Fiscal adjustment programme short by $174 million
Central Bank Governor Dr Delisle Worrell says Government’s much-maligned fiscal adjustment programme has achieved one of its most important objectives to date – that of bringing the demand for foreign reserves, which stood at $1.66 billion or the equivalent to 15 weeks of import cover at the end of September, back in line with supply.
However, in his review of the island’s economic performance for the third quarter of 2014, Dr Worrell warned of the need for further adjustment, both in terms of raising much-needed revenue and reducing spend, in order for the country to meet its deficit target under the 19-month programmme.
He acknowledged that the fiscal adjustment measures, introduced back in April – including a public sector-wide retrenchment programme targeted at 3,000 workers – had so far reduced the deficit by 0.9 per cent of GDP and were forecast to yield an additional one per cent return.
Another two per cent reduction, he said, would come from a recovery of revenue.
However, the Governor warned that “further revenue enhancement and expenditure adjustment equivalent to two per cent of GDP will be required in the second half of the fiscal year [which began in October and runs until the end of March] to bring us to the target deficit of 6.6 per cent of GDP”.
He pointed out that so far this year, the fiscal deficit of $360 million had been financed largely by a reduction in Government deposits with the banking system to the tune of $235 million. The remainder came through a draw down of Government deposits at the Central Bank and by the National Insurance Scheme.
In terms of the financial needs for the remainder of the fiscal year, Dr Worrell said a requirement of about $205 million was anticipated. He made passing reference to the island’s net public sector debt, which, up to the end of September, was the equivalent to 75 per cent of GDP, up from 67 per cent at the end of last year.
In the meantime, the Governor is still forecasting growth in the order of two per cent next year and by 2.3 per cent in 2016. This is a less conservative projection than the one he had issued at the end of June of a 1.2 per cent growth in 2015 and 2.5 per cent growth in 2016.
However, no revision was made to his earlier growth forecast for this year of 0.3 per cent. The leading economist explained that the island’s growth strategy was private sector led, focused mainly on the foreign exchange earning sectors and anchored on the current peg to the US dollar.
“Furthermore, our growth is premised on increases in productivity, enhancement of the quality and appeal of our country’s products and services, and reforms aimed at improving Government’s facilitation of business,” he added.
In reporting a turnaround in the vital tourism industry, he said the sector recorded an eight per cent increase in arrivals up to the end of the third quarter. He also said airlift from the United States and Canada was expected to increase by nine per cent and 20 per cent respectively “in time for the coming winter season”.
“Tourism value added is estimated to have increased 0.1 per cent so far for the year. Barbados continues to hold its own in the international business sector, on the basis of its reputation for sound regulation, good infrastructure and compliance and international standards,” the Governor added.
In an immediate reaction to the report, economist Ryan Straughn said it was both disappointing and embarrassing, adding that it provided more questions than answers.
Straughn, a former Central Bank employee, told Barbados TODAY that he did not see the fiscal adjustment measures reducing the deficit by an additional 1.4 per cent of GDP as projected by the Central Bank for the final six months of the fiscal year, given the fact that Government had only achieved a reduction of about 0.9 per cent so far.
“So even if everything else materializes. . . you are talking about almost doubling. I think this is where one has to be concerned because you only realized $77 million in the first six months of the fiscal year, then reasonably speaking how do you expect to almost double that coming on to the end of the fiscal year? It really doesn’t make sense to me,” said Straughn.
Furthermore, he said, unless “something significant” happened, such as the start of a number of major construction projects, then he did not see the economy recording a two per cent growth next year and 2.3 per cent the following year “simply because the policy of the Government has not changed”.
Describing as unfortunate the decision not to hold a press conference for the second quarter in a row, Straughn said “overall, the report is really lacking”. In fact, he termed it “wishy-washy”.