Why is Barbados punishing its middle class?
Among the most interesting and potent development debates facing the small, open economies in the Caribbean and elsewhere are the policies that they should adopt when faced with declines in the revenues earned by their foreign currency earning sector.
In Trinidad and Tobago, Finance Minister Colm Imbert has opted for a small depreciation of the exchange rate—a limit of seven per cent for the 2016 fiscal year—along with minor fiscal consolidation, comprising a seven per cent reduction in government expenditure and some tax increases.
In Barbados, the Governor of the Central Bank Dr DeLisle Worrell, has for decades been the intellectual proponent of a fixed exchange rate policy with the necessary adjustments to the population being borne exclusively by fiscal policy—higher taxes and reduced government expenditure.
Worrell’s most recent defence of Barbados’ steadfast maintenance of a fixed exchange rate came on July 4, 2016, when he wrote in his monthly economic letter: “If there is insufficient foreign currency inflow to meet the demand for imports and other foreign payments, Government is obliged to increase taxes and cut its own spending, so that fewer imports can be afforded.”
In the letter, which was headlined “The value of your money is a measure of successful economic management,” Dr Worrell argued that the fiscal adjustment measures that Barbados undertook in 2013 “were in a very good cause, to protect the value of Barbadians’ savings and our accumulated wealth.”
For Worrell, then, the strongest arguments for maintaining the fixed exchange rate is to protect the savings of Barbadians and the country’s accumulated wealth.
Over time, increasing taxes and cutting spending achieve their goal of reducing aggregate demand in the population. But, logically, the Barbados adjustment programme of higher taxes and lower government spending imposes tremendous sacrifices on the island’s middle-income households, impoverishing those families who comprise many teachers and public servants.
In doing so, Barbados’ fundamentalist commitment to a fixed exchange rate, which has been hugely influenced by Worrell’s beliefs, has decimated the savings and the wealth of middle-income Barbadians even as it widens the wealth gap between rich and middle-income Barbadians.
In June, the treasurer of the National Union of Public Workers, Asokore Beckles, was quoted in the Barbados TODAY online newspaper as saying the island’s workers had undergone an internal devaluation in their incomes of between 25 and 30 per cent over the past five to six years.
Beckles, a statistician and economist at the Barbados Government’s statistical department, argued that a B$1 in 2010, is worth B$0.70 or B$0.72 today.
It is noteworthy that in 2013, Barbados retrenched 15 per cent of its public sector workers, an estimated 3,000 employees. It is also noteworthy that Barbadian public servants have not had a salary increase since 2010 and its teachers have not seen their incomes adjusted since 2009.
If the incomes of the teachers and public servants in Barbados are worth up to 30 per cent less in 2016 than in 2009 or in 2010, that means those members of the middle class have suffered a decline in the value of their income and their savings (a devaluation) by up to 30 per cent.
If a larger percentage of the income of a teacher or public servant in Barbados goes to pay taxes, buy food and gasoline and pay electricity, water, cable and telephone bills, in most cases that means that they have less money to save and invest today than they had six or seven years ago.
This is especially true as a result of the higher taxes imposed on Barbadians in the last six years—including the widening of the VAT net to include basic food items, a new tax on mobile usage, increased property taxes, higher tertiary education fees and user fees on a wide range of services.
In January 2008, private individuals held B$4 billion in deposits in the country’s commercial banks, while business firms held B$1.24 billion. By April 2016, private individuals held $4.6 billion, a 13 per cent increase in eight years. Business firms, on the other hand, saw their deposits jump by 51 per cent to B$1.88 billion in the eight-year period.
In the period January 2008 to April 2016, the weighted average deposit rate at Barbados banks plummeted from 4.75 per cent to 0.40 per cent.
By comparison, deposits held by T&T consumers in commercial banks and non-bank financial institutions increased by 59.3 per cent in the period January 2008 to April 2009, while for that same period deposits held by incorporated businesses increased by 4 per cent.
Deposit numbers, of course, do not provide any information on the incomes of the individuals—which would indicate whether they are middle income—but they do tell a story about the overall ability of individuals to save. One imagines, however, that a teacher or public servant would adjust to higher taxes first by cutting back on expenditure, but second by drawing down on their savings.
