The following is Part One of the unedited text of the Financial Statement and Budgetary Proposals for the year 2010.
Mr. Speaker,
It with a sense of great humility that I accept the honour to present the on behalf of this Democratic Labour Party Government. I do so Sir, chastened by the enormity of the circumstances, challenged by the task that confronts me, but comforted by my belief that Almighty does not place upon the shoulders of any man more that he is able to bear.
I am even more fortified in the view that God will not inflict upon the people of this nation a burden too difficult to carry. I make bold this declaration mindful of the fact that I speak at a time when the nation still grieves for its fallen leader; Is still reconstructing from the devastation wreaked by Tropical Storm Tomas, and still recovering from that awful tragedy that took the lives of those six beautiful young women at the now infamous Campus Trendz fire-bombing incident.
All of this Sir, coming against the backdrop of the continuation of a domestic economic recession, almost exclusively driven by the ravages of a global financial and economic crisis characterized by most as the worst since the Great Depression of 1930, in terms of its global reach, duration, and severity of its impact.
It is as if Barbados was entering the vortex of the perfect storm.
But even so Mr. Speaker Sir, we hold fast to our faith in God, our love of country, and to those fundamental beliefs of equality of rights, charity with wealth and dignity of existence afforded to all who move among us.
It is for these reasons then Sir that I give thanks for all of the blessings that have been bestowed on our nation, and thank God for giving me the strength to be here this evening to bring a message of hope and reassurance to the citizens of our great nation.
Mr. Speaker Sir, it would be remiss of me if I did not crave the indulgence of the House a minute or so to thank the constituents of St Michael North West for reposing confidence in me to represent their interests in this House of Assembly. I am indebted to them for the patience which they have extended to me even as I balance the demands of ministerial office with that of meeting their personal needs and that of their communities.
On a personal note, I count myself as fortunate to have worked with and gained the respect and confidence of three Prime Ministers: His Excellency, Sir Lloyd Erskine Sandiford, The Late Honourable David Thompson and my new political leader the Hon. Member for St. Michael South. All of these gentlemen have allowed me to serve the people of Barbados in roles varying from that of Personal Aide, to a minister of the Crown. Gaining as it were invaluable experience in the art of governance, while contributing to the overall development of my country.
I equally acknowledge the hands of guidance in my life from the mother who fathered me, to the village of Deacons that raised me and the teachers of the Garrison Secondary School that shaped my early understanding.
Ultimately, I rise before this nation to deliver this presentation with the love and support of many across Barbados and none perhaps stronger than my beautiful wife of a decade, who is here this afternoon.
Mr. Speaker Sir, the eminent Caribbean political economist C. Y. Thomas, in delivering the Sixth William G. Demas Memorial Lecture, spoke accurately to the Caribbean development existence when he fashioned the analysis of a development glass half full. In his treatise, Thomas surmised that while regional countries, including Barbados, had achieved much success in pushing their respective developmental agenda, there were some constant and worry characteristic features of our development that portended deep structural misalignments between national expectations and national capacities. Which, when cruelly exposed to the vagaries and ultimate weaknesses of the international economy was seriously endangering our abilities to secure balanced development for future generations of our people.
Thomas’ thesis, which I wholeheartedly support, concluded that in several countries the very success upon which our post-colonial development was forged relied on a dominant sector economic model of development anchored as it were on a generous over-reliance on foreign markets. It created an appropriately expansive social development platform unmatched by a similar expansion in national productivity and ring fenced by a neo-liberal political model known more for its social elitism than popular inclusion. These winning characteristics of the sixties, seventies and eighties, are now the very elements undermining the very tremendous progress they caused.
In many ways, Thomas’ reflections are entirely characteristic of the Barbados’ post-independence experience.
Mr. Speaker Sir, few can deny that Barbados has done well as a country in the last 44 years. The relatively stable performance of our economy characterized by positive economic growth in the main; our extensive and at times unmatched array of social services, and our much heralded commitment to and clinical practice of the art of political democracy have all underlined a successful model that have at varying points secured for us the label of number one developing country in the world.
But fewer still Mr. Speaker, will deny that in the last twenty five years or so this development model, though still useful in many regards, has been cruelly exposed as limited in scope, highly susceptible to external shock and largely unresponsive and inflexible to the ravages of deep seismic shifts in global political and economic phenomena.
To illustrate my point Sir, we have only to look at the impact which the last three major global recessions have brought to our door steps. In 1973, a steep and disruptive increase in oil prices, and a concomitant emergence of what was then termed as stagflation, led to major economic and social dislocation in Barbados. Again in 1981-82, another oil driven global recession wreaked havoc on the macro fundamentals of the Barbados economy leading to job losses, increase in user fees and general belt tightening.
In 1991-93, a then global recession economically contiguous to the war in the Gulf immediately undermined our economic progress to the extent of large job losses, cuts in public servants salaries, and increases in user fees. Even Sir, for a brief period in the early part of this century, following the relatively small disruption in global commerce after the terrorist attacks on the World Trade Centre, our economy showed signs of buckling under the slightest of pressures.
The object lesson here Sir for all of us to glean is that it matters little which party is in government at the moment in time, who the Minister of Finance is, or which degree he/she comes to the post with. Our economy is structurally challenged and in need of major reform.
And, with each passing global recession, it is becoming pellucid that the severity of the impact is, like the water on sea wall at the wharf road, seriously undermining our ability to defend the Ship of State.
The issue then Sir is not if a recession is going to come, it is when. Not if it is going to impact us but to what extent. Not if we are going to respond but how. Recessions are by their nature cyclical and relatively short. It is however the virulence and reach of their impact that is proving increasingly more difficult to predict and worst yet control.
