The editor of the Business Guardian, Anthony Wilson, in his article of August 18, "Why is Barbados continuing to punish its public workers", questioned the ability of the processes being used by Barbados, by its Central Bank Governor, Dr Delisle Worrell, and Finance Minister Chris Sinckler, to contain the recession by the use of fiscal measures and not, say, a devaluation.
The nadir of this discussion is Dr Worrell's thesis that small open economies that depend on substantial imports should not attempt to control aggregate demand in the economy by currency devaluations if there is a drop in foreign exchange earned, especially since such countries cannot increase their exports or substitute for imports by local production in a reasonable time frame. Hence the country should use fiscal measures–taxes, etc– and particularly so reduce government spending, decreasing the money available in the economy, controlling aggregate demand and reducing the demand for imports in the attempt to retrieve trade balance.
Wilson, in his article, recognises that over time increasing taxes and cutting spending achieve the goal of reducing aggregate demand. He is concerned, however, that higher taxes and lower government spending impose tremendous sacrifices on the middle (and also lower) class (the world's current bobolee). But these measures are meant to force the population to make these sacrifices. Still, he implies that the taxes should be vertical, ie heavier on those that are more able to pay. This is to lose sight of the fact that the taxes etc are aimed to reduce consumption, aggregate demand, and should be aimed at those sectors that contribute most to consumption.
Listen to the World Bank:
"The roughly 4.5 billion low-income people in developing countries collectively spend more than US$5 trillion a year. Indeed the lower segments spend more in consumption than the middle and higher segments combined. This is so in food, beverages, energy, clothing and footwear and housing." Therefore the most efficient and effective taxes with respect to repressing aggregate demand is a consumption tax (as opposed to an income based tax) that targets the lower and middle classes.
Listen also to Dr Worrell:
"The essential point missing from the recent debate is that small open economies are different; international economic shocks hit them especially deep and hard, and in the short term they have little choice but to absorb the blows and try to remain on their feet." Barbados is taking blows on the chin, the sacrifices they have to make.
Further, Wilson claims that, in particular, these fiscal measures have decimated the wealth and savings of the middle income workers. This, he claims contradicts Dr Worrell's statement in 2013 that these fiscal measures. "Were in a very good cause, to protect the value of Barbadians' savings and our accumulated wealth." There is some confusion here especially if one were to refer to Dr Worrell's article on the Greek recession that, "Above everything else they (the fiscal measures) should protect the value of the currency by allowing the shock to feed through to a fall in real income. There is no additional foreign exchange earned or saved; real income falls by as much as is necessary to balance the external accounts. In any event exchange rate depreciation imposes an avoidable inflation penalty that becomes entrenched in expectations."
This suggests that Dr Worrell expected that fiscal measures in reducing aggregate demand would reduce incomes, reduce GDP, which could cause a drawdown on savings etc., as has occurred in the attempt by some to adjust to lower spending levels.
In many of our small economies that depend on one major horse to earn foreign exchange the public service is overstaffed. Barbados in curbing its spending reduced its public sector by 20 per cent hoping that they would be re-absorbed in the private sector. This has come about to a certain extent since the unemployment rate, which was 7.6 per cent in 2008, peaked at 13.2 per cent in 2014 but is now at 9.3 per cent. What, however, is of concern to me was the large increase in non-performing loans (NPLs) with respect to mortgages. According to the Barbados Financial Stability Report 2015 (FSR), bank mortgages in their NPLs rose substantially from 17 per cent to 42 per cent between 2008 and 2015, while the growth of mortgages as a proportion of total loans grew from 27 per cent to 43 per cent.
Clearly, something is at work here besides the reduction in aggregate demand, ie, the reduction in consumer ability to spend.
The figures from the FSR show that mortgage loans between 2000 and 2015 grew from some $0.25 billion to $2.5 billion–a growth of some ten times–growing to $1.5 billion in 2008. This rapid growth seems independent of, or even contrary to the recession that overtook Barbados in 2008. The rate of growth even showed a spike in 2011-2012. What caused this, a phenomenon reminiscent of the US sub-prime mortgage fiasco.
Listen to this comment from the FSR:
"In absolute terms, the bulk of the mortgages are held by the commercial banks, but in percentage terms the highest exposures are by the finance and trust entities which specialise in mortgage services. Past attempts by the Central Bank (of Barbados) to control mortgage demand led to the development of the trust and mortgage finance sectors in an effort to bypass regulatory controls. These entities are currently under Part III of the Financial Institutions Act and remain a significant part of the financial landscape although several have been re-absorbed by their parent entities. However, even considering the combined bank, finance and trust entities, the growth in bank exposure to mortgages has been extraordinary."
Barbados has had its share of a sub-prime mortgage debacle.
Wilson asks whether Finance Minister Colm Imbert will follow suit. There is little hope that oil and gas prices will recover in the near term. Our Central Bank Governor has told us to brace for a long recession. Delisle Worrell tells us we have no alternative but to absorb the blows and try to remain on our feet. Can we?
Mary K King
St Augustine