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WHAT MATTERS MOST: Lessons going abegging

Clyde Mascoll

WHAT MATTERS MOST: Lessons going abegging

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A COMBINATION of ignorance and arrogance is responsible for the fiscal madness that is now parading as fiscal adjustment in Barbados.
The most recent comment by the Minister of Finance best sums up the combination when he said that the foreign loan will help to finance Government spending for the rest of the fiscal year, without understanding that the loan on its own will not stop the printing of money that is now in excess of $625 million.
The lessons learnt from the economic recessions of the early 1980s and 1990s and outlined in Central Banking
In Barbados: Reflections And Challenges should have been used to help manage economic conditions over the last five years.
“Fiscal policy is the cornerstone of a fixed exchange rate regime,” the document states. “It is instructive that whenever fiscal policy became lax, foreign reserves came under pressure, requiring a combination of foreign borrowing and fiscal adjustment.
The imposition of stringent measures makes it clear that unsustainable expansionary fiscal policies may eventually carry considerable economic and political costs.”
This lesson tells the story in terms of foreign borrowing and fiscal adjustment and costs. But applying this  lesson requires leadership.
The concerns raised over the printing of money are economic because it is the single greatest threat to the foreign reserves of Caribbean economies. Ignorance of this fact is no excuse for a government and its economic advisers. The latter cannot be excused, even if they tried to rewrite economic theory using some contrived graph purporting to represent a relationship between fiscal adjustment and foreign reserves.
Big men must stand up to such arrogance when they see it.
The borrowing of a foreign loan will not reduce the printing of money; it will reduce the outstanding balance of the money already printed, if the borrowed foreign exchange that is locked away for a rainy day is not sterilized. Since the Minister of Finance has indicated that it will help to finance Government spending; this means it is not being sterilized. Therefore the level of money already printed will be reduced, thus making space for additional money to be printed.
In essence, the only way to reduce the printing of money is to reduce Government’s fiscal deficit. In the circumstances, with Government revenue declining or at least not growing, the only way to reduce the fiscal deficit is by cutting Government spending. This is now being euphemistically called “fiscal adjustment” to avoid what meaningful cutting of expenditure connotes, “job layoffs in the public sector”.       
Of course, the current administration is fearful of job layoffs, given the experience of the early 1990s and recent promises not to do so. Having responded the wrong way to the initial economic recession of 2008, Government contributed to prolonging the recession by compromising the conditions for economic growth.
Fortunately for the Government, the post-2008 period was accompanied by a wage freeze in the public sector, no increases in interest rates and very manageable foreign debt servicing.
All of these circumstances favoured the Government, yet it found a way to create Barbados’ worst fiscal crisis and every effort was made to blame the international economic environment.
Another lesson learnt is that “borrowing is no substitute for sound macroeconomic policies”, for even if borrowing temporarily softens the adjustment, it tends to leave the underlying problems unsolved.
“External borrowing is useful in providing resources to complement domestic savings, but access to external funds at reasonable cost depends on the strength of the macroeconomic framework and on the market conditions when funds are needed.” The lesson is to borrow when conditions are favourable.
The International Monetary Fund (IMF) will ultimately determine whether Government gets the foreign loan and possibly the final conditions.
The arrogance of the Minister of Finance and his economic advisers is exemplified in the following lesson: “The Central Bank is an inappropriate source of deficit financing [printing of money]. When Government relies heavily on the Central Bank to finance its deficit, there have been problems of reserves losses.” Printing money to buy Government treasury bills has the same effect as the overdraft facility of the Government at the Central Bank.  
A glaring refusal to adhere to basic economic principles, known both in theory and practice, wrapped in the arrogance of those in charge of our economy, has undermined our pride and industry, not to mention our immediate future economic prospects.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.