BU apologizes for the late update of the Hal Austin submission.
Introduction:
Barbados is in the last chance saloon. Things are much worse then they believe and the recent Budget proposals by finance minister Chris Sinckler have only added to the fog of ignorance. I have taken the liberty of a long contribution, but please forgive me as these are important issues which deserve a proper airing.
The Budget:
Minister of finance Chris Sinckler kicked off his 2013 Budget statement with a broader social philosophical statement which has wider application to what can be called the Barbados Model, and in the US the American Dream. He states: “(We are now at a historical juncture) …that presents this country with a real opportunity to choose a path of restructuring and revitalisation not just to the obvious systems that drive our economy and society, but importantly as well, to the core beliefs, values and philosophical moorings that characterise who we are as a people, what quality of life we want and imprint what we desire to leave on history’s page.”
That, I suggest, is a statement that all public intellectuals and anyone taking part in the ongoing public conversation about who we are must at some point address. Further, the minister admitted (page 5) that the government’s macroeconomic programme had gone off track and needed to be brought back in line to attain “…economic sustainability characterised by growing international reserves, exchange rate stability, sustainable and balanced economic growth and adequate yet affordable social services provision.” Of course, he does not offer an explanation as to why the macro-economic policy had gone off track, given the DLP has been in government for going six years.
Read text of Budget 2013
No sooner than Mr Sinckler made this confession, than he resorted to the fiction of the problems with the Barbados economy, blaming the 2007/8 global banking crisis and following recession, for the fundamental causes of the economic problems in Barbados. In fact, those global events exposed the problems, not created them; the fact that the public sector, households and corporates in Barbados had been living on borrowed time throughout the most remarkable historic period in global economic growth is not as global problem. The nation’s real problems have been deep structural defects – an overburden public sector payroll of about 30000 people, incompetent tax collection, etc; followed with unaffordable household debt and a badly managed private sector, especially small family-run hotels managed with the financial sophistication of old ladies selling sugar cakes and peanuts on trays. What excuses the private sector, however, is that it is their money they are wasting whereas government was spending taxpayers’ money as if there was no tomorrow.
Further, the minister’s analysis is also factually incorrect: Barbados throughout the boom years underperformed both the region and the globe, which, truthfully, was the fault of the previous administration. Then he talks about the international demand for our goods and services, without itemising these goods and services. Is he referring to tourism, or the invasion of foreigners buying over-priced properties on the West Coast in one of the most property bubbles and blatant money laundering exercises in the world, equal to Russian billionaires buying British football clubs?
The reality, of course, is that during the boom years what looked like exciting times were in fact British and Irish visitors enjoying long haul holidays on their credit cards and many of them, infected by the sunshine, releasing equity from their over-priced homes to buy properties in Barbados and the wider Caribbean. Therefore, there was nothing surprising when the Irish economy collapsed that the underbelly of so-called Irish millionaires buying up the West Coast was exposed as a sham – a massive debt mountain.
The minister then went on to claim that the global crisis hit our major trading partners, naming the US, Canada, Britain and the Caribbean. Apart from our imports, how ‘major a trading partner’ is the US to Barbados? Did the global banking crisis hit Canada in the way it did the other developed economies (see: Michael Bordo, et al “Why Didn’t Canada Have a Banking Crisis in 2008 (Or in 1930, or 1907, or…”, National Bureau of Economic Research, August 2011). This DLP administration is making it up as they go along. Further, if the Barbados economy declined by 4.5 per cent and the fiscal deficit by 10 per cent during the financial year 2009/10, why has it taken the DLP government this long to realise the economic impact of this reality? Why is he now acting in the 2013/14 financial year?
The answer is partly because during this time senior DLP ministers and advisers were too busy denying that the economy was at best flatlining and clearly in a rough and steady decline, including the self-delusion of ‘green shoots’ in 2010 and 2011. What were these green shoots? Then he adds “….the unanticipated depth and duration of the current global recession has meant that, on average, real economic activity has fallen by one per cent every year since 2008.” What is the compounded figure? In any case, the global economy is not in recession, a fact he would have been aware of from simply reading the various IMF report, including the World Economic Outlook (April 2013), and the revised paper (July 2013).
