Buckle Up – Central Bank Economic Review About the Numbers

The keynote of Governor of the Central Bank Cleviston Haynes’ latest review of the performance of the economy was about growth for 5 consecutive quarters. The blogmaster is happy we are seeing an uptick in economic performance. Who does not want to see growth EXCEPT the ignorant and those rabid political partisans. Oftentimes we forget an economy is about how people in a country efficiently utilize resources with a goal of supporting a reasonable standard of living. 

However, five consecutive months of growth in the local economy, if one considers that in 2019 the global economy was significantly impacted by the pandemic should not be waved as a pretext that it will be business as usual. It is known by all and sundry our economy has a structural problem. The blogmaster recalls Dr. Frank Alleyne in 2008 – at the time serving as financial adviser to late Prime Minister David Thompson’s adminsitration- making the point there was an urgent need to address a tired economic model inherited from Barrow. It is 15 years later and the conclusion any fair minded commentator can make is that there has been negligible change to the structure of the local economy. We continue to be over reliant on tourism. It is understandable given the natural beauty of the Caribbean people will want to visit for a price BUT too far east is west.

Of mighty concern is the average Barbadian seems blissfully unaware the challenge the island is currently facing because we are a price taker in a global economy that is seeing a spike in inflation for commodity and services. It is fashionable of recent to blame the disruption to global supplies because of COVID-19 and Ukrainian Russian conflict or a slow down in the US economy which is forecast to enter a recession soon with the Fed intervening for a second time to raise interest rates. The performance of the US economy is important for Barbadians to take note given the parity of the Barbados dollar to the US dollar. Through it all too many Bajans continue to expect a broke government to be able to fund conspicuous consumption habits, giving credence to the adage – a people with champagne taste and mauby pockets.

Where do we go from here?

To a simple way of thinking, we have a people comfortably living a lifestyle that is unsustainable and has to be continually supported by debt financing. We have also the situation of successive governments, in order to maintain popularity, fueling the addiction of citizens to conspicuous consumption by borrowing. And thirdly Barbados is plugged into a capitalist system which will drag us along with it IF…We are truly in a pickle. A situation which older folk describes as one not being able to tell the other comeback. 

Your guess is as good as this lowly blogmaster where we are headed. We may agree that if we continue to buyin to the notion that our borrowing is within our capacity to repay without factoring the inherent risks of a small developing state, we should sit back, buckle up and enjoy the ride to the Economic Cliff.

Central Bank of Barbados Governor Cleviston Haynes delivered the Bank’s review of Barbados’ economic performance in the first half of 2022 and took questions from the media and online audience.

Review of Barbados Economy January to March 2022

Central Bank of Barbados Governor Cleviston Haynes delivers the Bank’s review of Barbados’ economic performance in the first quarter of 2022 and takes questions from the media and online audience.

Review of the Economy January to March 2022 (Text Version)

Policy Performance and Outlook (Part 1)

General Election will be held in Barbados 19 January 2022. One expects a key issue of the campaign will be economic plans to move Barbados forward and the Mottley led government will be asked to defend its management of the economy since 2018 notwithstanding it must have been a difficult undertaking based on what the state of the economy was and then the pandemic. The following was shared with the blogmaster and now posted for comment – David, blogmaster

Context – How did we get here?

To judge them fairly, one would have to first look at the state of the nation upon the administration assuming office in May of 2018.  In 2018 the administration faced a debt to GDP ratio of 158.26% or 174% if you include arrears. These arrears were simply $1.9 billion the government refused to pay to ordinary Barbadians and businesses as opposed to money borrowed. This includes money owed to government contractors for work done or goods provided, income tax returns to individuals, vat returns to businesses, reverse tax credits to the working poor and $250 million in civil servant pensions Which government had stopped paying to the NIS.  Therefore, it is fair to add it to the total government debt as the current administration does. The total debt to GDP ratio of 174% was up from a ratio of 83.3% in 2008 when the Thompson administration took office. That is a staggering increase in the Debt to GDP ratio of any nation in just 10.5 years. For further context, when the Owen Arthur Administration took office in 1994, the country’s debt to GDP ratio was 55.93% an increase of 27 percentage points in 14 years in which Barbados; Rebuilt a Highway, Built a Cricket Stadium, built two new Secondary Schools, rebuilt a prison. refurbished an Airport and placed technological equipment in all schools through Edutech and built new Tenantry roads through the Urban and Rural Development Commision. The Mottley Administration also assumed office with less than $400 million in Foreign reserves with a foreign debt payment due in just over a month, very low to no economic growth for a decade, An economy headed back into recession despite the global economy growing at 3 percent at the time according to the UN Barbados was the third most indebted country in the world after Greece which is backed by the European Union, and  Japan which has the second highest amount of Foreign Reserves in the world after China. The question then becomes, Why did the Thompson/Stuart administration struggle so much to manage the country’s fiscal and economic affairs?     

