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by Anthony Wood
Politicians and their unashamed, ultra-partisan supporters are always in search of information to glorify themselves. The recent revelation by the Central Bank Governor, Cleviston Haynes, that the Barbados economy grew by 10.5 per cent during the first six months of the year is fodder for the Mottley administration and its supporters.
Though some commentators have questioned the veracity of the Governor’s information and have made comparisons with the much slower growth achieved in other Caribbean and larger economies (and declines in some economies like the USA), the Governor’s revelation should be placed in proper context.
It is common knowledge that the Barbados economy declined by almost 20 per cent during the coronavirus pandemic. Domestic economic output in nominal value declined from 10.5 billion dollars in March 2020 to around 8.5 billion dollars at the end of December last year. At the height of the pandemic the tourism industry and related businesses were decimated.
It was therefore expected that once the restrictions on travel imposed for the coronavirus were lifted, the country would benefit from the pent-up demand for travel by tourists from Barbados’ source markets. Thus, the resuscitation of the tourism sector and related businesses during the first six months of the year was expected.
The strong tourism performance which accounted in a disproportionate way for the overall 10.5 per cent growth in national output was helped considerably by the hosting of cricket matches against England. These games attracted
many thousand English visitors and cricket enthusiasts from other countries.
When the structure of the growth experienced in the first six months of the year is examined closely, there is cause for concern since the performance of the other productive sectors has been unimpressive.
When the anticipated, precipitious decline in tourism for the summer is added to the sub-par performance of the other engines of growth, we can expect a meagre growth performance for the economy in the third quarter.
Another point to note is the inflationary impact of the growth figure reported by the Central Bank Governor. Given that his growth figure was based on the comparison of two gross domestic output values in NOMINAL terms
(as opposed to REAL terms), the price impact on the
growth was not explained. In this continued inflationary environment, the growth figure in REAL terms would be more meaningful since the figure would have been adjusted for the price impact.
While we welcome the strong growth performance of the economy (fuelled mainly by tourism activity) during the first half of the year, the reality is that the gross domestic output is about 9.4 billion dollars in nominal terms, still way below the 10.5 billion dollars achieved in early 2020.
There is a pressing need to stimulate higher levels of sustained activity in ALL sectors in order for the economy to surpass the levels achieved before the onset of the coronavirus pandemic. The country simply cannot afford to continue relying so heavily on tourism. The warning signs are there and those who choose not to take heed will do so at the economy’s peril.
I also read with keen interest an article written by Harry Russell (Wild Coot) entitled 1.6bn Central Bank Hole which appeared in the Nation newspaper of August 1st and Professor Michael Howard’s informative commentary on the article which was published in the Nation newspaper on Wednesday, August 3rd.
These articles raise some interesting and profound issues relating to the state of economic policy-making by the Mottley administration and the functioning of the Central Bank. First is the issue of Central Bank Independence. Central Banks in developing economies are typically
not independent.
However, given the domination of the Central Bank of Barbados by the previous DLP Minister of Finance which resulted in the Central Bank providing substantial amounts of accomodating finance (printing money) with the consequential adverse impact on the balance of payments and foreign reserves, we thought that the new administration would not aim to repeat that suicidal mistake.
The administration failed to give more independence to the Central Bank when changes were made to the Central Bank Act. All indications are that the administration will be relying on the Central Bank to purchase some of the securities in the new BOSS programme through which 200 million dollars are to be raised annually.
This comes on the heels of the Central Bank’s prominence as an investor in the 125 million Treasury Notes issue late last year and the original BOSS programme.
Second, the article by Professor Howard, an expert in Public Finance and my Lecturer on the subject and colleague in the Economics Department at Cave Hill Campus, briefly makes contact with the mis-direction of the economic policies of the Mottley administration. These include the continued “heavy borrowing (from domestic and foreign sources) and tax, and spend indiscriminately” policy;
over-reliance on Tourism with little attention placed on meaningful diversification of the economy; politically-motivated, unnecessary heavy spending on non-revenue earning large capital projects, inefficient state-owned enterprises, social events, advisors/consultants and supporters including influencers; and return to relying on the Central Bank to finance government operations.
Also, the administration seems oblivious to the reality that without generating much higher levels of foreign exchange, the country will find it problematic in the short to medium term to sustain the level of imports whose costs have increased significantly in the last six months.
As noted by the Governor of the Central Bank, the cost of imports for the first six months of the year was in excess of 2 billion dollars while the recovering tourism industry yielded about 835 million dollars over the same period. Such a situation resulted in a very large current account deficit which should not be allowed to continue.
The country urgently needs to boost its national capacity to Import (ability to pay for imports from its current export earnings) rather than rely on BORROWED foreign reserves.
On the current economic policy trajectory which is not grounded in social and economic efficiency, and is not focused on stimulating higher levels of output in ALL productive sectors, economic recovery will be much
slower than desired.
Anthony Wood is a senior economist, former lecturer in Economics, Banking and Finance at the University of the West Indies, Cave Hill Campus. He is also a former Cabinet minister in a Barbados Labour Party administration. This column was offered as two Letters
to the Editor.