The minister went on to tell parliament that the traded sectors in particular have borne the brunt of the impact (of the global recession), as a decline in global GDP, depressed credit markets and elevated levels of unemployment in our trading partners significantly reduced demand for domestically produced goods and services. This statement is another fiction, of the minister’s fertile imagination. Global GDP has not declined, in fact it has continued to grow and there is no depressed credit market.
According to the IMF, global growth was 3.9 per cent in 2011, 3.1 per cent in 2012 and is projected to be 3.1 per cent this year and 3.8 per cent in 2014. For the US, in the same consecutive years, growth was (or projected to be): 1.7 per cent, 1.2 per cent, 1.2 per cent and 2.1 per cent; for the UK, it was: 1.0 per cent, 0.3 per cent and is projected to be 0.9 per cent and 1.5 per cent; for Canada, it was: 2.5 per cent, 1.7 per cent and is projected to be 1.7 per cent and 2.2 per cent. Not only has the global economy been growing, driven mainly by Emerging Markets, there is now a growing body of statistical evidence which shows that China has either already overtaken the US, or will sometime between 2014 and 2015 as the largest economy in the world. (see: World Bank, IMF, Penn World Tables).
As we reflect, statisticians are doing their sums to see if, for the first time in 160 years, the giant US has been removed from the top of the global economic tree. If so, this will be an historic moment of enormous proportions and will signal a far greater tectonic shift than was previously expected. Even some of the most intractable developed economies are now growing: Japan, France, Germany – growth may not be spectacular, but it is growth, with the troubled Eurozone overall having grown by 0.3 per cent over the last quarter, despite the lame duck southern economies.
The truth is that the Barbados economy has been stuck in stagnation ever since the 2007/8 crisis and, too, the economy has experienced difficulty in borrowing in the global financial markets because of its adverse credit ratings. The minister also told parliament that the tourism sector had declined by 5.5 per cent in 2012, but again attributed this to a variety of reasons, including reduced airlift and the loss of Almond Resort. Almond Resorts collapsed because of what come guests perceived as gross managerial incompetence, a reality of which I had a slight experience, and an overall lack of workable business models and managerial incompetence in the hotel sector as a whole. We only have to go back to the 2007 Cricket World Cup when hotel occupancy was only 70 per cent, at a time when the entire English-speaking world was focused on us. Manufacturing output also decreased by 12.2 per cent, according to the minister, but since there is no significant manufacturing base in Barbados, it would have helped if he had given actual numbers for this sector, rather than percentages. Then, as if to drive home the point, he said this economic slowdown was to do with an “…entirely unfavourable international economic environment and with an economy sorely lacking sustainable economic diversification and badly in need of restructuring.”
Again, the minister was blaming exogenous events for the stagnation of the Barbados economy, when in reality the DLP government had nearly six years to restructure the economy, and in particular the public sector, and just as long to diversify the economy. This failure to implement a radical, or even defensive restructuring programme must be put fair and square on the minister and his senior policy advisers. As he said, in the first year in office tax revenue fell to about one-third of what it had been for the previous five years. This was an obvious red flag and should have been accompanied by a clear policy approach to minimise the effect of this, including, if necessary, a 33 per cent reduction in public sector spending.
Others may point out that the gross incompetence in collecting outstanding taxes, especially VAT (see previous Auditor General reports) and the poor management of the national insurance scheme, could be put down to weak administration and poor oversight by permanent secretaries and ministers. And, he intimated, revenue fell by a further ten per cent in the following tax year, 2009/10. The picture the minister paints is that things were not just as bad as government critics alleged, but far worse. Then, bizarrely, he continues: “Even in spite of all these challenges Sir, the one area in which we were able to hold together behind a robust external current account management policy was our international reserves. “Indeed, despite the lower than anticipated outturn of the traded sectors, the stock of foreign reserves increased from Bds$1359m to $1464.3m, resulting in an increase of the import cover from 16.4 weeks in 2008 to 19.5 weeks at the end of 2012.
“Even in the face of declining tourism earnings, a significant fall-off in private FDI flows and increasing energy prices, the reserves were maintained through government’s fiscal strategies.”
It is not clear if this is a statement of the government’s and central bank’s macro-economic skill or public financial madness, piling up foreign reserves while the economy was getting a battering. Such management of foreign reserves is outdated, does not reflect the post-1980s financial consensus and imposes greater burden on Barbadian corporates and households than was necessary. History will condemn this policy for what it really is.