Fiscal Management  

To find answers we cannot speculate but we will need to take a look at the Government’s accounts aka “The revised estimates” you can find here: Estimates and the Central Bank of Barbados data on Government operations. In order to be fair to the previous administration we can only examine the Fiscal Balance on the Current Accounts since this does not include repayment of interest on loans from the Arthur or Sandiford Administrations. The examination of this data does not paint a pretty picture. Since Grantley Adams Administration in 1952 Barbados had only recorded a fiscal deficit of it’s current accounts five times with four of three occasions being so small it hardly registered twice under Barrow, once under Tom Adams and Twice under Sandiford, with the largest being in the fiscal year 1988/89 of $20 million. The reasons behind this rule are two fold:

Running a fiscal surplus or balanced budget on the current account takes pressure off the Central Bank to print money to finance it . which in turn secures the fixed exchange rate since money printing depletes the foreign reserves.   
Secondly, It creates fiscal space by allowing the government to borrow for purposes which are desirable like to build roads. schools improve public transport and water resources.

Then in 2008 something happened, Barbados departed from an “unwritten fiscal rule” which we had followed for decades, we went terribly off track as the data shows in 2008/2009 we spent 189.4 million more than was received in revenue  2009/2010 486, millions more than tax revenue, in 2010/210 $638 million, 2010/2011 $266.2 million, 2011/2012 $614.3 million 2013/2014 was the worst year in which we spent $786.7 million more than was collected in taxes. Every year until 2018 Barbados borrowed to pay wages and salaries and to keep the “lights on” so to speak. This was not to invest in infrastructure or digitizatization or upskilling for the future but spending in the current period. In the financial year, 2010/2011 (page 27) Capital Expenditure actually fell by 41.2% and it never recovered throughout the life of the administration. This means that the administration which ran the largest deficits in the history of the country all invested the least in its future.  The administration also reduced investments in human Capital in the form of  higher education, by 2012, our government had racked up arrers to UWI to the tune of $150 million  and by 2013 Government officially announced tuition fees for Barbadian students after not paying the University for some time. This wasn’t during a pandemic, global flights were not halted and we had not been hit by a major hurricane (thankfully).  To be fair, there was a global financial crisis between 2008 and 2010, however the previous administration did not have a revenue problem. The 2008 budget which Thompson delivered ensured that tax revenue remained at 2008 levels despite the Canadian’s signing a tax treaty with Cayman which reduced our International business taxes.  In fact by 2009 the Government raked in 2.6 billion dollars in taxes, surpassing 2007 levels.  However, the country had a spending problem, driven by a category called transfers and subsidies, mostly going to State owned Enterprises. We were adding obscene amounts to the national debt not to build roads. bridges, schools, clinics. hospitals and to digitize and modernize the economy but to throw into a dark hole called SOE’s.  What happened as the years went on was those deficits lead to short term borrowing, which lead to credit rating downgrades which lead  to higher interest costs.  This spiral ensured that the country could not buy a single bus, leading to stories like this, or garbage trucks or upgrading sewage plants or fix crumbling school infrastructure or supplying water to parts of the island where people were suffering from dry taps. We simply had no fiscal space.  When the deteriorating credit rating scared off Institutional investors. We resorted to borrowing from the Central Bank (printing money),this money printing led to the Foreign Reserves plummeting even after we managed to borrow, at very high interest rates (10-13%) from Credit Suisse at.  

Fiscal Space and Restoring Credibility 

I don’t know much about politics, but as someone who thinks who has often derided politicians for trying to trick people, one thing that struck me in reading the BLP’s 2018 manifesto was the lack of “pie in the sky” promises and the honesty about the need for debt restructuring (page 8) and going the IMF , which is almost unheard of in a political campaign in the Caribbean.  To be frank, this style of candid campaign lead to the new administration being able to make the decisions it needed to upon assuming office.   

After 3.5 years what has been their Record?   A week after assuming office the Government announced that Barbados would be suspending Debt payments and entering talks with creditors and the IMF in order to stop the slide in the Foreign Reserves and get Fiscal Space.  This debt restructuring exercise was wrapped up in 2019 details: here.
Just over a week later, the Minister of Finance went to parliament to deliver the so-called “min-budget” which was just a set of adjustments to the Estimates presented by the previous administration in March. Measures in these adjustments were meant to close the still large fiscal deficit which the island struggled with by going to the root of the problem, Transfers and subsidies to SOEs. Government proposed taking a number of SOEs off of the Consolidated fund and forcing them to fund their operations using their own revenue streams. Some Measures included:  Airline travel and Development tax for tourists coming from outside Caricom to go directly to BTMI while taking BTMI off the Consolidated fund (partly privatizing it) Product Development levy on Tourism services to create more revenue stream for BTMI. Moving the SSA and the Water Authority off the Consolidated fund though the Garbage and Sewage Contribution. A PPP to let a concessionair run Harrison’s Cave so the Government can take it off the Consolidated fund, the entity which was later chosen was Chukka Caribbean. The Purchase of new garbage trucks and buses. The resumption of payment of tuition for students at UWI The increase in non-contributory pensions from $155 to $225.  

