the economy and support individuals”.
He explained that by pausing the debt target for the next two years and reducing the primary balance, the Government would have some funds that could help pay down debt and support the economy.
“So, I think it makes sense,” said Dr Ram. “What the Government has to be clear on, however, is to say to the population when they intend to get back on track to meet its long-term debt target. I imagine they are keeping that debt target at 60 per cent of GDP by 2033.”
At the same time, he said the medium to long-term focus should be on growth reform, “because if we can get this economy growing by three to five per cent per annum, that will help bring down the debt to GDP a lot quicker”.
Dr Ram added that in the short-term, the focus had to be on supporting the economy and people.
“So, I think it is the only thing most Governments around the world are going to have to do – have a greater appetite for debt in the short period,” he said.
“Governments still have to support, so we have to find some additional resources to try and keep the economy afloat. So, what you might see is that some amount of money that was expected to go towards the paying down of debt will now perhaps go toward supporting the economy… [and] there is probably going to be some new borrowing.”