An assessment of the economic report of the Governor of the Central Bank of Barbados

On Wednesday, January 31, 2024, Dr Kevin Greenidge, Governor of the Central Bank of Barbados, presented the economic report on the performance of the economy for 2023. Despite Dr Greenidge painting a glowing picture of the macroeconomic performance of the economy and prospects for 2024, there are concerns about the interpretation of some of the data and the lack of details about key economic variables.

The highlights of the economic report are as follows. First, two years of solid economic growth have placed the economy at its largest size in history at $12.8 billion. This was achieved as a result of 13.8 per cent growth in 2022 and 4.4 per cent growth in 2023. The growth performance in 2023 was driven by a robust performance in tourism which contributed to improved performances in other sectors through linkage effects.

Second, the size of the economy of $12.8 billion is large enough for everyone to benefit. Third, the unemployment rate increased from 7.1 per cent in September 2022 to 8.3 per cent in 2023. Fourth, the 4.4 per cent growth not only bolstered transaction-based tax revenues but also contributed significantly to reducing the debt-gross domestic product (GDP) ratio. Fifth, private sector investment of $1.9 billion annually is required to achieve growth of 4 per cent in 2024 and a strong growth rate in successive years into the medium term. Sixth, the level of foreign reserves was $2,997.4 million or 31.6 weeks of imports of goods and services as at December 31, 2023.

Though not mentioned in the presentation, the $12.8 billion is nominal GDP. It is well accepted by economists that in periods of persistent high inflation, the more appropriate measure of economic performance is real GDP rather than nominal GDP. Nominal output is the product of quantity and prices. Hence, in periods of high inflation, an increase in nominal GDP can be influenced by price increases in a disproportionate manner.

This point was acknowledged by Dr Greenidge in his first presentation on the performance of the economy. On that occasion, he noted that nominal GDP reached $11.4 billion in 2022 compared with the pre-pandemic level of $10.6 billion in 2019. However, when adjustments are made for price increases, the figures are $7.6 billion and $8 billion, respectively, indicating that the economy was $400 million smaller in 2022 compared to 2019 in real terms.

It is therefore puzzling that Dr Greenidge emphasised the nominal figure of $12.8 billion for 2023 and did not repeat the comparative analysis for real GDP in 2023 relative to 2019. Using the Central Bank data, real GDP was $7.93 billion in 2023, which is less than the 2019 figure of $8 billion. Thus, despite the nominal growth in GDP of 12.3 per cent (and real growth of 4.4 per cent) in 2023, the economy was smaller compared to 2019 in real terms

The suggestion by Dr Greenidge that the economy’s size of (nominal) $12.8 billion is large enough for everyone to benefit is unfortunate, insensitive and not expected from a trained economist. ECON 101 states explicitly that GDP is simply a summary statistic of the productive capacity of the economy and is an inadequate indicator of the well-being of citizens in an economy.

An increase in GDP will not be beneficial to the majority of the population when there is a high degree of skewness in the distribution of income, when there is inadequate spending on social services, and when (re)distributional policies are not catering properly to the most vulnerable in society.

As an architect of the International Monetary Fund-supported Barbados Economic Recovery and  Transformation (BERT) programmes, Dr Greenidge ought to be acutely aware of the adverse impact of the austere economic measures on the Barbadian economy and society.

Indeed, there has been an increase in dispossession and poverty, high cost of living and high food prices impact negatively on the most vulnerable families, and inadequate spending on health and education presents challenges in the provision of these two key public services. Also, the state of accommodation for some public officers is undesirable, and there is a pressing need to upgrade the road infrastructure and improve the distribution of water to certain areas in the country.

The co-existence of growth and an increased unemployment rate is deserving of an explanation. It is accepted that the quantity variable (rather the price variable) in the nominal GDP calculation should have correspondence with employment, that is, the quantity variable should have a positive relationship with employment. Thus, if the nominal GDP in 2023 was influenced more by price increases rather than quantity increases, growth can occur with an increase in the unemployment rate.