And in this regard Sir, the deeper and more impacting they become the more difficult it is for small vulnerable developing countries such as Barbados to defend against them.
In their ground breaking work on small economies in the year 2000, the Commonwealth Secretariat and the World Bank surmised among eighty odd small economies in the world, Barbados was one of the most dependent on the global economy and thus highly vulnerable economically.
That was in the year 2000. I believe that the Honourable member for St. Peter played a role in that process that lead to that research and its follow-up work. That is why it is so ironic that, ten years later the same agencies along with counterpart organizations such as the IMF and UNECLAC in their respective reviews of the Barbados economy could expose the depressing reality that far from an improvement in its fortunes Barbados has in fact become even more highly dependent on, and ultimately vulnerable to the Global economy.
Put another way Sir, I make bold to suggest that even in spite of the numerous promises made by the Minister of Finance in last government to restructure the Barbados economy; and even in the face of a period of relative economic prosperity and expansion globally and as a result domestically, no serious attempt was made to capitalize on those opportunities to restructure the Barbados economy in a way that would have moderated its over dependence on the world economy, reduce our high vulnerability and save us some of the pain we are experiencing now.
That we wasted that opportunity in the face of a blind desire for regime consolidation, and electoral success has been and will be to our eternal detriment even if action is not taken now.
When faced with the last major recession in this country in the early 1990s, it was the Democratic Labour Party that put Barbados’ interests first. We fought and won the battle to save the Barbados dollar. We right sized the public service and reformed some statutory corporations while restructuring the sugar industry. We made substantial changes to the direct and indirect tax systems, including all the preparation for the introduction of a Value-Added Tax, while creating new and better ways for earning foreign exchange through the then Foreign Exchange Committee.
We started restructuring work in sectors such international business with new facilitation units, while changing the incentive regime for manufacturers to encourage greater export growth.
We did all of that in the midst of the then recessionary conditions. Yes, some of the measures we took were painful, but they laid a perfect wicket on which the incoming Barbados Labour Party batted and score runs. And scored runs they did Sir. What they did not do however Mr. Speaker was to use that time of plenty, to continue to properly engage in a fundamental restructuring of the Barbados economy to prepare it not only to better withstand the ravages of the next recession, but equally to evince a deeper and more sustainable form of economic and social development.
What we got instead Sir, was a plethora of feel good pet projects, distinguished only by their huge costs and infamous costs overruns. The Highway project, the office complex at warrens, GEMS or JAWS, and the ultimate legacy of the last government, a potential 750 million dollar prison Dodds St. Philip.
No substantial restructuring of the manufacturing sector to forge new vistas of innovation and the expansion of the domestic entrepreneurial class. No radical reforms in the agricultural sector to transform it from its benign and perpetual small holdings subsistence characteristic to an agglomeration of larger farming cooperatives with positive vertical linkages to other sectors in the domestic economy. No new agro-processing capacity to allow for the creation of solid export niches to diversify the foreign exchange earnings base of the country.
No serious continuation of the reform programme started in the sugar industry by our late revered leader in the early 1990s. Not even a single new investment product in the international business sector to which we can point.
What we got Mr. Speaker Sir from the then so-called economic dream team was a daily diet of economics 101, spiced as it were with a good dose of long talk and little action.
Little wonder Sir that the Democratic Labour Party, has returned to government only to find our productive sectors virtually the same place we left them. Tell me Mr. Speaker Sir, should I or any other on this side be hearing in consultations with business sector leaders, or even on call in programmes that government needs to assist with the restructuring of agriculture sector, (especially the sugar industry), manufacturing, or even tourism.
Should we in 2010 be lectured by the Leader of the Opposition, on a “new strategy” for the International Business Sector. Which truck Sir, did that plan fall off of and why did the truck not pass during the fourteen year reign of the great economists?
Mr. Speaker we wasted an opportunity to seriously restructure our productive sectors. We substituted long term sustainability for short term gratification.
We over relied on high end construction fuelled by foreign direct investment and the growth in international financial and business services.
Truth be told Sir, this model worked well when things were great in the global capital markets and people as it were had “money to burn”. But we always knew, or should have known that this approach was bound to be severely tested once another serious financial downturn came along.
The other point worth noting here is that riding on the back of this foreign driven success, Government was able to increased total revenues from $1.6 billion in fiscal year 1999/2000 to $2.5 billion in 2007/2008. Put another way total revenue as a percentage of GDP went from 32 % to 36 % during the period.
However, concomitantly, total expenditures increased at a much faster rate during the same period, rising from $1.7 billion to $3.2 billion, or from 33.7 percent to 46.3 percent GDP.
The story here Mr. Speaker is that growth in the economy during this period, averaged at around 2.5 %, allowed for more generous increases in revenue supported primarily by a higher tax take on corporate profits and commercial transactions through the VAT. It however also encouraged an expansion government’s current expenditures with the adding of projects to spend on that in the main were not themselves self supporting.
This lends itself to at least three immediate observations which are instructive of the realities we now face.
The first is that there is a strong and relevant correlation between the maintenance of sustainable economic growth and a country’s ability to modulate its fiscal accounts. Secondly, when Government enters the market with new initiatives, these more often than not are likely to be social type, non self supporting programmes that consume revenue rather than earn it, and thirdly that when that trend of growth is broken public accounts can and inevitable will fall into disequilibrium as governments struggle to maintain tax revenue with the additional weight of an expanded social sector programme.
The upshot of this Sir is that if revenues do recover quickly especially when recessionary conditions persist, and deep compensating cuts are not made in current expenditures, moderate to large deficits will result.