What were the results of these adjustments? 

To be clear, a number of these measures were tough, but they had a simple theme, to stop taking money from the consolidated fund and throwing into dark holes called State owned Enterprises like SSA, BWA, Harrison Cave, BTMI and BTPMI and Transport Board, The type of Spending which choked the country for a decade.  By March 2019 Barbados was recording a small fiscal surplus on the current account of $167.2 million.  During that same period the administration sought to address the infrastructural decay of the country with Temporary fix to the south Coast Sewage problems: New Garbage trucks arrived by January 2019 and more would arrive by December 2019: The purchase of new buses which arrive by mid-2020.  Reinvesting in primary and Secondary Education through repairs to schools like St Giles primary,  or St George Secondary  Establishment of the Education Reform Unit and the the upgrade the electrical wiring across all schools and fence to fence wifi connectivity. Bringing in Coding and Robotic kits to launch the coding and robotics programme in 2022.For a long time people have been crying for water relief in parts of rural Barbados and the administration spent money to fix water distribution issues facing them see: here and here. Residents in parts of St.Andrew, St John and St Joseph are benefiting as seen by this tweet.  The administration also repaired and rebuilt several roads across Barbados, the latest being in St. Phillip seen here and here.  

Arrival of Covid

Just as the country recorded a fiscal surplus current account surplus of  6%, the largest surplus in the Country recorded in decades.  The pandemic struck.  Note: In part 2 I will examine the Administration’s response to the pandemic and what I believe are the strengths and weaknesses going forward.  

Honeymoon Period Over for Mottley Government

Swordplay and ripostes are a feature of the political landscape of any country. Two years out from a general election constitutionally due in 2023 we have started to see a ramping up of the political vitriol and rhetoric by the two main political parties.

There is no doubt in the minds of political observers the Barbados Labour Party (BLP) took management of a poorly performing economy in 2018. The Democratic Labour Party (DLP) before its historic defeat was reported at one point to be borrowing 50 million monthly from the Central Bank of Barbados to meet salary commitment to the public sector, and the financial position of the NIS fund had deteriorated as a result of operating as government’s ATM. The foreign reserves dipped to a low level, for the first time Barbados achieved junk status credit rating and had become a pariah in the capital market. The parity of the Barbados dollar was under attack with predictably the D-word being mentioned as the ‘lord and saviour’ of our economic problems.

The Mia Mottley led BLP immediately on winning office took unpopular decisions to default on local and foreign debt by hiring White Oak Advisory, a boutique financial advisory outfit based in the UK see Barbados creditors fume at ‘absurd’ $27m advisory fees. Appointed the largest Cabinet some suggest in the world on per 1000 of population supported by the tagline – many hands make light work.

Along with taking over a poorly performing economy, external events have not been kind to the incumbent. The DLP in 2006 had to manage the economy during a global recession and in 2019 the BLP has had to manage the economy in a COVID 19 induced pandemic. That said, members of households although sympathetic to macro issues are always more concerned with bread and butter issues; maintaining an acceptable quality of life.

After 3 years in office the gloves are off and the performance of government – notwithstanding the challenges presented by the times – is attracting greater public scrutiny.

Enuff a pro-BLP BU commenter posted the following in defence of government’s performance and what is in the implementation pipeline.

  1. … who is about to redevelop the same Temple Yard through the UDC?
  2. Who about to give 50 acres to youth at Wakefield for farming?
  3. When your opponent is in your strongest seat racking up achievements and with zero seats in parliament your leader (Verla De Peiza) runs away, you’re in a bad state.
  4. More frightening is the leader in trying to get a foothold in St.Lucy is reported as saying “there is really a lot that needs to be done in St Lucy”, this is after the parish was represented in Parliament by a DLP member for 32 unbroken years starting in 1986, 18 of which the party was the government.
  5. Added to this are the topics she focused on water and buses when the BWA busy laying mains in St Lucy, a desal plant is in the works, more buses are coming and a mass transit framework. So that platform dead in the waatuh!
  6. The fact is that Dems can’t handle the government’s performance and know that with 2 years still to go another beating awaits. QEH upgraded A&E opening early next month.
  7. More HOPE housing coming, including St.Lucy and St.John.
  8. Vending legislation coming.
  9. National digital ID, licensing authority sorted (ASYCUD a lot of early noise too), new ways to pay and receive money, new mechanics and bodywork clusters.
  10. Scotland District rehab
  11. More buses
  12. More road improvements.
  13. New recycling and garbage collection.
  14. Vineyard project, new reservoirs, more water from Ionics.
  15. IL (the legislation for the commission has already been passed), whistleblower legislation etc etc all before the next election.
  16. KLM and Aer Lingus starting flights later in the year. Yuh remember empty Gol from Brazil? The Dems would do better to send a bowling machine.

Discuss for 5 marks.