The minister told parliament that, following the general election, government was faced with a further drain on foreign reserves. It is clear he is being disingenuous, since competent projections should have telegraphed this alleged development. But he adds: “It is why we did not believe that attempting to go to the other extreme and trying to spur growth by putting consumer spending on steroids was sustainable because in a depressed foreign exchange environment it would have placed our international reserves under tremendous pressure long before now.” Then he asks rhetorically: “…one only wonders where we could have been today had we adopted that policy wholesale.” Again, the minister is simply wrong.
There are three key drivers of a national economy: consumer spending, which can be described as the first tier, corporate spending, the second tier, and public spending, the third tier or back-up. What more rational critics have been saying is that government could have used the Bds$300-$400 million parked idly as part of foreign reserves to pump-start the economy by lending to small and medium enterprises on commercial terms and funding infrastructure projects.
Further funds could have been added to this development pot by offloading non-core government assets, such as a massive hotel portfolio, the Transport Board, and numerous others. Had the minister taken such objective advice, the Barbados economy would have been showing above trend growth and, more than that, the Barbados Growth Model would have been an outstanding example to small economies. (I am curious to know why the Bds$2320.4m revenue for the 2012/13 financial year was nearly $300m less than the amount budgeted for? Do they apply accrual accounting in the public sector? (This is reinforced by the budgeting for public sector salaries and wages: from Bds$804.3m for 2012, presumably the 2011/12 financial year, to $807.1m, “due mainly to increments.” About $818.6m was budgeted for. Why?) Parliament was told that total debt repayments for the 2012/13 financial year were Bds$1100.2m, with interest payments of $559.5m, or about 50 per cent of payments made and further amortisation payments of a further $540.7m.
Some of the foreign reserves could have been used to pay off some of these debts which, with any penalties for early repayment, would still be a much better management of finances. Such mismanagement of public finances is worse than incompetence, it is simply madness. Government mis-managed the Bds$0.5bn that could be spent on infrastructure developments and much-needed restructuring. To make matters worse, interest payments had increased by $32.3m over the previous financial year, and amortisation by a further $86m. Then the government pats itself on the shoulder by claiming the debt repayment over the period was $26.4m less than was originally budgeted. The original accrual number was as bogus as the saving, since one could budget to spend any number then claim to have made a ‘saving’. Minister Sinckler then compounds his disastrous mismanagement of the economy by informing parliament that capital expenditure was Bds$93.7m, compared with $91.9m for the previous financial year.
In fact, the numbers for capital expenditure should be rising substantially since it is this investment that will be the key driver of the economy during the slump and which would put the economy in pole position when the business and economic cycles turned. Put simply, economics 101, during the depression both household and corporates will cut back on spending and, ideally, try to reduce their debt. By spending on infrastructure developments, government would stimulate the economy, providing jobs and buying in services from the private sector, mainly construction.
So, people in work will spend, shops and stores will re-stock and employ extra staff, government would get revenue in terms of income taxes and VAT, and that virtuous circle would continue. This is the purpose of quantitative easing and asset purchasing such as that done by President Obama with General Motors; the other alternative, apart from spending a portion of foreign reserves is to print more money and manage the inflationary effects of over liquidity.
Further, out of his own mouth the minister condemned himself, when referring to the deficit of Bds$668.5m, 7.9 per cent of GDP, or higher than the 4.4 per cent of GDP originally planned for; in other words, a bogus reduction in the deficit then blaming “under-performance of revenue” for the failure. Then he added: “The deficit for the corresponding period in 2012 (again presumably the 2011/12 financial year) was $384.2m, or 4.4 per cent of GDP.” Another failure of economic planning.
There is also a suggestion that inflation is now 2.7 per cent, compared with 8.4 per cent in the same period in 2012; I am sure the people responsible for these numbers are honourable, but it is difficult to believe. It smacks of cooking the books, reducing inflation by nearly nine per cent in a single financial year. In any case, who is responsible for managing inflation, the central bank or ministry of finance? And what is the official inflation target, if any? It is not unfair to detect an element of deception in the minister’s Budget speech. On page 13, we are told that by the end of 2012, foreign reserves were Bds$1.4bn, or 19 weeks of import cover, no caveats, leaving us with the impression this was still the case at the point of reporting to parliament. But, on page 23, we are told that foreign reserves only cover 16 weeks of imports by the end of June, compared with the 19 weeks by the end of March.
