Apr 2015 Financial News

Restoring fiscal order vital (Barbados)

Apr 27, 2015

Barbados has absolutely no hope of having a successful future unless the fiscal crisis facing the Government is satisfactorily and successfully dealt with.

This was the assessment made by Independent Member of Parliament, Owen Arthur, last week at the Institute of Chartered Accountants of Barbados (ICAB) at Hilton, which brought out a packed crowd to listen to his address: “In Search Of Economic Solutions for Barbados”.

He explained, “The deficit has ballooned out of all proportion for example, for the fiscal year 2013/14 the Government’s Revised Medium Term Fiscal Plan proposed a target of 3.5 per cent of GDP, with a worst case scenario of 5.2 per cent. The deficit for the year amounted to 11.8 per cent of GDP, despite the increase in the taxes that year. That fiscal outcome was twice as bad as it should have been at its worst, and 10 times worse than the level required for the sake of stability and soundness of our public finances.

“Government has since then virtually exhausted every conventional means by which to bring the deficit under control. It has met with no success. As such, and as evidence for this fiscal year, Government is projecting that it will record a deficit of 8.3 per cent of GDP and will have to borrow an additional $1.7 billion to add to an already bloated debt.

“This situation is simply unsustainable. It mandates that, as a matter of urgency, the Government should make recourse to policies of a kind that it has not hitherto deployed to tame this monster.”

Arthur believes: “The new policy approach must however be crafted to deal with what is now emerging as the source of the problem and that can easily be identified; 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 the entire worsening deficit situation. It is clear that Barbados is now plagued by a debt overhang, since its debt to GDP ratio has exceeded 100 per cent and debt service accounts for over 66 per cent of Government’s revenue.

“Six other Caribbean countries, confronted with debt profiles similar to that of Barbados, have had to incorporate debt restructuring programmes as part of their economic policies.

“Jamaica has in fact pioneered the use of a debt exchange whereby it has invited domestic bondholders to retire the existing bonds, and replaced them with bonds of a longer maturity but with an interest rate that allowed a significant savings on interest payments over the short term.

“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.”

The Economist outlined, “Jamaica’s debt exchange was at the core of its 2010 Programme with the IMF. That programme was suspended when Jamaica failed to meet its fiscal targets since it replaced its savings on interest payments by increased wage expenditure.

“The view expressed in the Barbados House of Assembly that the savings from a debt exchange should be used to finance tertiary education would lead to the same financial cul-de-sac that occurred in Jamaica – for a deficit cannot be reduced simply by replacing one expenditure by another.

“That said, it must be recognised that the fiscal adjustment required to bring Barbados’ circumstances under control will run into hundreds of millions of dollars. A debt exchange therefore will not be enough. It has to be supplemented by a programme of privatisation and a far reaching programme to restructure the operation of state enterprises.

“Transfer and subsidies to enterprises have recently come to exceed $1 billion annually. With the best will in the world, they cannot be sustained. Government now also finds itself in the same position as an entity which is cash strapped but has many assets. The sale of assets to raise resources to carry out fiscal consolidation is now an imperative.

“I would urge that any programme of privatisation should make provision for employee shareholder options, 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.

“In addition, the proceeds from privatisation should however not be used to meet Government’s current expenses, but should be put into a segregated account and used to help repay our debt.

“Given the scope of the adjustment required, a privatisation programme will also not be enough. A major tax reform initiative now also seems necessary.” (NB)

Source:
Barbados Advocate
Monday April 27, 2015

http://www.barbadosadvocate.com/newsitem.asp?more=business&NewsID=43059