Today’s economic report which showed that the economy contracted by 0.7 per cent during the first quarter of this year, and overall debt climbed to 151 per cent of gross domestic product (GDP), suggests Government has found itself in a catch-22 situation, according to a leading economist.
President of the Barbados Economic Society (BES) Shane Lowe told Barbados TODAY there was an urgent need for Government to cut its expenditure or “raise tax revenues”, both of which, he suggested, could push the economy back into a recession.
In any event, Lowe said, a one-off sale of Government assets would not be enough to provide a sustainable fix to the dire situation currently facing the country.
Despite a drop in the fiscal deficit from 5.7 per cent of GDP to 4.2 per cent as a result of higher and new taxes introduced in May last year and about 28 per cent reduction in Government’s spending, the administration failed to meet its targets for the fiscal deficit, as well as revenues from the taxes.
Lowe said while the foreign exchange reserves grew by close to $14 million at the end of March 2018, to $423.3 million or 6.9 weeks of import cover, this represented slower growth than the $25.8 million increase recorded over the same period last year, and a 40 per cent deterioration between March 2017 and March 2018.
“Given the large cuts to capital expenditure witnessed over the last few years, the need to boost capital works to enhance road, transportation and sewerage infrastructure; and very few sources of financing, the Government will need to cut current expenditure and/or raise tax revenues in excess of the existing $395 million fiscal gap if it intends to sustainably balance the budget and provide enough room to finance necessary infrastructure upgrades. One-off asset sales will not provide a sustainable fix to the problem.
“Furthermore, given the already weak outturn recorded in typically one of the most buoyant quarters of the economic calendar, additional tax measures and/or substantial cuts to expenditure could further push the Barbados economy back into recession unless private sector investment rebounds during the latter three quarters of the year. Renewed investor confidence and improved conditions for doing business are necessary to enable economic recovery,” Lowe warned.
The economist said the slow rise in the reserves during the first quarter suggested that without substantial growth in private or public financial inflows, planned debt service payments this year would likely reduce the stock of foreign exchange reserves for the sixth consecutive year.
He said while a one-off sale of public assets and planned placement of private sector foreign assets with the Central Bank could result in a stabilization of the reserves this year, it was simply not enough in the near future, given Government’s large debt payments which are due from 2019 - 2022.
Lowe added that although the country continued to benefit from greater earnings from tourism, and demand for imports remained weak, declining inflows of foreign investment and large external debt payments continued to stifle the economy’s ability to reverse the downward spiral in foreign exchange reserves.
“It is therefore important that policymakers secure a cheaper and more sustainable source of foreign financing, likely for a period of two to four years, to stabilize foreign exchange reserves, to facilitate a sustainable reduction in the fiscal deficit, and to restore Barbados’ international credit rating to more credit-worthy status,” the BES head recommended.
He said while the May 2017 austerity Budget measures had succeeded in reducing Government’s financing needs and slowing the growth in demand for imported goods, “they have contributed to virtually no growth in economic activity since June last year”.
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