Mr. Speaker Sir there is no mystery to this and what has transpired in the last two years can squarely by placed in this vein, just as it was for the recessionary periods in 1981-1982, 1991-1992 and 2002-2003 and now for 2008-2010 when the our fiscal deficits expanded beyond six percent of GDP to varying degrees.
Revenue Vs Expenditure Debate
It is for this and other reasons Sir that I find the debate over raising taxes or cutting expenditure to be particularly interesting and at times devoid of the level of intellectual sincerity expected in public discourse.
For example Mr. Speaker, in 2002/03 when the fiscal deficit in Barbados rose to 6.9 % of GDP we were told post the increases in expenditure that the then government had introduced a “reverse stimulus package”. That was seen as a “brilliant response” by the then Minister of Finance.
However in 2008 when the late Minister of Finance, faced with the worse ever global financial and economic crises, clearly outlined this government’s strategy for containing job losses, slowing the rate of decline in the economy, and keeping activity going in the economy, through an expansionary fiscal policy he was accused of being reckless and spend thrift.
But who the cow likes……………
Then Sir, they are those who in the comfort of opposition or even the private sector proclaim loudly………….CUT EXPENDITURE, don’t raise taxes. Never really telling you where these cuts are to occur, or to what extent and definitely not honestly telling the people of Barbados what the true implications are for many working class people in Barbados if that advice is followed in the way in which it is rendered.
They are not going to tell you that the structure of Government’s expenditure budget, it hardly affords any Government the luxury of major reductions in expenditure.
We can’t make cuts in our debt service payments because that is tantamount to voluntary defaulting or economic suicide. We can’t cut the salaries and wages bill of government.
And since government is the biggest consumer of goods and services in the economy with so many businesses relying on government accounts to make a living and keep people employed we know that any dramatic a cut in this form of expenditure will dampen spend in the economy and further deepen the economic decline.
So they all argue, cut subsidies and transfers to public institutions. Of course these critics will not tell you that 75 % or all transfers and subsidies to public institutions go towards paying salaries and pensions and debt.
Put another way Sir, what these people are saying to this government in coded language is that we should send home Barbadians. Cut jobs, retrench, lay off or otherwise sever hundreds perhaps even thousands of public sector workers.
That Mr. Speaker represents exactly what all this talk of major cuts in public expenditure means. It is a policy prescription that this government rejects, in the way in which it is being presented.
Surely Sir, a case must and has been made for serious adjustments in the government’s expenditure budget and to this we recommit ourselves with a high level of seriousness. However such adjustments will be done as strategically and as efficaciously as is possible over a short to medium period so that few if any jobs are affected by this approach.
We will not shy away from the need to pursue a vigorous course of fiscal consolidation in line with our commitments in the Medium-Term Fiscal Strategy (MTFS) but the effort must be balanced and reasonable. It is better, at least in our view, for a man or woman to be able to earn a dollar even if they have to lose a little more in taxation than for that person to be sent home where they can’t earn anything at all.
I lay down the challenge to all of arm-chair economic gurus tell the people of Barbados which major item of expenditure are you prepared to cut. Tell the public servants how much money you are prepared cut from the expenditure budget from subsidies and transfers and which statutory boards are likely to be affected. Tell the people!
Are you going to cut the 145 million dollars that goes to the QEH, and If so, by how much? Are you prepared to cut the UWI budget which has now reached almost 150 million dollar per annum? How about the sanitation Services Authority? Tell us when you speak, we are all ears.
Mr. Speaker this is the stark reality of the situation which we currently face and why all of us in Barbados must face the problem and fix it. But in order to do this we have to be upfront and honest with the people of Barbados and this is the solemn pledge that I give to you Sir, this Honourable House, and to all Barbados. Under my leadership in the Ministry of Finance there will be no hiding the truth from the people of Barbados, because the effort I will call for to return this country to financial stability and ultimately sustainable economic growth cannot be met by half the population. It must be achieved by all our citizens.
What We Did and Why We did It.
In 2008 when our late Prime Minister presented his first budget for this term of office he said these words and I quote: “There are those who think that 2008 is the worst time for a political party to come to office bearing in mind the multifaceted challenges that confront us”
Sir he could not have been more correct.
Background to the Recession
It was evident from mid 2007 that the world economy was slipping into recession. However Mr. Speaker, I don’t think even the most gifted among us could have foreseen the severity and far reaching consequences of this recession.
It is now accepted that this financial crisis, triggered primarily by collapse of the US sub-prime mortgage market led to a liquidity shortfall in the United States banking system and a massive loss of confidence. This resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. It has contributed to the failure of key businesses, declines in consumer wealth estimated in the hundreds of billions of US dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity.
All of our major trading partners were severely affected. In the USA, their economy spiraled into an unprecedented free fall that saw a major decline in GDP, occasioned by massive job losses, home foreclosures and bankruptcies. At one point, Sir, this major tourism generating market for Barbados, was losing up to seven hundred thousand (700,000), jobs a month. President Obama’s response was a massive 800 billion dollar stimulus package which two years on has only paid marginally dividends, produce jobless growth and cause his party a massive defeat in the mid-term elections. In the UK, our biggest tourism and Foreign Direct Investment market (in terms of spend), the decline in GDP was even more dramatic and the job losses staggering. Home and business foreclosures were extensive and the government’s fiscal accounts are in shambles.
The British Government too responded with its own version of a stimulus package but that, like the USA’s has only had marginal effect on the economy and instead has made its budget deficit worse and prompted a stern correction by the Chancellor of the Exchequer – the Minister of Finance in that country.
