THE ISSUE: Too early to judge
Are the measures Government has introduced enough to solve the country’s fiscal problems?
Government is confident they will suffice, while the Opposition does not think they are enough.
Institutions like the International Monetary Fund (IMF) view them as a step in the right direction as does the Central Bank of Barbados.
We are referring to fiscal consolidation measures announced in the August 2013 Financial Statement And Budgetary Proposals followed by a Ministerial Statement four months later in the House of Assembly, on both occasions by Minister of Finance and Economic Affairs Chris Sinckler.
Even if there was no consensus on the type of action to be taken, what everyone agreed on was the need for action, otherwise the Barbados economy and the public purse would suffer potentially irreparable harm.
Barbados has found itself between a proverbial rock and a hard place. The economic recession that surfaced in 2008 has dragged on here ever since. The result was that foreign exchange earnings from crucial sectors like tourism and international business and financial services has shrunk. Amid the plummeting revenues from these and other traditional sources, Government’s own finances have suffered. While less money was at its disposal, the demands for its funding increased, including social services, and its wages bill.
It is in light of these challenges that Sinckler announced various measures, the laying off of 3 000 public sector workers arguably the most controversial action. In addition to most eyes being on Sinckler and Government’s action, the role the IMF played was also scrutinised. This Washington DC-based institution went public with its perspective on Barbados’ fiscal position in the report issued following its annual Article IV consultation with Barbados.
“Recent fiscal measures, if fully implemented, should stabilise debt levels by 2016. However, downside risks are considerable and failure to implement corrective policies could result in a disorderly adjustment process. Even with full implementation, fiscal financing pressures and external sector sustainability would remain challenging,” the IMF concluded in its report.
It also recommended “a comprehensive and sustained fiscal effort” to “reduce vulnerabilities and lower public debt”, including “targeting the wage bill and inefficiencies in public enterprises where stronger governance is needed.
Another perspective came from the Inter-American Development Bank, which referred to the IMF Article IV and concluded that the impact of Government’s measures were “conditioned on whether economic growth, that will have to be led by private sector investment, can be achieved”.
“The proposed 11 per cent reduction in the size of the public sector would result in an increase in the unemployment rate to about 14 per cent compared with 11.1 per cent in June 2013, ceteris paribus. Since the Government is the single largest contributor to GDP (16 per cent), reducing its expenditure will require other sectors to pick up the slack and create new growth,” it said.
“Foreign investment will be critical for economic growth and to augment the international reserves stock. Also, the higher unemployment levels could present financial challenges for the National Insurance Scheme, which already has a substantial amount of investment in Government securities – about 68 per cent of its total investment,” it added.
As for the Central Bank, it said the IMF was on the same page it was, as well as government.
“The IMF acknowledged that the Barbadian authorities have recognised the need for urgent action, and that the announced measures, if fully implemented, would serve to lower the fiscal deficit to 4.9 per cent of GDP by fiscal year 2014/15, and would help to restore stability to external flows,” the bank said in response to the IMF report in January.
“The IMF’s recommendations are in line with the policies announced by Government, and are being implemented [including] a medium-term strategy for the further reduction in the fiscal deficit.”
During last week’s Estimates debate in the House of Assembly, Sinckler again defended the current administration’s economic stewardship, blaming long-standing structural problems for the difficult position the Barbados economy was in. However, Leader of the Opposition Mia Mottley countered that Government had compounded its fiscal problems by introducing increased taxation on Barbadians in its 2014/2015 budget.
With the measures still not fully implemented analysts say it is still too early to conclude if the action being pursued is the right one. Much will be determined by how much Barbados benefited from the winter tourist season, which is now ending, and how the economy performs for the rest of the year.
Government’s implementation of the measures and its own financial discipline will also be key factors.