Friday, January 19, 2018

Denting Bajan pride

I have always been an admirer of Barbados and Bajans. It is easily the most disciplined of Caribbean territories. Bajans understand that they live in a very small country with limited engines for generating economic growth and sustaining prosperity. It is why they have placed so much emphasis on education, and why they have not equated service with servitude, as some other Caribbean territories seem to do. They are cautious and risk-averse. Like other Caribbean nationals they too like a party, but they are not generally given to excess.

Which is why the recent developments in the policy landscape and the dramatic intervention following the Article IV consultation by the IMF are surprising. Small countries are of course better off avoiding the IMF altogether, and that means pursuing consistently conservative policies which keep stable the critical economic indicators, particularly on the external account. Policymaking has to be preemptive and proactive.

Key indicators are the Net International Reserves, debt ratios (debt/GDP, and external debt service to exports of goods and non factor services), the overall fiscal balance and the primary balance. There is a tremendous onus on the fiscal authorities and the central bank to measure and read the indicators correctly, and to act decisively when action is needed.

Barbados has special policy burdens because it has elected to maintain a fixed exchange rate regime and to eschew devaluation. It has held the exchange rate at BD$2:US$1 since 1975.

The first burden is that the real effective exchange rate has been appreciating, but it seems that the appreciation has not been fully offset by higher productivity, so that the economy has become more expensive and hence less competitive over time. This means that the exporting sectors have had to do more just to stay in the same place.

The second burden is that when it is required, adjustment must fall on employment in order to adjust real incomes to the level required to restore external balance. It also means that, as in any structural adjustment, growth in the short run has to be sacrificed in order to restore external balance, which is and must be the primary objective. It is not possible to have one’s cake and eat it. It appears that those basic lessons were glossed over or overlooked by the fiscal and monetary authorities. And the question that has troubled me is, why?

Part of the explanation is obviously political. The death of then prime minister David Thompson in 2010 left economic and political management in less confident hands at a time when the global recession and the impact on the local Barbadian economy required astute management and tough, proactive policy action. Instead, economic management failed to face up to reality and floundered.

The policy posture of the central bank of Barbados has also been puzzling. Its governor, Delisle Worrell, is a competent and experienced economist and has been a career central banker, interrupted only by his stint at the IMF. In June 2012, a presentation authored by Worrell entitled “How We Keep the Economy Stable” was circulated.

The presentation betrays no lack of grasp of what was required— tough fiscal action to raise revenue and cut public sector spending in order to reduce the deficit, and investments to accelerate export growth and close the current account deficit. However, it promoted the curious notion that Barbados does not have a debt problem because its debt ratios are comparable to Germany, a large, highly diversified and competitive First World economy!

The projections presented by Worrell just 18 months ago and the actual out-turns presented by the IMF following the recent Article IV consultation are so far apart that it seems the central bank was completely misreading the signs and held an overly optimistic view of the economic prospects and of the government’s resolve to address and fix the fiscal situation.

When rating agencies, as well as regional and international organisations indicate that the situation and prospects are very difficult if not dire, or that policy actions are not credible, serious introspection and reexamination of one’s thinking are warranted, not denial. Moreover, the role of the central bank is always to speak truth to power. Politicians hate bad news and avoid difficult and politically unpopular policy choices. Yet delay and dilution only serve to make the required medicine even more bitter.

An IMF-imposed adjustment programme will restore external balance and more importantly, reopen access to the external capital markets, including policy-based loans from regional and international organisations. But the cost will be high in terms of employment and incomes over the medium term and the incumbent administration is likely to pay a high political price.

The greater challenge for Barbados however, will be determining where to make the investments in those new exporting activities where productivity is much higher, and in those existing export activities that are able to expand export volumes (tourist arrivals and expenditure) at a much faster pace, so that the sacrosanct exchange rate can be maintained. In respect of the second of these, getting Butch Stewart and the Sandals Group on board, while not well-received in some quarters, is in my view, a step in the right direction.

Barbados will need to leverage its highly educated labour force in innovative ways beyond offshore finance. And even if the exchange rate parity remains inviolable, consideration might still be given to loosening exchange controls on the current account and allowing nationals, including Caricom nationals, to hold foreign currency accounts in local banks. The central bank might be surprised at how much capital might return home!

Barbadians are a proud people and having to submit to IMF dictates will certainly dent Bajan pride. I am confident, though, that, if it does come to that, they will swallow the bitter medicine, keep the programme under the Fund as short as possible, and emerge from their difficulties with a sound strategy for implementing a reconfigured and competitive economy, much as they did in the early 1990s.

• Dr Terrence Farrell is a former deputy Central Bank Governor and former chief executive of One Caribbean Media Ltd.