Indeed Sir, only a few months ago the Chancellor introduced the most severe austerity programme in the history of the country. He raised VAT from 17 ½ % to 20 %, announced the intended cut in 500, 000 public service jobs, and rolled back several social welfare programmes. Mr. Speaker he even instituted massive cuts in the UK’s defense budget, the likes of which has never been seen in Britain.
Across Continental Europe, similar austerity programmes have been introduced to deal with unsustainable budget deficits and return financial stability to the economy. From Portugal to Ireland and through Greece to Spain, the story is the same.
In all these cases the initial response was virtually the same. A massive stimulus package geared towards maintaining aggregate demand in the economy by stimulating spending designed to keep business going, halt the declines in GDP and thereby save jobs.
This at the time Mr. Speaker seemed like the correct thing to do, and in some respects these packages did have some effect in halting the free fall in the economy. But compounded with deeper structural problems in public accounts especially on the expenditure side has led to unsustainable fiscal deficits and consequential threats to economic viability, financial stability and potential social dis-cohesion.
Closer to home, most if not all of our counterpart countries in the CARICOM Single Market, experienced moderate to severe declines in output leading to business closures, jobs losses and general economic instability. Jamaica was forced to return to the IMF and the World Bank for another set of structural adjustment programmes that portended painful job cuts, cuts in social spending and the increase in user fees for social services. In the Bahamas wide spread job retrenchments ensued as several hotel properties closed or significantly reduced operations leading to declines in GDP output and consequential austerity measures from the government there. The OECS have not fared any better and they too witnessed moderate job losses, business closures, declines in tax revenues and a general contraction in GDP.
What most, if not all of them did not anticipate was the length, virulence, and share devastating impact of this recession. That Sir, was the game changer for all of us. The anticipated return to moderate levels of economic growth behind the massive stimulus packages has not occurred and instead the economic recovery in some has been slow and tepid, shallow at best and non-existent at worse in others.
From the outset, this DLP administration under the leadership of the late David Thompson, when faced with similar difficulties set out like most others to defend our way of life and protect our standard of living.
We surmise Mr. Speaker that while we did not have the financial resources to introduce a huge stimulus package as many in the opposition were telling us to do, we still had a duty to make strategic interventions that would contain the expected economic decline and limit its potentially debilitating impact on the people and of businesses of Barbados.
To this extent your government devised two critical economic intervention plans. The Medium Term Fiscal Plan and the Medium Term Development Plan, both of which Sir, were laid in this Honourable House in March of this year. There were numerous and a widespread public consultations on these plans particularly with the public and private sectors as well as the expanded Social Partner Group.
The main short to medium term objectives of government’s response to the recession was as follows:
I) Containing our External Debt, and protecting our foreign exchange reserves;
II) Maintaining jobs;
III) Return the country to fiscal balance in a reasonable time frame;
IV) Keeping intact and strengthening the social safety net;
V) Strategic investments to build productive capacity;
VI) Returning the economy of Barbados to a sustainable growth path in the shortest possible time.
Foreign Exchange Earnings, Debt Management and the Foreign Reserves
During the last 34 months our economic management plan was therefore built on the three necessary pillars for an economy like Barbados that depends so heavily on foreign exchange earnings as well as on a high level of imports. These pillars are maintaining an adequate level of foreign exchange reserves, appropriate monetary policy, external debt containment and targeted support for economic activity designed to slow the rate of expected declines and spur economic growth in short term.
Mr. Speaker Sir, with expected declines in the main productive sectors of Tourism, International Financial and Business Services and Manufacturing the new government’s critical focus in this area was to contain the fall off in foreign exchange earnings. These attempts were further challenged by a massive fall off in Foreign Direct Investment consequential not on any opposition to or dislike of foreign investors by this government, but because on the real shortage of international finance capital, due to the widespread banking crisis and a massive decline in investor confidence.
In the face of these realities this government implemented a judicious strategy of foreign reserves management geared towards developing and activating capacity building projects funding by external regional and international financial development institutions such as the CDB and IDB. Containing leakages on the reserves through the introduction of judicious monetary policies and raising foreign loans to roll over expected calls on the reserves to meet debt service commitments.
Ultimately, the standard objective of the Government was and has been to achieve a turnaround in the decline in the foreign exchange earning sectors starting with Tourism and International Business, and working through Manufacturing and Sugar and Non-Sugar Agriculture. Government also embarked on a concerted programme to woo foreign investors back to the country even as they proceeded with nervousness and trepidation as a result of the uncertainty in the international economy and the unsettled nature of the markets.
Sir, in Tourism we concentrated our efforts on reinforcing Barbados’ brand in the traditional markets while exploring new opportunities in emerging markets such as Brazil, and other parts of Latin America. We took a deliberate decision to go after the Canadian market which was once one of our largest sources for visitors but had fallen off in the past decade. We noticed that the Canadian economy was showing some resistance to the recession and through a mix of increase advertizing and an aggressive policy to increase airlift (through West Jet primarily) that market has vastly improved in production in the past two years. Indeed Sir, following a resurgence in 2009 the Canadian market has so far this year recorded a 21.6 percent increase in visitor arrivals.
The same upward trend is true for the USA where behind a similar strategy of expanding airlift and targeted increases in marketing effort over the last two years arrivals from the USA have recovered appreciably to record double digit increases in both 2009 and for this year so far. We have also added new capacity through Jet Blue on the Northeast region and additional American Airlines lift out of the Southeast region.
In the UK market with deeper recessionary conditions than expected, a loss of airlift, the imposition of the Airline Passenger Duty as well as a series of natural catastrophic events (snow storms and volcanic ash) have hampered our efforts there but the signs in the last few months have been encouraging to the extent that it appears as if the declines have tapered off.