The twin phenomenon of growth and an increased unemployment rate may also be explained by increased productivity in key economic activities by existing and new workers, while more non-productive workers exit the labour market through retirement, frustration with working conditions and remuneration, and cessation of welfare-type government programmes.

With regard to labour market statistics, it will be useful for the Central Bank in future reports to present labour force participation rates (percentage of persons within the eligible workforce seeking employment) for males and females, a disaggregation of the retirees in terms of those persons opting for early retirement and those leaving at the mandatory age, and statistics on youth unemployment.

The tourism sector was the main driver of growth in the economy in 2023. In expounding on the tourism arrival statistics, an unusual approach was utilised by the Central Bank in comparing arrivals for 2023 with average arrivals for 2017 to 2019. Such an approach masks the peak pre-pandemic performance in 2019 and overstates the relative performance of tourism in 2023.

A review of the tourism statistics indicates that long-stay arrivals of 636,540 in 2023 were 89.1 per cent of the 712,946 arrivals in 2019 (rather than 93 per cent if the average of 684,214 for 2017 to 2019 was used). Figures for cruise passengers were rather disappointing, with cruise arrivals in 2023 reaching 64.6 per cent of the level in 2019.

The performance of tourism, though on an upward trajectory since the pandemic, does not compare favourably with many of Barbados’ competitors, for example, Aruba, Curacao, Dominican Republic, Grenada, Jamaica, St. Maarten, The Virgin Islands, and Turks and Caicos, which surpassed pre-pandemic levels in 2022 and enjoyed new record arrival levels in 2023. Thus, the challenge of the tourism planners in Barbados is to intensify their marketing efforts in order to ensure that the 2019 peak level of performance can be surpassed in 2024.

The practice has been to rely on tourist arrivals as an index of growth and performance of tourism. However, it is recommended that the Central Bank augments its assessment of the tourism sector through the adoption of the recent suggestion by Professor Michael Howard to employ quantitative approaches to calculate net foreign exchange earnings from tourism and the multiplier effects of tourism on the economy.

The Central Bank report noted that the debt-GDP ratio declined from 120.3 per cent in 2022 to 115.5 per cent in 2023. With the size of the economy reaching nominal $12.8 billion, the level of public debt was $14.79 billion on December 31, 2023. Considering that the government’s debt payment obligations will amount to almost $1 billion for the financial year ending March 31, 2024, the level of debt stock of $14.79 billion at the end of 2023 is indicative of a continuation of the policy of excessive debt accumulation by the government.

The government continues to use the policy of excessive foreign borrowing (rather than earning foreign exchange) to maintain a healthy level of foreign reserves. According to the report, the gross international reserves reached about $3 billion (or 31.6 weeks of import cover) at the end of 2023, an increase of $227.2 million over 2022. This increase in reserves resulted from an inflow of policy-based loans.

Finally, it was stated that $1.9 billion in annual private sector investment is required for the economy to achieve a growth rate of 4 per cent in 2024 and for such growth performance to be sustained into the medium term. However, the Central Bank report does not provide any information on a private sector plan to achieve the targeted level of investment. The lack of specifics on investment raises uncertainty about the economy achieving projected growth rates.

While the news of economic growth, driven mainly by the resurgence of the tourism sector, is welcomed, the Central Bank Governor is urged to temper his excitement about the economy given the following realities: unbalanced nature of growth with the economy heavily reliant on tourism, persistent high prices are contributing to the growth of nominal GDP and transaction-based taxation revenues, increased cost of external borrowing, constraining economic impact of the high tax regime, and the depressing social and economic impact of the austere measures in the BERT programmes.

 

Anthony Wood is a senior economist, former Cabinet minister in the Owen Arthur administration and former lecturer in economics, banking and finance at the University of the West Indies Cave Hill Campus.