Why Barbados’ Debt to GDP Ratio Has Risen Again

Author(s): Central Bank Of Barbados

Created 16 Feb, 2021
Tags CBB Blog
Categories DEAD LINK General Press Release
Views: 3140

The increase in Barbados’ debt-to-GDP ratio to 144 percent at the end of 2020 after falling to 120 percent in December 2019 is the result of a combination of factors that impacted the economy in 2020, said Central Bank of Barbados Governor, Cleviston Haynes.

Haynes explained that the falloff in tourists coming to the island and the national shutdown in the second quarter of 2020 led to a significant reduction of economic activity, resulting in an almost 18 percent decline in GDP (gross domestic product).

A Combination of Lower GDP and Higher Debt

But while this contributed to the rise in the debt-to-GDP ratio, he revealed that it was only one half of the equation. The ratio was also impacted by an increase in debt. That’s because during the year, Government increased its spending, using what economists call expansionary fiscal policy, to safeguard lives and livelihoods.

“We all understand we are going through a very difficult period. This is something we recognise here… the International Monetary Fund also recognises that this is a period where we have to do as much to safeguard health. Which means we have to increase our expenditure on health-related stuff.”

The Central Bank Governor pointed to several initiatives that were implemented to strengthen the economy.

“You’ve seen a number of programmes the government has announced over the past year, including the increased capital expenditure, the expenditure on things like the BEST programme, the increase in welfare payments, etc.”

The Barbados Employment and Sustainable Transformation (BEST) programme was implemented to assist hotels to maintain their staff and upgrade their properties during the downturn.

A Reduced Primary Balance

Haynes also spoke about the relationship between debt and another major economic indicator, the primary balance. The primary balance, the difference between Government’s revenue and its non-interest expenditure, is an indication of Government’s fiscal space – how much room it has to make different decisions with finances.

Under the island’s Extended Fund Facility (EFF) programme with the IMF, Barbados targeted and achieved a primary balance of 6 percent of GDP in fiscal year 2019/20 (April 2019 to March 2020). With Government needing to spend more due to COVID, that target has been reduced to -1 percent in fiscal year 2020/21 and 2 percent in fiscal year 2021/22.

Haynes explained the implications of this:

“The more liberal the policy, in other words, the smaller the primary balance, the greater the need for financing. And therefore, if there’s a greater need for financing, it means that your overall stock of debt is going to go up.”

He however highlighted that the current borrowing is more controlled and is being carefully monitored. He also confirmed that the long-term goal remains to bring the debt to GDP ratio down to 60 percent by fiscal year 2033/34.

He commented on the future trajectory of the primary balance as well, saying that as we recover, the target will return to five or six percent of GDP, giving the Government more breathing room. “By then generating surpluses, you are able to reduce your need for financing, and therefore the stock of debt ceases to grow at the rate that it grew in the past year,” Haynes said. “Overtime, GDP itself will grow.”

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