This effort externally was met with a strong domestic support programme for sector stakeholders. We developed and introduced the Tourism Relief Fund which provided much needed working capital to industry players including the small ones to keep doors open, people employed and earn foreign exchange for the country. They also benefited from the additional 10 million dollars in marketing funds provided to the BTA, and from the general waiver of interests and penalties from VAT and National Insurance. Credit must also be given to the Barbados public for the supporting the Staycation programme which has been key to conserving foreign exchange as well as keeping Barbados employed in the hotel sector.
Sir, I have met with and spoken to key players in this sector in preparation for this budget exercise and they have all universally proclaimed that were it not for this Government’s efforts over the last two years hundreds of workers in this sector would not have been able to retain their jobs and businesses would have had to significantly down sized operations or close entirely.
Yet Sir, some people, for their own political or personal benefit are claiming that this government has done nothing to help the country come out of the recession.
In the international business and investment sectors, the late Prime Minister before he fell ill undertook an extensive mission to the UK, Europe and the USA to meet with and encourage investors with projects in Barbados to restart them. The Late PM reemphasized Barbados commitments to facilitating such investments as far as was reasonable to help ease difficulties of these investors to get their project restarted or continued.
Government issued the largest ever local guarantee to a foreign project to the tune of sixty million US dollars, which was intended to assist the project’s new developers to get the project restarted. I am happy to report to this House Sir that only last week the project’s new directors were able to initiate perhaps the most critical element of that restart plan through the payment of the large number of creditors who were owed money by the project.
These are mostly local business people including several small businesses and individuals. This I am reliably advised removes a major stumbling block to the project’s restart sometime early in the New Year. This is a domestic solution to an internationally created problem and full kudos must go to all involved, especially in my view the Late Prime Minister and this government for have the foresight and the tenacity to stick with this project.
We also got commitments from principals associated with the Beachlands, Batts Rock, Merricks and Foul Bay projects that they would initiate or restart their initiatives. While local large developers at St. Peter’s Bay, Lime Grove, and Apes Hill kept the faith with the government’s programme and forged ahead with their projects even in spite of difficult times.
These efforts by government have sent a very strong signal to the international market and investors that Barbados is still very much open for business and serious about finding ways to help investors proceed with their projects.
Mr. Speaker Sir, we even introduced new initiatives aimed at attracted the very lucrative corporate social investment sector by amending local Charities Act and the Income Tax Act to facilitate giving by high net worth individuals and corporations and Barbadians in the Diaspora. We also created the Barbados Foundation for Philanthropy to facilitate investments of this nature into the domestic social infrastructure.
In the International Business and Financial Services Sector we continued to adopt an aggressive posture on expanding our Treaty Network signing new Double Tax Treaties with Mexico and Panama the Czech Republic and Portugal.
In agriculture, the previous Minister of Finance in his 2008 budget gave an extensive array of incentives and other assistance to the sector including increasing the subvention to the Barbados Agricultural Society.
All of these initiatives Sir, and others, helped the country to either save or continue earning foreign exchange in the face of massive declines in consumer demand among our major trading partners. The interventions were not massive because we did not have the resources for that type of approach. But they were strategic and have had the desired effect to varying degrees. We now have to build on these going forward.
Debt Management Strategy
Government’s external debt management strategy focused on minimizing the cost of borrowing, by taking advantage of low interest rates, while seeking to avoid an excessive build-up in external debt balances that would place further pressure on the country’s foreign reserves. As such, new foreign debt has been issued predominantly to roll over maturing liabilities and to offset any erosion in reserves that resulted from the economic downturn. We also followed a deliberate strategy of concentrating our borrowing more from the International Financial Development Banks such as the IDB and the CDB which proffer project loans at very attractive interest rates. In this regard in the last two years we have source close 110 million US Dollars for projects in water, energy and sectoral competitiveness. This strategy has allowed us to keep our external debt service as a percentage of exports within the international standard of 15%, with this ratio expected to decline in the medium term. This approach to managing foreign debt has been facilitated by Government’s ability to rely on the highly liquid domestic financial market to provide the majority of financing for its operations. Both in the domestic and external markets, Government sought to obtain longer-term debt at maturities that minimise the possibility of bunching.
Going forward, Government will continue to closely monitor its indebtedness by, amongst other things, examining the maturity and interest rate composition of its debt to ensure that the cost of borrowing is further reduced, without undertaking unnecessary risks. In addition, rather than relying only on borrowing from the international capital market, Government intends to place greater emphasis on securing external funding from multilateral institutions, at more concessional rates.
In terms of the domestic banking sector and creating and maintaining liquidity in to assist domestic businesses we sought to pursue:
1. The international borrowing by government for its projects so that government did not crowd out the private sector.
2. Support the reduction by the Central Bank of the reserves that the banks have to keep at the Central Bank or in government securities.
3. Support the Central Bank’s restarting of its scheme to lend more to the banks if the banks needed it and had government debentures to use as collateral for the increased borrowing.
4. Encourage the Central Bank to expand its schemes to guarantee lending by the banks to small and medium sized businesses so that businesses can keep their doors open and maintain their employment levels.
5. Support the Bank’s efforts to reduced interest rates quite aggressively so that the minimum savings rate has been lowered to 2.5%. Since the banks set their interest rates based partly on this minimum savings rate, we expected the commercial banks to move immediately to reduce their lending rates by at least the same amount that the Central Bank has reduced the minimum savings rate.
