Most commentators have been consumed by the politics of Minister of Agriculture Dr David Estwick’s recent public intervention. I would like to focus on the substance of the proposal to avoid lay-offs through a $10 billion loan from the United Arab Emirates (UAE). I offer the perspective of someone who was a frequently invited guest of the Abu Dhabi Investment Authority in the UAE and a former visiting scholar at the International Monetary Fund (IMF).
Estwick’s analysis of our challenges speaks many truths. Our fiscal problems began with the global financial crisis, but they were compounded by policy responses that pushed Barbados into a negative spiral, which meant that the subsequent global economic recovery passed us by.
The Government increased public employment, paid for with higher taxes. The central government wage bill jumped from eight per cent of gross domestic product (GDP) in 2007 to 10.3 per cent in 2013 – the highest in the Caribbean. In a recession, higher taxes (and lay-offs) tend to have an amplified negative multiplier, dragging GDP down sharply with tax revenues following suit.
By 2013, a higher wage bill and lower revenues pushed the Government’s deficit to 9.6 per cent of GDP and gross Government debt to almost 140 per cent from 80 per cent in 2009. Dr Estwick explains that he would have opted for a wage freeze as early as 2010 to avoid this mountain of debt.
Instead, rising deficits and debt triggered a series of downgrades of our credit rating to junk and below by the international credit rating agencies. Consequently, domestic and international banks became less willing to buy long-term Government debt, forcing the Government to rely on the central bank to purchase 44 per cent of its short-term paper with newly “printed” Barbados dollars.
The conversion of these newly printed dollars to foreign currency hit our foreign exchange reserves, unnerving investors, and leading to a slump in foreign private investment to $77 million in 2013 from $350 million as recently as 2011, crimping growth further.
The Government has been reduced to offering increasingly generous tax concessions to new investors at the expense of existing ones: robbing Peter to pay Paul. Estwick rightly argues that we need to break this cycle.
The Government’s recent reliance on short-term debt financing has already lowered the average cost of debt. Swapping existing debt for a jumbo loan at 4.0 per cent would free up, approximately, $200 million per year, or less than one third of the current $700 million annual deficit. But to get this benefit we would have to exchange our predominantly domestic debt for foreign currency debt. That’s dangerous as we can’t tax in US dollars. A sinking fund that doubles our debt and increases our debt service in order to reduce it when high-yielding long-term debt is retired would bring little benefit, especially as no one is going to loan us funds at a rate commensurate with our credit risk and then allow us to invest these funds in assets of higher yields and less quality.
Estwick is right that shifting some of the burden of debt servicing to a time of economic recovery is a necessary part of a stabilisation plan, but it is only one part.
Avinash Persaud is a former global head of currency research at J. P. Morgan.
