It is quite clear that the Government still needs to level with Barbadians on the true state of the economy. According to the International Monetary Fund (IMF), the Government is facing the challenging task of “raising foreign exchange and reducing the fiscal deficit in an environment of low growth, high debt and a fixed exchange rate”.
It states further that “while adjustments in these circumstances often rely on currency devaluations, staff encountered universal support across all stakeholders for maintaining the current exchange peg”. There is no doubt that no Barbadian wants to see a devaluation of the dollar.
If the exchange rate adjustment is not an option, then the other policies, including monetary policy, must be used to reposition the economy. This requires a delicate mix of attack and defence as the only sustainable way out of our economic misery is through growth. Economic growth, especially in small dependent economies, demands that the government gets involved in spending for investment.
The story of Jamaica is one in which the country hardly lacked for private investment, particularly from foreign sources, yet it struggled to achieve even moderate growth because of the absence of government investment that provides the platform for private initiative. In essence, it is imperative that along with investment in infrastructure, investment in human capital, especially in education and health, be the target of any economic growth strategy.
In this regard, controlling the country’s national debt does not mean cutting it immediately. It really means controlling the rate at which it grows over a prolonged period and, more importantly, using the debt for economic rather than just political reasons.
The IMF has also stated that the Government has agreed to do six things which it has to explain to the people of Barbados. One is to implement significant spending cuts and/or tariff increases in the coming weeks. This has started but the real question is, what is meant by significant? Furthermore, there is a need for transparency in not only identifying areas for cutting, but the method of implementation, which has been the bane of an unwilling Government.
The Government has agreed to cease Central Bank financing – that is the printing of money – to release the pressure of the bank’s foreign reserves. This has to be explained, as notwithstanding the borrowing of $300 million last December, the foreign reserves have declined by over $110 million so far this year. And this has occurred during the height of the winter tourist season when the country should be accumulating foreign reserves.
It is the kind of information that has to be made known to the people who have been forced to sacrifice for the last five years when this Government put its political self-interest above that of the other participants in the economy.
The process involved in ceasing the printing of money in the current circumstances is perhaps the most important initiative that has to be undertaken. But this process has several dimensions that must be explained in full to all Barbadians, including businessmen. The Government has also agreed to increase interest rates, which is contrary to what it was saying in the not-too-distant past. This change in policy requires an explanation since it has serious implications for savings and investment in the country’s economy. The current interest rate policy was designed to reduce the cost of debt servicing to the Government; nothing more, nothing less.
The Government is also expected to work with the labour unions to lower real labour costs over time. This really translates to mean wage restraint, which apparently the unions have agreed to over the next two years. But public sector workers have had a wage freeze for the last five years in the face of rising prices of over 40 per cent since 2008.
This has already constituted a serious reduction in their spending power and compromised economic growth. The Barbados economy has contracted by almost one per cent per annum since 2008 and certainly cannot continue on this path. Yet the Barbados economy is now expected to decline by 1.2 per cent in 2014, while all other regional economies are forecast to grow. The key to any meaningful recovery has to be significant economic growth achieved by a combination of local and foreign investment.
The revelations in the Article IV Consultation report of the IMF suggest that the true state of the economy is not yet known to Barbadians and the time has come to fully embrace the people in this our darkest hour.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email mascoll_clyde@hotmail.com.
