Submitted by Terence Blackett
Many of us deduce that smart, intellectual folks run our world, our country and our economic affairs. Our politicians are not “gods” as some would have us believe – though many claim “divine” authority on all matters pertaining to logic, the “real politique” and the fashioning (or lack thereof) of laws which are meant for our public good.
Economic hardship in the United States money markets is reducing profitability for those who own US dollars, contributing to dollar devaluation. Many are asking – “will China dump the rest of its estimated $876 billion hoard of U.S. Treasuries and crash the Treasury market — and by doing so, kill the U.S. dollar, drive interest rates sky high and leave the U.S. economy a smoking ruin?” (Mike Larson – Money & Markets Sept. 2009).
The answer – probably not! It isn’t in their economic interest at this time. But the colossal US debt, quantitative easing (PRINTING MONEY out of thin air) and the dwindling loss in stock values are creating a lethal cocktail of financial woes for investors, borrowers and the ordinary saver.
So how does US debt and currency evaluation affect the Barbados dollar? Answer – severely. Here’s why…
Barbados’ debt in the last 2 years of a new DLP government has seen the public debt grow from 74.1% of GDP at the end of 1999/2000 to 94.6% at the end of 2007/08 and increase of 20.5% in the last decade – and our new government is struggling to keep up balance of payment commitments, pay its bills and hold to statutory obligations.
During the aftermath of 9-11, the former Barbados Labour Party’s fiscal policy response was to embark on a major public works investment programme propped up by unsustainable public sector worker wage increases which resulted in a dramatic spike in the public sector deficit – seeing a 6 times increase from a mere 2% at the turn of 2000/01 to a stark 13% around the end of 2002/03.
And how was our existing debt financed?
By more borrowing which created more burdensome DEBT!
The public debt-to-GDP ratio jumped from 74% at around 2000/01 to 87% around the end of 2002/03. The economy saw a bounce in 2004 due in part to foreign exchange earnings from tourism, and other structural policies but that trend was not consistent right up until 2007/08 where the BLP government managed to narrow the deficit to 6% of GDP by the end of 20006/07. But elections were looming precariously.
There is a number of questions to be answered by the former BLP government for those “Off-Budget Activities” vis-à-vis, “Public Enterprise Initiatives” which went belly–up creating further strain on the current fiscal deficit. A further case needs to be answered for all those politicians who became “millionaires” while in political office at the expense of the public purse and those hovering on or below the poverty line.
Additionally, there is the well known factor of the cost over-runs and the gargantuan investment in the building infrastructure for the hosting of the Cricket World Cup (CWC) held in 2007 – notwithstanding, an ABC Highway project that has been a failure of “Midas” proportions with cost over-runs which has added significantly to our current deficit and “Debt Mountain”. With our current debt levels, every person in Barbados’ take would be just under US$20,000.
To add insult to injury, Bajan consumers are racking up a staggering $100 million a year in personal consumer credit in the form of easy access credit cards, loans and other lines of personal credit from banks whose balance sheets are suspect at best and dodgy at worst.
Research shows that commercial bank credit to private individuals (consumer debt) grew over a period from 1966 to 1994 at a rate of $23.7 million in 1966 to $102.6 million in 1994, an increase of 433%. The numbers have continued to spike year on year as the growing credit/DEBT* bubble grows exponentially with no curbs in sight.
So as our new government reaches its 2nd year in political office, the public sector debt-to-GDP ratio had risen to an alarmingly astronomical 94.6%. A mathematical spreadsheet of current public sector debt is apocalyptic in scale to say the least with domestic debt weighing in at a whopping 75%, accounting for the growing mountain of public debt we are all saddled with.
80% of domestic debt held by our current government is long-term. One could argue the mitigating circumstances with short-term debt v long term debt but that is not the loci of our discussion at this time. Let David Thompson and the other monetary “gods” haggle and weigh over that bit of fiscal policy.
International financial creditors account for almost 60% of Barbados’ publicly serviced external debt. However, a global monetary contraction in the market due to the economic crisis the world is facing has meant a slowing in the flow of funds from private creditors (i.e., HEDGE FUNDS) but in particular investors from the international capital US/EU markets, has exacerbated the debt problem.
The government’s pledge is to reduce the current debt to 60% of GDP by 2012 but this falls on deaf ears as this fiscal objective faces serious obstacles in the present global economic climate.
The government is still dead set on expansion in terms of infrastructural development, (i.e. flyovers and the rest of it) to meet its development objectives. However, given the anticipated levels of cost to be incurred, we will fall far short of any commensurate increases in revenue, especially since higher revenue growth was predicated on continued strong economic growth particularly in the tourist sector.
The financial outlook is clearly heading in one predetermined direction. We hate to admit the obvious – but currency devaluation is no longer a matter of how but when…
The blogmaster invites you to join the discussion.