WHAT MATTERS MOST: Lesson Two
Last week I suggested that the key to managing any Caribbean economy is to manage the demands of the Government which are ultimately paid for by the private citizens who pay the taxes, or whose taxes are used to repay the loans of the Government.
The ultimate price in managing such an economy is the absence of foreign exchange. The demands of Government and the absence of foreign exchange are inextricably linked.
The current financial status of the Government is much worse now than it was in the early 1990s when the International Monetary Fund forced the Government to cut public sector workers’ wages and salaries, to lay off 3 000 workers and to impose heavy taxes. So why is the same not yet happening in Barbados today?
Unlike the early 1990s, the country has foreign reserves and so the private sector is not fully affected by the prevailing economic circumstances. Remember the march – capitalists and labour joining forces against the state? It was not just about Sandi for the capitalists. It was more about the shortage of foreign exchange first and foremost, followed by the other factors.
In the context of Caribbean economies, a balance of payments crisis is far more critical than a fiscal crisis. If the country has no foreign exchange to purchase foreign goods and services and repay foreign debt, then it literally shuts down.
This does not mean that a fiscal crisis is sustainable; it simply means that it is less critical than a shortage of foreign exchange because the Government has short-term options to mask the fiscal problems. This is what is in evidence in Barbados in the current crisis, not induced by any international recession.
This brings me to this week’s lesson. To avoid the IMF stabilization and adjustment (demand management) programme, a country has to ensure that the creation of domestic credit is kept in line with the growth of domestic liquidity (available money). Domestic credit creation is associated with the financing of the Government’s persistent fiscal deficits.
If the Government is able to borrow as happened in 2010, when it received $540 million from foreign institutions, then domestic credit creation appears to be under control. This is currently reflected in the Central Bank’s balance sheet where large negative claims on the public sector appear.
The claims are simply the difference between what the bank lends to the Government and what the Government has on deposits, including the National Insurance Scheme. Having borrowed $540 million last year, the claims would become even more negative.
By the way, the major lending of the bank to the Government is set at ten per cent of the estimated revenue for the fiscal year. Therefore if the Government expects to collect $2 billion in revenue, then the overdraft facility at the Central Bank has a limit of $200 million.
The selling of the NIS shares would have been inspired by the foreign currency which has to be deposited at the Central Bank and treated as a deposit of the Government.
It is the only plausible reason for the sale of the shares, in an institution that has a monthly surplus of more than $10 million. It is not the kind of decision that a real politician would have made at this stage in the country’s development.
At the policy level, the key to managing our economy is to understand that the combined behaviour of the private and public sector is constrained by the availability of foreign exchange. The Government has behaved – in spending $535 million more than it received in revenue for 2010 – in a way that will do medium- to long-term damage to the Barbados economy.
It continues to be irresponsible behaviour that only time can remedy. It is not sustainable!
Clyde Mascoll is a professional economist and Opposition Barbados Labour Party spokesman on the economy.