The minister then makes a bold promise: “Against the backdrop of these realities Mr Speaker, and ever mindful of the fact that the global economy is unlikely, especially among our key trading partners, to rebound over the next 12 to 18 months, it is now absolutely necessary for government to intervene to procure some very specific objectives in the short to medium term”. Once more the fiction of global economies, which is part of his fertile imagination: as has been pointed out, the US economy is growing and has been for sometime; the UK is growing, the Japanese is growing, even the euro is growing, among the developed economies. And, of course, even though they have slowed down, the leading emerging markets are still growing spectacularly.
High Net-Worth:
Apart from what clearly appears to be a deliberate misrepresentation of the global economic landscape, the evidence of which is there on the IMF website, I will emphasise the wealth of the global mega-rich as individuals, rather than aggregate numbers. According to the most recent World Wealth Report, at the end of 2012, there were about 11 million high net-worth individuals in the world, with investable wealth of about US$42trillion, a fall of 1.7 per cent from the previous year. Of those, 3.37 million are based in the Asia-Pacific region, compared with 3.35 million in |North America and 3.17 in Europe. However, in terms of investable assets, high net-worth people in |North America had assets valued at US$11.4 trillion, compared with $10.7 trillion in Asia-Pacific and $10.1 trillion in Europe.
Quite clearly, Barbados as a self-described premium destination is failing to attract any perceptible number of global high net-worth investors, either as visitors or as equity investors. This, more than anything reflects the lack of confidence in the local equity and property markets, as evidenced by the collapse of the Four Seasons deal and the scramble for a purchaser for Almond Resorts. The minister, in the revised medium term strategy plan, has projected modest growth assumptions of 3.0 per cent by 2017 and 4.5 per cent by 2020 and, he points out, the key driver of that growth will be “…private-sector led, productivity-enhancing, export and investment focused, employment-generating. Socially balanced, and supportive of green growth and environmental sustainable development.” But where are the policies, monetary and fiscal, to drive these grand objectives? The private sector is under enormous pressure for funding, either to grow their businesses or to support cash flow, yet the foreign-owned banks are refusing to lend them money. In fact, the central bank has backed this by giving undue publicity to the issue of under-performing loans, the excuse given by the banks not to lend in the Barbados economy.
How does the minister hope to bypass this lending logjam? By imposing new liquidity conditions on the banks, or by incentivising the development of a non-banking sector?
He gives us four proposals for growth, what he calls ‘interventions’: increased public and private, foreign and domestic investments; better business facilitation; increased productivity; and, increased competitiveness. Again this is simplistic, rhetorical waffle, without any substance. The big question remains how is he going to achieve all this?
The minister explains: US$50m (Bds$100m) in marketing and promotional activities to drive the tourism sector, including US$13m (Bds$26m why do Barbadians talk in US currency?) to settle tourism authority debt. This is money he plans to raise through an Inter-American Development Bank loan, or in other words, deepening public sector debt. Clearly the minister has not been able to separate what is rightly government responsibility, generic promotion of Barbados as an ideal travel destination, and the promotion of hotel sector. The myth of sports tourism will be the focus, in a joint effort with the National Cultural Foundation, the ministry of culture, youth and sports, called grandly the Barbados International Culture and Sports Tourism
Promotion Initiative.
So what are going to be these popular sports which will attract new tourists: cricket, golf, what else? The reality is that for over 50 years Barbados has had a unique sport, road tennis, which has all the ingredients of being a world-class sport, yet it is either ignored by the middle class elite who run sports and policymaking, or they simply do not have the marketing skills to promote this simple, but energetic sport on to a regional or world stage. The minister gives a long list of sporting and leisure events around which this new promotion would be based, but it looks like the same old, same old.
