WHAT MATTERS MOST – Fiscal bind
TO SIMPLY characterise the current economic recession in Barbados as the worst since the 1930s depression is very misleading from a policy standpoint. Such a characterisation is true for the United States, Britain and European economies based on the genesis of the recession in the housing and financial markets and its reflection in the unemployment rates, the negative growth rates and the size of the fiscal deficits.In the case of Barbados, the current unemployment rate is just over ten per cent as compared to around 24 per cent in 1992 and 1993; the negative growth averaged 4.3 per cent between 1990 and 1992 compared to a projected average of less than two per cent for 2008 to 2010, if real growth in 2010 is “still expected to be marginal” and the import reserve cover is above 16 weeks as opposed to an average of just over five weeks for the period 1990 to 1992.Furthermore the size and structure of our: (1) fiscal deficit; (2) the national debt and (3) the balance of payments deficit have to be analysed in relation to the two previous major recessions of the early 1980s and 1990s.The departure point for such analysis has to be a seminal paper entitled Lessons From Barbados’ Experience With The International Monetary Fund written by Cleviston Haynes, the current deputy governor of the Central Bank of Barbados. This paper suggests that severe balance of payments problems induce countries to seek financial assistance from the IMF and this is precisely why importing the label of the worst recession is inappropriate.What is worst is the structure of the country’s fiscal deficit. It differs from that of previous recessions in the sense that the large current account deficits are unusual and unsustainable and will take about five to seven years to correct.The correction has to come on the expenditure side and this makes it politically more challenging.The two largest chunks of current expenditure are wages and salaries and transfers and subsidies which account for almost 65 per cent of government’s total expenditure. Most of this spending goes to paying workers! The balance of payments deficit in the last three years is characterised by a dramatic change in the capital account that is little foreign direct investment. The country has always spent more on imports than it earns from exports. It relies on receipts from tourism to offset the trade deficit. Since the tourism receipts are insufficient, the foreign investment and international borrowing are crucial in determining the balance of payments with the rest of the world. My near 16-year call for the restructuring of the Barbados economy has to do with addressing the balance of payments deficit.An understanding of the fiscal and balance of payments deficits is critical to the management of the Barbados economy as the two deficits are interconnected, but as suggested in the Haynes Paper the balance of payments is far more threatening. This is why the country still has some breathing space albeit very little.The national debt is at an all-time high, but the reliance on local debt has been a change for the good, though time is running out on this strategy as well. The size of the debt is unsustainable and has to be addressed via the management of the fiscal deficit over the next five to seven years.The best way to deal with the fiscal deficit is through growth in the economy that will result in more revenue for government and prudent expenditure cuts that are inevitable given the fiscal condition.Economic growth has to be accompanied by the earning of foreign exchange that is investment has to take place in the sectors which export goods and services. This is impossible without the aid of foreign direct investment, thus the need for a clear foreign investment policy.The economy cannot grow without some resurgence in imports which means the use of foreign exchange. Resolving the fiscal position is the key to Barbados’ economic recovery!
Clyde Mascoll is a professional economist and former Government minister in the last Barbados Labour Party administration.