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Economist points to fiscal weaknesses

mialisafenty, [email protected]

Economist points to fiscal weaknesses

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Dilly-dallying with necessary fiscal consolidation and being duped by predictions of a world economic recovery that is yet to fully materialise is a primary cause of the economic difficulty some Caribbean nations are confronting.
Respected regional economist Dr Dave Seerattan has identified these factors in a commentary in the latest newsletter from the Caribbean Centre for Money and Finance, which is based at the University of the West Indies’ St Augustine Campus in Trinidad and Tobago.
Sharing his views under the topic The Lessons From IMF Fiscal Policy Advice And Policy Implementation In The Caribbean, the research fellow said the big mistake Barbados and its regional neighbours made was to avoid “pre-emptive action” with their fiscal policy while increasing their borrowing and waiting for a world economic recovery to solve their problems.
According to him, one of the “main weaknesses” of this stance was that “fiscal policy has generally been pro-cyclical with fiscal consolidation not being implemented when demand was buoyant but rather in periods when aggregate demand and growth was weak, leading to greater costs in terms of lost growth and employment”.
“The highest uptake of the [international financial institutions] more sensitive advice therefore tends to occur in bust conditions when it is very costly to do so. The most important lesson to be learned from the interplay of [International Monetary Fund] fiscal policy advice and the implementation of fiscal consolidation in the Caribbean is that governments must be more proactive in implementing needed and often unpopular policy advice and initiatives since delays in the implementation of needed reforms generally tend to make a bad situation worse,” he said.
The economist said Caribbean countries were now paying for “opting to put off necessary adjustment until there was little room to manoeuvre”, a decision he said was “informed by the political unpopularity of fiscal consolidation efforts, especially during periods of relatively strong growth but also current thinking which indicates the fiscal consolidation during depressed economic conditions prolongs the bust cycle”.
“The years following the international financial crisis therefore saw many countries in the region attempt to mitigate the adverse impact of falling demand by practicing counter-cyclical fiscal policy financed by borrowing with a view to eliminating deficits in the medium term, rather than front loading fiscal adjustments to deal with imbalances. “This strategy was predicated on the global economy recovering in the timelines projected by many leading multilateral institutions,” he pointed out.
“These timelines have, however, not only proven to be optimistic with signs of global economic recovery taking longer than expected to appear but global growth resuming at relatively muted levels, especially in developed market economies.
“This meant the anticipated rebound in fiscal revenues flowing from more robust foreign demand was slow in coming and was also muted. Weak fiscal accounts in the region therefore continued to be a feature of the regional landscape with the attendant increase in indebtedness. When it became apparent that this strategy was flawed because of optimistic assumptions about the rebound of the global economy and given the already high vulnerability of many countries in the region in this area, many had no choice but to take the hard decision to institute some level of fiscal consolidation to arrest the situation.”