Make debt a priority, urges Arthur
Former Prime Minister Owen Arthur is warning that Government is sinking deep in debt.
He has also cautioned that continued printing of money by the Central Bank would amount to “‘an act of vandalism”.
Arthur was the guest speaker at the 40th anniversary function of the Institute of Chartered Accountants of Barbados at The Hilton on Thursday night.
Stating that Barbados’ current economic circumstances of ballooning debt was ‘simply unsustainable’, he said “Government should make recourse to policies of a kind that it has not hitherto deployed to tame this monster”.
“The deficit for this fiscal year is projected to be $215 million larger than for last year; the servicing of the debt is however to increase by $240 million. The increased debt servicing is therefore accounting for more that all of the worsening deficit situation,” said Arthur in explaining his position on the domestic economy.
He said the situation had now reached the stage of “debt overhang”,
since its debt to GDP ratio had exceeded 100 per cent and its debt service accounts for over 66 per cent of Government’s revenue.
He also pointed out that Caribbean countries with similar debt profiles had introduced debt-restructuring programmes, including Jamaica, which has launched a debt exchange in which domestic bondholders are invited to replace their paper for ones with longer maturity dates that give savings on short-term interest payment.
“ I judge that Barbados needs to put a similar debt exchange in place, on the understanding that it will give the country some fiscal space to enable it to start to climb out of the hole in which it now finds itself.”
However, he cautioned against Government’s use of savings from such a scheme to meet other expenditure, such as education, saying it would only fill a hole, not erase debt.
Describing Government as an entity that is cash poor but asset rich, the former Minister of Finance said “the sale of assets to raise resources to carry out fiscal consolidation is now an imperative”.
In addition to a programme of privatization, he said restructuring of the operations of state enterprises must also be factored into the overall debt reduction strategy, noting that transfers and subsidies to these public entities “have recently come to exceed $1 billion annually”.
“With the best will in the world, they cannot be sustained,” Arthur said.
With any privatization, Arthur said employees should be given first option of ownership of the going concern, “such that it can be used not just to help reduce the fiscal deficit, but also to broaden the base of ownership in the country”.
He said tax reform must also feature in Government’s debt reduction strategy but warned that such changes must not be towards higher taxation.
“We know now from harsh experience that increasing the tax rate in a shrinking economy does not improve the tax yield,” the former Prime Minister said, suggesting instead that there was need for modification to the administration’s social spending.
“Government may have to continue to curb its expenditure on education and health, areas vital to the well-being of the people and critical to the competitiveness of the economy,” he said.
“It should ensure that the poor and the vulnerable continue to have free access to such services provided by the State, but it should create an environment whereby the private sector expands into the areas where the Government has traditionally dominated, by enabling persons above the threshold at which income tax is payable, to have new allowance for health care and education to help offset any new expenditure with which they are confronted.”
Arthur, who is a trained economist, said all suggested measures would fail unless the printing of money by the Central Bank to finance Government’s deficit was halted.
He described the practice as, “one of the main threats to the growth and stability of the economy”, while noting that the international credit rating agency, Moody’s, cited it among reasons for its downgrades of Barbados’ ratings. He also noted that the International Monetary Fund had stated that it must be curbed.
“After all of the downgrades and after the Government has been forced to borrow recently simply to boost the foreign reserves, the Central Bank in its March 2015 report indicated that for the first quarter of the year it had provided financing of $345 million to the Government,” highlighted Arthur.
“Continued printing of money on this scale to meet Government’s financial requirements will constitute an act of economic vandalism and must be brought to an end,” he cautioned.