Hotel Refurbishment:
Minister Sinckler also proposed a Bds$50 hotel refurbishment fund, previously announced, which would be funded through an Industrial Credit Fund and Credit Guarantee Schemes. This proposal is so bad it verges on corrupt financial economics. The bottom line is that the mainly private, family-owned or limited liability hotels are incompetently managed and should be allowed to drift in to the insolvency and bankruptcy. Government should not allow pressure, more properly blackmail, from a self-interested private sector to force taxpayers in to financing them, when already many of them have defaulted on income tax, national insurance payments and VAT. Of course, government should help in terms of offering advice; by reminding them that the responsibility for improving their stock is that of the equity holders of their businesses, not taxpayers. If not, government (preferably through a Sovereign Wealth Fund) should offer debt for equity by taking a proportionate share in the companies in exchange for any improvement loans. Otherwise there are a number of other financial mechanisms that the owners of these properties could use: sale and buy back, for example, selling the property on condition that the new buyer gives a lease to continue running the business for a number of years, say 30 years. The hotel and the property are two different businesses. Hotel owners can also open up new revenue streams by outsourcing their restaurants, there is no reason why a hotel should be running a restaurant, along with night time entertainment. There is also the room maid and laundry services which can be outsourced to independent companies, along with imposing direct charges on the use of towels, for example.
The bottom line, as pointed out, is that many of the hotels are badly managed and there is no compelling reason why they should continue to be managed that way just because they have always done so and there is no clear reason why government should take on this responsibility on the bogus claim that it helps the tourism industry. What the minister is proposing is worse than this. I quote: “The Industrial Credit Fund channels funds to entities through qualified financial intermediaries operating in Barbados. Potential beneficiaries first approach a financial intermediary with a project proposal. The intermediary in turn submits a proposal to the ICF for funding.” Then he adds: “The ICF may advance up to 90 per cent of the requested loan amount. The Credit Guarantee scheme provides commercial banks and other credit institutions protection against losses arising from the failure of eligible entities to repay their loans.” This proposal is a recipe for potential fraud: who are these ‘qualified financial intermediaries’? Are they going to be lawyers, accountants, insurance brokers, estate agents, Uncle Joe Cobbly, or globally recognised financial advisers? Then, why should government intervene to guarantee loans for commercial businesses rather than the banks, whose sole purpose is lending money? In fact, why should these so-called qualified financial intermediaries be the ones to approve loans rather than the banks, whose day job it is?
Of importance also is why is the minister bypassing the Small Business office in preference to these so-called qualified financial intermediaries?
In fact, this proposal is designed for those who have mastered the art of making applications, not of running businesses. The simple answer is that these hotel owners should go to their banks and obtained secured loans in the knowledge that failure means losing their property – that is the risk involved in running a business. The minister also made the rather scandalous announcement that the Industrial Credit Fund will be funned in part by the national insurance scheme, an abuse of a long-term state controlled fund that should be prohibited by law.
So, the NIS is now funding privately owned small, in the main mis-managed hotels, often owned by people who have no compunction about sending their children to private fee-paying schools in Europe and North America. To show his ignorance, the minister suggests that the NIS will ‘periodically’ deposit surplus funds in the OCF. Can some one please tell him the NIS does not have ‘surplus’ funds, that this is an actuarial assumption, no more no less, based on long-term obligations.
He continues: “This approach seeks to spur much needed financing to the sector but minimise the risk to the NIS and address a number of incentive problems.” Of course he is right – that there is a profound and urgent need for deeper financialisation – but wrong, that this should come from the over-exploited NIS.
What the minister should have proposed is the formation of at least a single balance sheet retail bank – a post office or credit union bank – with strict balance sheet lending policies, which would more than meet the needs of the troubled hotel and wider small business sector on a sound commercial basis. He did not because it is outside his and his advisers’ policy making comfort zone. He also announced proposals to buy Almond Resorts and Silver Sands Hotel using low-interest loans from the Chinese. But, there is an old Barbadian saying, what sweetens goat mouth….. Does this Chinese deal involved demolition of the existing buildings and building from scratch? Is part of it a loan in kind, in that the building work will be done by imported Chinese labourers, even the unskilled work, when Barbados has an unemployment level of over 11 per cent of the workforce? Does it involve giving permanent resident to any of the Chinese workforce? These are questions that must be answered since they form a central part of Chinese bilateral agreements.
And, is expanding the government’s hotel portfolio the best way of spending Bds$350m in much-needed funds, when in reality the minister should be auctioning off the Hilton and the other hotels it owns? In a display of generous funding of the tourism sector, he has reduced VAT on hotel accommodation to 7.5 per cent, a decision that is short of scandalous. Why is he now subsidising European and North American tourists?