On this point Mr. Speaker, we believe that the banks should go even further and reduce their spreads, that is, the difference between what they lend at and what they obtain funds at. I believe that if the rest of the country is operating on tighter profit margins, then the banks should too. If the banks take the position that the risks in lending increase during times of economic difficulties and increase their spread, then they will only make it worse for the rest of the country. And so, I want the banks to act as truly responsible corporate citizens and share in the margin tightening of all businesses in the country, by reducing their spreads in their lending rates. This is critical for us because we have to help reduce the costs of doing business in the country by reducing interest costs, particularly at this time. The banks must also reduce their spread so that people who have mortgages get a little ease during these difficult economic times.
I am convinced they can do better and help our domestic businesses to weather these difficult times and emerge stronger to the benefit for the said banking institutions.
The net effect of all these policy interventions by government in the last two years has been modulate the impact of the effects of the international recession on our net international reserves to the extent that we have created a settling point of about 1.4 billion dollars on average. This represents around 19 weeks of imports which is above international standard requirements.
Mr. Speaker while we are not happy with this in the circumstances of the greatest economic recession in the history of the world I believe that this Government has done well to stave off much larger declines in the reserves.
Economic Expansion – maintaining employment levels and domestic demand
Mr. Speaker in addition to our efforts in the main traded sectors as I just highlighted our programme to slow the decline in output in the economy and push for an expansion in the shortest timeframe consisted of many other internal interventions. For example:
· Government maintained its level of employment, and supported the private sector in doing the same
· Government agreed a wage increase thereby injecting around $75 million of additional spending in the economy in the following fifteen months.
· Government also maintained annual increments
· We brought forward the increases in the reverse tax credit to $1,500 for the workers earning less than $16,500 a year a full year ahead of plan to protect low income workers.
· We introduced the free bus rides for schoolchildren saving some parents little as $400 per year for one child making one trip each way to school to as much as $1500 a year for a parent with two children making two trips each way to school.
Mr. Speaker Sir, further to these measures this DLP administration also provided funding annually for:
1. The camps programme – which accommodated more children at camps across the island; this social initiative also had a strong economic component as it provided work for small caterers and restaurants.
2. We introduced an intense road repair programme – repairing more of our very bad roads and building roundabouts at some of our unsafe junctions
3. We also initiated a programme to repair more of our schools that are in dire need of repair.
Maintaining Employment and Strategic Investments
Mr. Speaker, Government felt that the economy would benefit more during this time if we kept people employed. It was critical for us to help the private sector maintain and increase employment so that the level of economic activity in the country was maintained as much as possible. It was also felt that it was better to have many smaller projects that could be implemented quickly. In this regard we:
1. Expedited the electrical retrofitting and upgrading of the former NHC terrace units at a cost of almost $15 million.
2. Initiated the Construction of almost two hundred thousand square feet of new office accommodation at Warrens at a cost of around $100 million. These new offices will house public officers who have suffered for a long time from working in sick and dilapidated buildings. We will then be able to repair or rebuild the offices now being used.
3. Accelerated our Housing Construction programme completing projects Greens, Four Hill, March Field, Coverely, and Work Hall, while initiating work at Forde’s Road, Sayers Court, Stuarts Lodge and completing the works at Country Road. These projects not only provided much needed homes for working class Barbadians, but also injected millions of dollars in additional spending in the economy, provided employment for several artisans and labourers and other sub-contractors.
4. Provided $60 million to The Queen Elizabeth Hospital to support their plant and equipment upgrade facilities programme to enable the QEH to function at a reasonable level while we plan the complete renewal of our entire health sector plant.
Widening and strengthening the safety net
Understanding the potentially devastating impact of the recession this administration moved quickly to broaden and strengthen the social safety net by:
1. Increasing non contributory old age pensions.
2. Increasing national insurance pensions.
3. Increasing welfare grants.
4. Expanding the Welfare to Work Programme.
5. Introducing the National Environmental Enhancement Programme (NEEP) to provide additional short-term employment opportunities for welfare recipients to encourage them to graduate from state funding.
A DELIBERATE STRATEGY:
Mr. Speaker Sir, what I have just highlighted was a deliberate strategy on the part of this government to intervene in the economy to forestall the real possibility of it going into free fall, causing hundreds, even thousands of workers to have to going home. It was a strategy to hold jobs because we surmised Sir, that it would not have been in the interest of Barbados or Barbadians to allow massive unemployment to ensue as the recession got worse.
That Sir would have caused massive social and economic dislocation and potential security risks for the state.
We understood Mr. Speaker that by doing so it would cause government to carry increased current expenditures and this in turn would negatively affect the fiscal deficit. This was to be expected given the nature of the times with slow and declining economic growth in the economies of those countries with which we have our closest economic relations.
We defended our people as best we could in the circumstances. What none of us bargained for or could have predicted was the extensiveness and virulence of this recession and when we thought that it bottomed out and a strong recovery would come, it did not happen.
We were hoping for a recession that would last no longer than two years with very small growth or small decline in 2008, an expected bigger decline in 2009, breakeven or very small growth in 2010, and a resumption of growth 2 – 2.5 % in 2011. This proved to be the right path but declines were greater than expected in 2009 as the full effects of the global recession began to be felt in our productive sectors.
Mr. Speaker, that sir was the response of this DLP government to the financial crisis besetting the world. We cannot be accused of not being proactive, or not providing the necessary stimulus to the economy. We had a clear strategy and implemented it. What was in the realm of the unknown and still is, is how much longer. What is certain is that significant risks remain for the world economy over 2010-2011 period.
