Stimulus or stranglehold
Over the past two years, our economy has exhibited flat and declining growth patterns, with zero growth in 2012 and a contraction of 0.20 per cent in 2013. The first quarter of 2014 saw further contraction of real GDP of 0.40 per cent, which was actually an improvement over the first quarter of 2013. The average growth rate for the economy now stands at 0.6 per cent.
With this in mind, it has often been stated and repeated that the only way to improve our current economic state in the short to medium term is to take steps to engineer sectoral growth, while implementing cost reduction and cost control measures, effectively managing our net foreign reserves and in the long term to satisfactorily restructure our economy.
The primary means of Government earning revenue on its fiscal account is through taxation, levies and fees, but this cannot result in overtaxation of citizens and/or businesses that threatens our ability to maximize the benefits of the firm-household relationship for provision of and consumption of services that keeps the economy going and provides for growth.
The Minister of Finance last week announced in Parliament, the intent of Government to pursue sovereign debt (Government to Government loans) to fund several capital projects that are deemed necessary for our society and economy at this time, and on the basis that such debt will at more favourable rates. My comments on this last week were taken by many out of context, but while I understand the ongoing social development that is required, much of my current judgement has to be based on our current fiscal and debt position, which will ultimately dictate the pace of social and infrastructural development, especially it is to be financed through long term debt.
So will the $900 million plus be an economic stimulus or future economic stranglehold?
The funds, once accessed, will likely be used for some or all of the following capital projects, but I believe there must be some additional considerations:
1. West Coast Sewerage Project.
2. Airport Expansion Project.
3. Sugar Terminal Project.
Barbados currently devotes 30 per cent of its revenue to service interest on debt and these are fixed monthly or annual commitments, and with projected growth averaging around one per cent into 2015, I believe that the proceeds of any sovereign debt must realize some future revenue and improved earning capacity for the country, but it must also be coupled with the other elements of sectoral development that we have deemed necessary.
Investment in capital projects is necessary to spur employment opportunities for the unemployed (including some section of the persons recently retrenched), and has been regularly used as a means of economic stimulus and growth, while getting consumption in the economy moving upwards.
Investment in projects such as the airport expansion have to be in conjunction with upgrade of our hotel room capacity over and above the investments by Sandals. Any expansion at GAIA will provide the ability for larger aircraft and higher volumes of passengers. However, the utilization of any expanded facilities will be driven by the state of the tourism sector –– room stock, attractions, cost of accommodation, and so on. I therefore believe that investments like this one will have to be timed well taking into account the activities in the wider tourism sector;
If the investment is in projects that yield no real current or future revenue, how do we plan to fund the associated interest and debt related payments, as our projected current account deficit for the current financial year is indeed about BDS$900 million?
So it is worrying what the real effect will be and this has nothing to do with a lack of support for importance of the initiatives. In the first instance we need investment in productive capital projects in my opinion.
Foreign exchange management. The importance of the currency peg can never be taken for granted and this necessitates prudent management of our reserves both at the Central Bank and within the commercial banking system. The fact that the Central Bank is now enforcing what the Inland Revenue Department refers to as old but existing policy that requires tax clearances, and in some cases further restriction on the quantum of foreign exchange that can be disbursed, does not represent a significant issue in itself, but rather should raise concern about the state of our reserves and more importantly the earning of same.
It is time for there to be more clarity on our foreign exchange position in terms of current earnings vs current disbursements, categorized by purpose and also analysis of our reserve movements. I see this as essential simply because the Government may need to and in fact probably should use moral suasion to influence how individuals and businesses utilize foreign exchange during our current crisis.
However, such an approach requires clarity on exactly where we are and the imminent concerns or dangers. As an economy we are still utilizing a hefty sum of foreign exchange to prop up an extremely high food import bill, which ultimately is being fuelled by tastes for a range of items not produced locally or regionally.
The role of agriculture. The Leader of the Opposition in her submission last Tuesday suggested an option where the unemployed might be given tracts of land to engage of agriculture whilst ultimately supporting their families. While the concept of utilizing state lands to provide gainful employment for displaced citizens has its merit, we need to take a more comprehensive approach to the role of agriculture in reducing the consumption of our scarce foreign exchange, but more importantly as a key component of restructuring our economy.
I however while supporting any thrust in boosting our agricultural sector and the contributions still being made by a few committed farmers (livestock and crop) believe we need to acknowledge the following challenges:
1. The attractiveness of agriculture to the younger generation is not widespread, and we therefore must explore means of changing this as agriculture will have a chance of making any meaningful contribution. I have no suggestions as to how we can achieve this currently, but it is a dialogue that must be had.
2. The scourge of predial larceny continues to be a serious deterrent to farmers and represents the single highest competing force that farmers face daily. As a country we need to improve the legislation governing the penalties for the perpetrators of these crimes, if we are to give the sector a fighting chance.
3. Any other feasible and affordable steps, measures or incentives that could be taken should be analysed and this writer is very open to providing support to any initiatives to increase our ability and capacity to grow more of what we consume.
I support the view that fiscal consolidation and engineering growth are critical to bringing our economy out of this economic rut, but it requires the effort of all Barbadians led by a transparent and open Government and driven by foreign and local investment and a high degree of innovation and cooperation across all sectors of our economy –– old and new. It cannot be led purely by Government investment and expenditure. In my opinion that is a recipe for future disaster.
(David Simpson is Immediate past president of ICAB and a director of the Barbados Entrepreneurship Foundation (BEF), and serves as co-champion of its finance pillar.)