Economist weighs in on economic report

Though lauding the Mia Mottley administration for being “fiscally responsible” during the first half of the year, one local economist is expressing grave concern over the island’s growing debt levels.

Kemar Stuart, Director of Business Development, Finance and Investment at Stuart & Perkins Caribbean, said it was good that Government managed to record “a balanced performance” under harsh circumstances which included curfews, lockdowns, Hurricane Elsa and other incidents.

However, Stuart told Today’s BUSINESS he was very concerned that the amount of money borrowed from international financial institutions over the past year was nearing one billion dollars.

“Government’s indebtedness to international financial institutions is of concern given that in one financial year debt owed to these institutions such as the International Monetary Fund, World Bank, and the Latin American Development Bank increased by $852 million dollars, from $1.763 billion at June 2020 to $2.615 billion at June 2021,” said Stuart.

He was responding to the latest Central Bank report, which indicated that at the end of June this year, Government’s debt stood at 150.3 per cent of gross domestic product (GDP) or $13 billion.

This represents an increase of 23.4 per cent in debt to GDP ratio when compared to the same period last year.

In his economic review for the six-month period, Central Bank Governor Cleviston Haynes said the elevated debt ratio continued to be driven by the contraction in GDP which was responsible for 78 per cent of the increase in the pre-COVID debt ratio.

“Since June last year, international financial institutions, recognising the severity of the shock caused by the pandemic on public finances, have assisted government in covering its financing needs.

During the April to June quarter, funding from external creditors was $264 million,” Haynes reported.
However, Stuart said it was of grave concern given the level of interest that Government had to repay on the debt.

What is more, he is predicting that Government would need to continue to borrow given the effects of the COVID-19 pandemic, which continues to restrict business activities and impact revenues.

“The continued reliance on international sources to finance government during the year and the absence of increased economic activity for locals to earn government money is not an ideal practice or in line with a sustainable growth policy,” he warned.

“Interest payments by Government reached over $882 million over this financial year and increases in debt and interest payments take scarce money to service debt.

In order to avoid another debt default all interest payments must be paid in full and on time as a priority versus distributing those funds into a ministry,” he said.

In relation to Government’s revenue and expenditure over the past six months, Stuart said: “The Central Bank report shows an economy that appears to be managed in a fiscally responsible manner”.

During the review period there were some broad-based increases in revenue, but total revenues declined by two per cent or $122 million, to reach 7.6 per cent of GDP. Meanwhile, expenditure increased by about $27 million, to reach 6.9 per cent of GDP at the end of June.

Stuart blamed the International Monetary Fundsupported Barbados Economic Recovery and Transformation (BERT) programme for restricting greater allocation of funds to large capital works projects to help drive economic recovery.

He added that under the programme Government was forced to meet targets “versus increasing spending to drive investments, jobs and growth”.

“Targeted industrial development can be achieved debt-free when government spends its surplus to create direct investment into citizens via pay increases, equity investment into the small and medium sized enterprise, increases in pension, Value Added Tax cuts, excise tax cuts on fuel, removal of the Garbage and Sewage Contribution (GSC) levy and increasing the basket of goods,” he added.

While noting the economy’s dependency on the recovery of the tourism industry, Stuart dismissed the notion that vaccination would play a critical role in the recovery process.

He also warned against making vaccine or regular testing mandatory, saying this could result in an increase in unemployment.

“To base a successful projection of future performance of tourism in Barbados on an increase in vaccination has proven to be flawed since these persons can still transmit the virus and therefore cause disruptions of daily economic activity,” he reasoned.

“The recent talks around mandatory vaccination may have adverse negative effects on the economy via increases in voluntary unemployment, civil protests as seen across Europe, the present likelihood that vaccinated persons still contract the virus and lastly, if vaccine compliance remains low then consumer bases of businesses will dwindle.

“Government should forge ahead with a plan to fully reopen the economy, cognisant of its ability to manage spikes, easing curfew hours and avoid future lockdowns of locals,” he said.

Stuart said he welcomed the recent announcement by Minister of Tourism and International Transport Senator Lisa Cummins that the tourism industry was in for major upgrades in several areas.

However, he warned: “to achieve deep reforms, measures will be required to tackle accommodation costs, gas and food prices; stem excessive import concessions and subsidies; and lower taxes and costs across the board, along with legislation to prevent unethical practices by tourism bosses as it relates to job security of workers”.

(MM)