The scenario of higher taxes and reduced government spending also means that many middle-income Barbadians are finding increased difficulty in servicing their debt obligations.
The 2015 Financial Stability Report of the Central Bank of Barbados concluded: “The default rate on mortgages, the mortgage non-performing loan ratio, rose from 1.9 per cent in 2008 to around 10.4 per cent in September 2015.”
The report estimated that 42 per cent of the non-performing loans at commercial banks in Barbados in 2015 were mortgages, which was up from 17 per cent in 2008. The report also stated that mortgage loans accounted for 43 per cent of total loans by commercial banks last year. Two of the five commercial banks in Barbados are T&T-owned entities: First Citizens and Republic.
Clearly, a significant number of middle-income Barbadians, such as teachers and public servants, are in danger of losing their homes, as a result of being laid off, their salaries frozen for six or seven years and the value of their incomes being decimated by higher taxes and increases in their cost of living.
Which group of Barbadians stands to benefit if commercial banks on the island start to foreclose on home and properties on the island because their middle-income owners can no longer afford to service their debts?
If, as Dr. DeLisle Worrell argues, the value of Barbados’ money is a measure of successful economic management, then the 450 per cent increase in the mortgage non-performing loan ratio in seven years must be an indication of his policy’s failure.
With the income of the average Barbadian teacher worth up to 30 per cent less today than in 2009, she also has less savings to contribute to the tertiary education of her children and less money to add to her registered retirement plan.
In fact, in the 2015 Budget the administration of Prime Minister Freundel Stuart eliminated the B$10,000 tax deduction allowed for investments in registered retirement plans.
An EY [Ernst & Young] analysis of the impact of the 2015 budget on a middle-income Barbadian earning a gross salary of B$75,000 calculated that her tax burden would have increased by 79 per cent in 2015 compared with 2014, as a result of the removal of allowable tax deductions, including investments in registered retirement plans.
So, not only have the fixed-exchange rate policies of the Barbados government devalued the savings of its middle-income households, but the administration there eliminated the tax incentive enjoyed by those households in supplementing their pensions with investments in registered retirement plans.
In effect, the real cost to Barbados of exchange rate stability is that the quality of life today, and in retirement, of a significant percentage of the island’s population has been sharply reduced—just so they have less money with which to buy foreign goods.
Despite the pain inflicted by the policies of the Barbados Government on its people, the outcome has not been favourable for the island’s stock of foreign savings.
The IMF’s 2013 Article IV consultation with Barbados indicates that the island’s net international reserves totalled US$729 million at the end of 2012.
By March 2015, despite lower oil prices and a rebound in tourist arrivals, Barbados foreign reserves plunged by 22 per cent to US$565 million, according to the 2015 Article IV consultation.
Presenting a first-half review of the Barbadian economy, Governor Worrell noted that the island’s stock of foreign reserves had declined to US$442 million, which was 39 per cent less than at the end of 2012.
If one of the reasons cited by Worrell for Barbados adopting his policy of maintaining the exchange rate by fiscal means was to protect the island’s accumulated wealth, then the precipitous 39 per cent collapse in the island’s foreign reserves in three and a half years must mean that Worrell’s policy is a failure.
But Worrell is not satisfied, arguing in his July economic letter that the “task of adjusting expenditures to restore a healthy balance of payments remains incomplete…Foreign reserves are adequate, but in order to return to a comfort zone, further fiscal restraint is needed to arrest the drain, and to restore the foreign reserves of Central Bank, which have been lost in the last three years.”
He argues: “If we compare the fortunes of small economies who have protected the value of domestic currency with the progress of similar countries who have failed to do so, it is clear that the short-run sacrifice pays very large dividends eventually, and those dividends are permanent.”
Does Governor Worrell consider that six years of ever-tighter financial strangulation of middle-income Barbadian households constitutes a “short-run sacrifice?”
And would he care to predict how soon those households will receive the “very large dividends,” which he claims would then be “permanent” and what form those dividends will take?