Flirting with danger
“We require this additional space to allow the authorities at the Treasury to be able to manage the financing of our deficit, and the management of our cash flows appropriately to give us space and time to be able to do what we are required to do in this economy.” — Christopher Sinckler, Minister of Finance and Economic Affairs.
Tuesday’s resolution to increase the country’s short-term borrowing limit was neither a trivial development nor a routine housekeeping exercise. It was the manifestation of the consequences of the downgrade of the country’s sovereign debt rating to “junk bond status”.
You would recall that the downgrade was attributed to Government’s high fiscal deficits, the abysmal economic growth prospects and the underlying uncompetitive structures of the local economy. Regrettably, not much has changed since Barbados’ credit rating was downgraded by Standard & Poors and Moody’s; Government’s finances have not improved markedly and the nation is still grappling with the same economic challenges.
Moreover, confidence in the management of public finances and the management of the economy has not been restored. The economic uncertainty coupled with the crisis of confidence is creating a corrosive investment climate. Therefore no one should be startled by the revelation that commercial banks are increasingly unwilling to hold Barbados’ long-term government paper.
The seminal macroeconomic Investment-Savings-Liquidity-Preference model surmises that economic output or GDP (Y) is simply the sum of consumption (C), investment (I), government spending (G) and the net of exports (X) and imports (M); i.e. Y = C + I + G + (X-M).
Without getting too technical, if you consider that Government’s stated policy has been to dampen consumer spending and imports by increasing taxation which funds higher levels of Government spending in circumstances where the inhospitable global environment has curtailed goods and services exports, as well as foreign direct investment, it would not be difficult to understand why the economy is shrinking rather than growing.
The country has now reached a stage where private local investment has been adversely impacted by the listless economic climate and investor confidence has deteriorated to the point where confidence in government paper has sunk to an all-time low.
Of the five drivers of economic growth (identified in the equation above), the only one that is growing in Barbados is government spending.
Two major implications arise:
(i) Since Government spending only accounts for a fraction of economic activity, its singular expansion cannot lift the economy out of the doldrums. Its deliberate policy (raising taxes) has successfully stifled private consumption and imports and now its spending excesses are curtailing investor confidence.
(ii) Fiscal imprudence is coming home to roost. Increasingly the government of Barbados is being perceived as a default risk. This explains the reluctance of the banks to hold long-term government paper. As private investment suffers another blow, Government’s cost of borrowing will increase as it stares down the risks associated with diminishing sources of debt financing.
Despite the fact that interest rates on short-term debt instruments tend to be lower than the interest rates on longer-term maturities, the switch from long-term borrowing to short-term borrowing will result in higher cumulative interest costs due to the increased refinancing iterations.
For example, the interest cost of a debt instrument of $1,000,000 at six per cent per annum to fund an annual fiscal deficit of $1,000,000 is $60,000; however the interest cost of a debt instrument of $1,000,000 with an interest rate of three per cent and a three-month maturity to fund an annual fiscal deficit of $1,000,000 is $30,000 times four (i.e. $120,000). This result occurs since the debt of $1,000,000 will have to be rolled over on four occasions during a 12 month period in the second scenario.
If these events aren’t symptomatic of a debt problem or at least an emerging debt problem, I don’t know what is. There is an elephant in the room and everyone knows it. A fiscal crisis is plaguing the public sector. The chief culprit is unbridled spending which, like a cancer is eating up more and more revenue, ballooning the national debt and impeding economic growth. If local policy makers continue at this rate Barbadians may have to wish growth and prosperity bon voyage.
Yesterday, it was heartening to hear the Minister of Industry, International Business, Commerce and Small Business Development acknowledging that cutting government expenditure does not necessarily mean sending home public servants. This important point should not be lost on the Minister of Finance.
The time to move from acknowledgement to implementation is long overdue. Many realistic proposals to cut public expenditure have been publicly and privately suggested to government but after more than two years little transformative action has been undertaken. The reform of the Barbados Drug Service was a fine example of the type of expenditure management that is required to stem the tide but a lot more must be done.
The Government of Barbados is flirting with danger, staring down the barrel of economic calamity. The longer the inevitable is put off the more painful the adjustment is going to be. These are serious times; there is no knight in shining armour from across the Atlantic that will appear to save the day. It is time to step up and be craftsmen of our fate.
It has been reported that Minister Sinckler indicated to Parliament this week that the government would carry out an intense review of the past four years and outline a growth path for the future. He also said that a team was hard at work and was willing to accept inputs from all members of the society. Though those statements were meant to be assuring, they illustrated that the Stuart administration is behind the curve.
If after a general election and years of public debate of the way forward, and the government is now seeking to formulate a credible plan something is seriously wrong. That is not good enough. It’s time for action!
* Carlos R. Forte is a Commonwealth Scholar and Barbadian economist with local and international experience. C.R.Forte@gmail.com