ON TUESDAY, MAY 9th the Central Bank of Barbados held its first economic press conference since 2014. It was hosted by Acting Governor Cleviston Haynes, who succeeded Dr DeLisle Worrell who was fired in February. Haynes touched on a range of economic issues while fielding questions from the media. BARBADOS BUSINESS AUTHORITY brings his thoughts on some of these matters.
Reducing the fiscal deficit
The bank has ongoing engagement and discussion with the Government. The issue for us is the size of the deficit and therefore we have been discussing with them the need for further fiscal adjustment . . . so as to bring the fiscal balance in line with the available resources to finance it.
The immediate priority is that we have to cut the fiscal deficit. The options for so doing are left to the minister to determine in terms of his mix of revenue and expenditure measures. But I think that a significant effort is going to be required in the current year to ensure that we can bring stability back to the public finances.
The International Monetary Fund (IMF) option
There are benefits to going the route of an IMF programme, one of which is that it can help not only to provide effects directly but it helps to catalyse resources from other entities. Having said that, we musn’t treat going to the IMF as a panacea because going to the Fund requires even greater discipline than we have been talking about previously and we need to demonstrate that discipline ourselves.
You have to demonstrate the commitment through the fiscal discipline that is necessary before you even decide that you are going to go. Once we have got to that point then that discussion can be entered and we will determine where we go from there.
Managing the international reserves
We have operated for periods of time with less than 12 weeks of imports, but we can’t allow ourselves to become complacent because we have been able to do that in the past. Speaking from where I sit, what ideally, I would like is to have more than 12 weeks because we need to be in a position where if there is any shock to the system that we are able to absorb that shock at that point in time. The lower your reserves fall the less able you are to absorb a shock.
So even though you might be able to exist with a particular level of reserves . . . the challenge I think is if there is a specific shock at a point in time that was not anticipated then you don’t have as much room for manoeuverability. What we want to see over time is that the trajectory is upward rather than the trajectory which we have had over the last few years where the trajectory has been downwards.
Central Bank money creation
The Central Bank is committed to an orderly adjustment of the economy. In that context, large financing of Government is not sustainable. The bank has made that policy known. I think all of the economic commentators agree that Central Bank financing in the magnitudes that we have had over the last few years is not sustainable and therefore . . . policy is being directed towards addressing that situation as quickly as possible.
Our objective . . . is to reduce an ultimately eliminate the Central Bank’s participation in new financing because we have to send the right message and as we move towards a durable framework over the medium term, Central Bank financing is not going to be part of that solution.
Credit rating concerns
The reasons why we have lost our investment grade ranking are our fiscal deficits, the fact that our reserves have been falling and the fact that we have not been growing very rapidly. So these are the central issues which we have to address going forward because what the investment grade rating does is that it helps to provide access at reasonable costs to the capital markets because you can’t finance all of the growth and development through local resources over time.
You might be able to do it in year one and year two but over time we don’t want to finance all of our development solely out of our local resources. There will be times when we need to get access to foreign resources and the credit ratings, the improved investment grade ratings, helps you with that access at reasonable interest rates. So for us it’s critical that we address the underlying macroeconomic issues and hopefully that will help us to address the question of improved ratings.
Public sector pay increase
Once you take those measures to increase the size of the deficit you have to also look for the compensating measure that are going to offset that increase because there is a fundamental issue that we have to address, which is how are we going to finance the deficits that we have been running.
[In] the past year much of that financing came from the Central Bank and we are all agreed that is not a sustainable way of dealing with the deficit. So I don’t see how we can add to the deficit without identifying the compensating measures that are going to address that increase.
Privatisation
It is perhaps easier to look at those which are commercial in nature, those entities which have revenue streams and which could therefore be more easily provided by the private sector to see whether or not those type of services can be privatised.
And if they are privatised what type of regularly regime they need to accompany them because their presence as public assets is because there is some social purpose that they are intended to serve. So it’s not a case, I think, of simply privatising assets but also looking to see if there is need for some accompanying regulatory framework.
Tourism reliance and economic diversification
Clearly, we need to have as diversified a product as possible. Tourism is, and remains, the central component of our foreign exchange earning capacity but we need to support that with activity in other sectors, particularly the international business sector, which . . . has been growing quite slowly. We need to be able to strengthen our capacity to earn foreign exchange through locally produced goods.
Obviously, our rum sector has been the chief one that we have used in recent years and we also need to look at activities which can dampen the demand for foreign exchange and in this regard the whole thrust towards the use of alternative energy offers us some prospects for reducing the demand for foreign exchange. (SC)
