Central Bank warns against quick fiscal fix
More Barbadians will lose their jobs and the economy will decline if Government moves to solve its fiscal problems too quickly.
The Central Bank of Barbados issued that warning this afternoon as it reacted to yesterday’s decision by Moody’s Investors Service to lower the island’s credit rating.
With $1.4 billion in foreign exchange reserves in the bank as of Wednesday, a “sufficiently tight fiscal stance” and what it considers a sound economic strategy, the bank said it was undaunted by the Moody’s decision.
But with the rating agency suggesting that Government could do more to control its debt and fiscal problems or risk another downgrade or recession, the bank said fixing the debt problem in this way was dangerous for the Barbados economy and employment.
“The current pace of fiscal consolidation under the (Medium Term Fiscal Strategy) has helped to constrain the growth in the fiscal imbalance and the level of debt. A tighter fiscal stance is possible but undesirable: it would slow the growth of debt because the financing needs would be lower, but it would also cause economic contraction and aggravate the loss of jobs. The ratio of debt to GDP might well turn out to be even higher than is currently projected,” it cautioned.
The financial institution shared Minister of Finance Chris Sinckler’s view that the latest ratings action was not a surprise, “as it brings Moody’s sovereign credit rating for Barbados in line with that of Standard & Poor’s rating revision in July 2012”.
Like Sinckler, the bank also said the island’s economic strategy “remains unaffected by this action, and continues to focus on conserving foreign exchange reserves and growing the foreign exchange earning sectors”.
“Barbados’ strategy for restoring sustainable growth is centred on the resurgence of tourism, international business, agriculture and agro-processing and the development of alternative energy, to ensure that there are additional foreign earnings to meet the demand for imports that will come with renewed growth,” the bank said.
“Through targeted marketing, development of new markets, productivity increases and other non-price competitive strategies, the private sector is leading the way to a sustainable growth path, with Government incentives and support, notwithstanding the impact of the protracted global recession.
“Government continues to finance its operations mainly from private domestic sources. For the fiscal year 2012/13, domestic financing is expected to contribute about 85 per cent of Government financing, sourced from the NIS, non-bank financial institutions, commercial banks and the public,” it added.
Central Bank officials, though acknowledging Moody’s observation that Government’s portfolio had a high proportion of domestic debt, said maturing debt was usually rolled over, and that with “no extraordinary peaks in the amortisation profile, there is little risk that the expected domestic financing will not materialise”.
“External debt service is only about seven per cent of the country’s earnings of foreign exchange in 2012. In addition, Government’s Medium Term Fiscal Strategy sets out a sustainable path via which the country’s debt can be reduced to comfortable levels by the fiscal year 2016/2017,” it noted.
The bank also said Barbados’ current pace of fiscal consolidation under the MTFS had “helped to constrain the growth in the fiscal imbalance and the level of debt”. (SC)