Mr. Speaker, thanks to our exposure to the world through 24 hour news cable television stations Barbadians have a good understanding of what the true picture is across the globe. I think they wanted to hear from us what we have been doing and where we are going to do. I have that level of confidence in our people, that they will understand, that we in Barbados cannot escape some of the pain that others are experiencing the world over. We have done well so far, but we cannot avoid taking strong measures to secure our future. We have escaped major damage from hurricanes for the last 55 years, but this year we got quite a brush from Tomas, and so it is with our economic storm.
Mr. Speaker, one distinguished US economist Austan Goolsbee, has put it this way: ”This recession is the deepest in our lifetimes, the deepest since 1929. If you take the people thrown out of work in the 1982 recession, the 1991 recession, the 2001 recession, not only is this bigger, this is bigger than all those combined.”
Mr. Speaker, Where are we now? How have we performed in the last year or so, What can we expect? It is to those questions that I now turn my attention.
INTERNATIONAL ENVIRONMENT
Mr. Speaker, economic recovery continued to strengthen during 2010 due mainly to emerging markets which are doing well, growing at approximately 7.0 percent and the industrial economies growing at a below par 2.0 percent. Growth within the global economy has been propelled mainly by the dramatic rise in manufacturing and global trade as well as by surges in inventory and fixed investment. According to the IMF’s World Economic Outlook October 2010, global GDP is projected to improve to 4.8 percent during 2010 after declining by 0.6 percent in 2009.
In the industrialised economies, unprecedented levels of public intervention (stimulus and counter cyclical fiscal and monetary polices) has stabilized activity and has even fostered a return to small but shallow growth in several economies. Data from the World Economic Outlook October 2010 indicates that GDP growth is estimated to increase to 2.7 per cent in 2010 reversing the 3.2 percent decline registered in 2009. However, fluctuations in consumer confidence and continued weakness in household incomes and wealth remains issues of concern in many advanced economies. In essence, recovery within advanced economies is anticipated to be fragile and tepid given that higher employment growth tends to lag behind improved business investment.
In this regard, massive fiscal adjustments must and have been undertaken in many industrialized economies including in some of our key trading partners along with accommodating monetary and interest rate policies.
Advanced Economies
United States of America
The recovery within the US economy slow and best and uncertain at worst though buttressed by a massive macroeconomic policy stimulus, financial stabilization measures, and a modest cyclical upswing. The economy grew at an annualized rate of 2.0 percent in the third quarter of 2010, faster than the 1.7 percent growth rate posted in the second quarter. Real GDP within the US economy is expected to grow to 2.6 percent in 2010. The unemployment rate is however expected to remain high at around 9.7 percent and is anticipated to hover around this level well into 2011. In Contrast, inflation will remain low and is estimated to be 1.4 per cent in 2010 and 1.0 percent in 2011.
Notwithstanding the slow recovery, the US economy continues to face macroeconomic challenges as policy makers seek to rebalance the economy by ensuring that the public debt is put on a sustainable path without jeopardizing growth. Under the current policies, the general government deficit is projected to be about 10.0 percent of GDP in both 2010 and 2011
United Kingdom (UK)
Recovery within the UK, one of our major markets, is anticipated to be much weaker than within the USA, with GDP growth projected to reach 1.7 percent in 2010. The UK economy at the end of the third quarter of 2010 grew by 0.8 percent, slower than the 1.2 percent recorded for the second quarter of 2010. The unemployment rate was registered at 7.5 per cent in 2009 and it projected to increase marginally to 7.9 in 2010. The inflation rate which grew by 2.1 per cent in 2009 is however estimated to increase to 3.1 per cent in 2010 and 2.5 per cent in 2011.
Given the pace of recovery within these two traditional markets, it is anticipated that growth within the US and UK would not provide a strong enough impetus to propel robust growth within the Barbados economy.
Canada
Turning to Canada, another major trading partner, the recovery within this economy is expected to be prolonged. Given the substantial strengthening of the Canadian dollar, GDP growth is estimated to increase to 3.1 per cent in 2010.
Euro Area
Within the Euro Area GDP growth is projected to be 1.7 percent in 2010 reversing the 4.1 percent decline witnessed in 2009. Inflation within the Euro Area is anticipated to edge up to 1.6 percent while unemployment is projected to hover around 9.7 percent in 2010 and into 2011. Many economies including Greece and Ireland are undergoing serious economic stress
Emerging and Developing Economies
Emerging and developing economies are generally further ahead on the road to recovery, led by resurgence in Asia. The recent rebound in commodity prices and supportive policies are helping many of these economies. In essence, the public debt ratios in some of these economies are around 30 to 40 percent of GDP and given their return to high growth rates, the Debt to GDP ratios are anticipated to decline. In these economies, fiscal balances are expected to increase by around 0.8 percent of GDP in 2010 and by a further 0.8 percent in 2011, following a loosening of almost 4.5 percent of GDP in 2009.
China’s economy grew by an estimated 9.1 percent during 2009 and is projected to rebound to GDP growth of around 10.5 percent during 2010, driven by domestic demand. Similarly, India’s economy grew by an estimated 5.7 percent in 2009 and is anticipated to grow by 9.7 percent in 2010 and 8.4 percent in 2011.
Brazil and South America are expected to grow solidly in 2010 but with some slowing down in 2011. Mexico is expected to grow by 4.0 percent in 2010 and 3.5 percent in 2011 and Brazil by 7.0 percent and 4.0 percent respectively.
Regional Perspective
Many Caribbean economies have experienced sharp declines in output, following the depressed tourism market, weak commodity prices and reduced inflows from remittances. There were massive layoffs and work week reductions in the labour market, reduction in imports, housing foreclosures, capital projects were halted, businesses closed and pipeline projects were shelved.