Does he think a saving of a few dollars will encourage Europeans and North Americans, not so inclined, to visit Barbados? That cost, estimated at Bds$9m, could better be spent on feeding Barbadian pensioners. In fact, all this funding should be paid for by the tourist sector, and in particular the hotels, through a levy and/or visa requirement, which in reality would not impact the number of visitors.
The system is so out of control that I have even seen the Holders’ Hill Season promoted by the tourism authorities.
Analysis and Conclusion:
Barbados is living on borrowed time and, like most people who have overdosed on free food and booze, they do not know when the party is over. It is over. Already the bleeding hearts are protesting that the Budget proposals are too tough; their criticisms range from attacking the proposed introduction of tuition fees to cuts in the hospital budget to redundancies. But the minister should simply ignore them, the health cuts were not advisable, but UWI must pay its way. The Opposition BLP is simply wrong on tuition fees and its opposition is political, not economic.
The call for a referendum on the fees is just middle class whingeing because for the first time they have to pay towards the costs of education their precious little children. The referendum idea is idiotic and undemocratic.
The biggest flaw in the proposals, however, is the obvious lack of proper assumptions and analysis, which adds to the overall confusion. A central part of any restructuring is the minister’s own department, which has a number of positions which duplicate each other and a number that are wasteful, including typists, maids, messengers, nine budget analysts, nine economists, including a chief economist, and six statisticians. The important question is what do they all do?
Sometimes when mention is made of the cloud of ignorance in government and policymaking, critics regard this as a cheap shot. But here is the minister: “The ministry of finance will instruct the Inland Revenue Department to procure on a consultancy basis a local company and tax law expert to handle tax law resolution issues and provide advice to the department so that timely decisions could be handed to businesses in the sector that require them. BIBA has generously agreed to work with the ministry to put this initiative into effect ASAP.” This, I suggest, is a major admission of ignorance within government: that there is no one in the ministry, Inland Revenue, or the Attorney General’s department with expertise in taxation law and this so-called expertise has to be bought in.
So, the very people who draft the legislation seem not to know how it works, or at least this is what the minister is suggesting. And to top it all, the Barbados Insurance Brokers Association has stepped forward to offer its services. Please!
A government of lawyers, and a massive university law faculty, and a nation of people who like public discussions and a media that is one of the ‘best’ in the world, with such a blind spot is beyond comprehension. In terms of tourism alone, the policy proposal lies in the face of the urgent need to diversify the economy, the reality is that the marketing budget is badly spent, such as advertising on Los Angeles local radio. How many tourists travel from Los Angeles to Barbados per US$10000 of advertising?
The minister made the bold claim that, based on a revised Growth and Development Strategy 2013-2020, “(S)ustainability of our economic growth and development over the 2013-2020 period will be assured through this nation’s commitment to productivity, efficiency, competitiveness and service excellence.” But this is rhetorical and meaningless in policy terms since nowhere in his Budget presentation is there any policy proposal to deal substantively with any of these grand ideas. Take, for example, the 21 days uncertificated sick leave that the 30000 public sector workers can claim in any one year. That is 630000 working days or three months short of two full years in costly unproductive sick leave.
Given the low capital spending, an investment in introducing technology with comprehensive functionality across all of government would introduce such far-reaching efficiencies that the investment would likely pay for itself in three to five years. One noticeable subject not mentioned by minister Chris Sinckler, and not raised by the Opposition or the media, is youth employment, the most pressing and urgent social issue facing the nation. After nearly six years, the global economy is still generally in turmoil even if it is growing, with the fast-growing emerging markets themselves going through a shuttering slowdown.
Two important recent developments have come out of this, first there is a flight of capital from the emerging market asset class back to the developed ones, mainly to the US, on the basis that the three per cent trend growth in the US is less of a risk and may even deliver in the short term greater returns. Second, there is a fear that the sudden growth of emerging markets over the last five years or so might have been a blip, an accident of history, and things will revert to the historical trend. This is wishful thinking. This basic misunderstanding of events in the global sphere typifies what is wrong with the minister’s analysis. The truth is that the Budget proposals promised more than they have delivered. It is like buying a pig in a poke. The minister has once again let down the people of Barbados and must do much better.
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