Of all the economic problems confronting Barbados, the fiscal crisis and anaemic growth need the most immediate attention. Contrary to the deliberate and convenient discussion, the Central Bank’s net international reserves have remained virtually unchanged for the last five years.
The following observation in the editorial of the SUNDAY SUN, December 30, is wrong: “. . . the foreign reserves have fallen by half in the past five years . . . .” This is the kind of statement, though not deliberate, which reinforces the view that increasing private spending in the economy is not an option.
It is the kind of statement that gives credence to the Central Bank’s new-found public obsession with the country’s international/foreign reserves.
Before discussing the two problems that need immediate attention, let it be known that the country has a debt problem. However, debt reduction in the next two years is virtually impossible, given some critical financial issues that have to be resolved.
Furthermore, restoring economic growth has to be a major part of the solution to the fiscal crisis. This is because growth is the only sustainable way to resolve most problems in economies.
As a result, in pursuit of economic growth there has to be some form of tax relief. This will cause an immediate deterioration in the fiscal position but spur economic output. And for every $100 million in new economic output, the Government receives about $28 million in revenue.
There is need for immediate tax relief and it must be accompanied by some reduction in the cost of energy, electricity and transportation. The cost measures will certainly inspire economic activity. Most importantly, the reduction in energy cost is very affordable.
The restoration of economic growth is not entirely or exclusively about our major trading partners; it has also to do with changing domestic policies to enhance competitiveness and productivity. The latter is what matters mosts in this environment.
Economic growth is a necessary condition. The one argument against growth is that it uses foreign exchange but it also earns. What’s new?
By law, the Central Bank is the Government’s bank, not the citizens’ or the private sector’s. When an individual seeks permission from the Central Bank to conduct a foreign exchange transaction, he/she goes to a commercial bank for the money. When the banks have excess, it is sold to the Central Bank.
A discussion that restricts the country’s foreign reserves to those at the Central Bank is deliberate and misleading. Indeed, the foreign reserves position of the total banking system is more critical in terms of meeting the demands of the private sector.
It is basic economics that small open economies have to import to survive. But it is not true that every dollar spent in the Barbados economy contains 70 cents in foreign exchange usage/leakage. This does not add up and it never did even when the figure was 60 cents.
Not too long ago, a motor car that retailed at $65 000 may have been imported for around $20 000. The local value added included the very high taxes and the mark-up. The notion is not tenable that Barbados’ largest consumer item on average leaked 70 per cent in foreign exchange in relation to the retail price.
Indeed, the reason why the value added tax performed so well and exceeded revenue expectations when it was introduced in 1997 is because of Barbados’ high local value added. In essence, our reputation as high cost contradicts the view that there is such a high leakage of foreign exchange in the country’s domestic consumption. It would be interesting to see the scientific studies that gave rise to the numbers.
Certainly, the vehicle uses oil in its various forms but the country produces a significant portion of crude. Furthermore, the Barbados National Oil Company (BNOC) is the country’s most profitable company. It therefore makes a lot of sense to restrict BNOC’s profit margins in favour of enhancing our competitiveness.
In the presence of adequate foreign reserves, the option to create economic growth is most desirable. It is the only platform upon which a concerted effort can be made to solve the fiscal crisis, the national debt problem, unemployment and bring back confidence in the economy.
Growth is the most urgent economic objective. It will not happen if the Government waits on the international environment. Barbados is no longer a colony, but with independence comes responsibility.
This is not the time to pass the buck to the rest of the world.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email clydemascoll@gmail.com.