Factors impeding growth in this Region included weak external demand for tourism from North America and Europe, coupled with a fall-off in FDI, limited room for policy support in light of chronic public debt burdens and lower remittances.
In the case of the Caribbean, with its limited fiscal space, the focus should be on maintaining targeted measures that ease hardship on the poor.
The downturn in regional economic activity has been reflected in rising unemployment in most countries, particularly in the hard-hit tourism and construction sectors. Unemployment across the region is projected to rise well into 2011. Inflationary pressures which subsided in the Region during 2009 are anticipated to increase. This is consistent with the recent uptick in international commodity and oil prices.
Domestic Economic Review
The global financial and economic crisis has posed a significant challenge for the Barbados economy. As a result real GDP growth has contracted by 0.2 percent and 5.5 percent in 2008 and 2009, respectively. In essence, the weaker than anticipated recovery in North Atlantic economies continued to dampen economic growth within the Barbados economy with overall economic growth contracting by 0.9 percent at the end of the third quarter 2010. This was an improvement to the 1.1 percent decline at the end of the second quarter 2010 and the 4.4 percent decline for the same period 2009.
Despite the marginal decline in growth witnessed during the first nine months of the year, the Barbados economy however remained stable. Foreign exchange reserves stood at $1.4 billion at the end of September, a reserve cover equivalent to 19.3 weeks of imports, above the prudential norm of 12 weeks. Private capital inflows during the first eight months of 2010 were up modestly as manifested by real estate inflows during the period totaling $86 million compared to $53 million in the corresponding period of 2009. In addition, other significant private transactions included inflows of over $100 million to finance the building of a new beer factory as well as financing for the soon to be completed Limegrove project.
However, during the first three quarters of 2010, the pass through effects of higher oil prices coupled with modest increase in volumes, contributed to the growth in retained imports. Imports were estimated to have increased by almost $140 million primarily on account of a 37.0 percent increase in the average price of oil.
Moreover, the depth and protracted duration of the crisis has led to broad-based contraction in output across virtually all sectors. This scenario has generated lower levels of government revenue, decreases in foreign exchange inflows from tourism and other related services and higher levels of unemployment across certain sectors, specifically the construction sector.
Traded Sectors
This economic outturn within the Barbados economy has in large measure been driven by a downturn in tourism activity which declined sharply by 6.6 percent in 2009 following the downward trend in tourism output witnessed since mid-2008. Empirical data suggest that the decline in tourism activity was due mainly to a fall off in long-stay arrivals. However, the sector has shown signs of recovery.
Information has shown that overall long-stay arrivals from the US and Canada continues to improve. This expansion in arrivals from the U.S and Canadian markets has partially compensated for the fall-off in visitors from Barbados’s largest source market, the U.K, largely due the continued weak performance of the UK economy compounded by the imposition of the Airline Passenger Duty by the United Kingdom government. Nonetheless, provisional data for October 2010 showed a marked increase in U.K arrivals by 7.3 percent, which would have contributed to the overall increase in tourist arrivals by 0.7 percent for that month when compared to the year before.
The improved tourism outturn in the first three quarters of 2010 is estimated to have boosted earnings by 4.7 percent or $75 million over that of the first three quarters of 2009.
The overall weakness in tourism output has had a knock-on effect on other sectors of the economy, with related services growing slower than the pace of visitor arrivals. Output in business and other services and transport, storage and communication at the end of September 2010 remained unchanged while modest increases in the wholesale and retail sector were witness in the similar period.
Manufacturing output fell by an estimated 3.2 percent in the third quarter of 2010 compared to 15.9 percent in the similar quarter of 2009. However, among the foreign exchange earning activities, there were positive signs with respect to the production of garments and chemical which were up noticeably during the first half of 2010.
Sugar production which was adversely affected by severe drought conditions since 2002, increased by an estimated 1.2 per cent in 2009, reversing the 6.9 per cent decline registered in 2008. However, foreign exchange receipts from sugar in the first half of 2010 were 20.0 percent lower than in the first half of 2009, reflecting not only the adverse impact of severe drought on crop yields but also the combined effect of the phased reduction of guaranteed prices and a fall in the value of the Euro vis-à-vis the US Dollar. Output in the non-sugar agriculture and fishing sector also recorded increases during the period.
The international business and financial services sector continued to exhibit moderate growth despite the challenges posed by the global financial and economic crisis. At the end of September 2010, the number of new entities licensed remained unchanged at 380 when compared to the same period in 2009. There were 297 International Business Companies (IBCs) licensed at the end of September 2010 compared to 285 in the similar period of 2009. With regard to Societies with Restricted Liability (SRLs), the new licences at the end of September 2010 numbered 9 in contrast with 15 recorded at the end of September 2009. These increased registrations notwithstanding, tax revenues from the sector remain significantly below pre-crisis levels.
Non-Traded Sector
In relation to the performance of the non-traded sector, the indirect effects of lower tourism activity were also acutely reflected in all sub-sector activity which contracted in 2009 for the first time since 2001. Performance in the construction sector was most noticeable, with output falling by almost 15.0 percent at the end of September 2010.
Unemployment and Inflation
The relatively weak economic performance within the economy was reflected in the rate of unemployment which moved from 9.9 percent at the end of the second quarter 2009 to 10.7 percent at the end of June 2010. Given the increase in the cost of consumer goods and services, the inflation rate edged up to 5.0 percent in July 2010 from 4.7 percent a month earlier.
Click Here To Read Part 2 Of The Budget
Click Here To Read Part 3 Of The Budget
