A Press release published on June 17 by the Central Bank of Barbados states that the recent credit rating downgrade “underscores the need for sustained fiscal constraint” and that “with the economic recovery now taking root, it is challenging for Government to maintain the current level of spending, while undertaking measures to maintain employment and the network of social support”.
I would go a step farther and add that the ratings are clear in their message that the Government of Barbados is spending too much, compared to what it is collecting in taxes and other revenue, and that it is not acting aggressively enough to reverse this trend. Government has already increased taxation, but in the circumstances, it must now act quickly to significantly reduce expenditure.
Given current economic conditions, however, it is unlikely that any significant reduction in Government expenditure can be quickly picked up by the private sector.
This therefore has the potential to undermine the ongoing but fragile recovery in the economy.
The situation is compounded by the economic uncertainty in our major source markets.
Government no longer has the option of waiting for strong economic recovery in the United States and Britain, as there is too much uncertainty surrounding the timing and extent of this.
Furthermore, as pointed out by Moody’s, “Barbados’ limited growth prospects, a function of its deteriorating competitiveness and declining productivity, make it unlikely that it will be able to grow out of its debt burden in the near-to-medium term”.
These words should be a wake-up call to the entire nation, unless we choose to ignore them.
It would seem then that the only clear near-term option left is for the Government to significantly and rapidly reduce its expenditure, but not to such an extent and at such a pace that it throws the economy back into recession.
This will almost necessarily involve a reduction in the public sector salaries and wages bill, and must be expertly and delicately managed by the Social Partners.
It provides, however, an ideal opportunity for radical reform of the public sector (including rapid acceleration of the Government’s privatization programme),
as attempts at incremental reforms have failed. We have simply advanced as far as we can with the current public sector systems and practices.
Apart from “deteriorating competitiveness and declining productivity”, the Barbados economy clearly needs to be restructured to permit robust growth without pressure on the foreign reserves and danger to the maintenance of the exchange rate peg.
This means that we will have to seek out new products and services for export to new markets (especially in emerging economies), reduce our import bill (including by investing heavily in alternative energy), and rebuild our national work ethic.
This will surely mean seeking out external partners with the necessary financial capital, expertise and business acumen as the local private sector does not appear to have the drive, resources or expertise to lead this effort.
In brief, the ratings of both Standard & Poor’s and Moody’s suggest that we have almost run out of time and options.
