| Author(s): |
Central Bank Of Barbados |
Let me begin by congratulating
the CHSB for hosting this important conference that seeks to empower our
leaders with the tools to manage risk in the dynamic environment in which we
operate today. Understanding and adapting to emerging risks and opportunities is
essential if firms are to compete successfully in an increasingly technology
driven competitive space where barriers to entry are being eroded rapidly. Firms
which formerly competed in the domestic market only can now, with a touch of a
button, compete abroad or conversely face competition from abroad.
It is in this context that I
am honoured, therefore, to present this morning on the theme Perspectives
on Growth in the Caribbean. As a policymaker, I am acutely aware that the
long term success of our business sector depends in part on how quickly and effectively
we are able to create a policy framework that facilitates growth, builds
confidence, stimulates innovation and encourages new investment. This is
essential because some of the industries that have served us well in the past
may not be viable in the new globalised environment. Our capacity to grow
strong competitive firms and develop new industries will therefore be critical.
Our responsiveness to emerging risks, whether as policymakers or as producers,
is therefore crucial. Understanding the challenges which each stakeholder faces
is key to the long term sustainability of the economy and the development of strong
competitive enterprises.
In my presentation, therefore,
I propose to share some insights on the recent growth experience in the economies
of the CARICOM region. I will use the recent Barbados experience to assist in
illustrating the need for a sound macroeconomic framework to underpin
sustainable growth.
Discussions on growth in
Caribbean economies are now topical. Such discussions are often prefaced by the
recognition that these economies are constrained by their small size in terms of
land mass and population and are vulnerable to economic shocks and natural
catastrophes. In addition, Caribbean economies are distinguished by an absence
of diversity in the goods produced and a heavy dependence on imports and a
limited range of export products.
Regional economies are not
homogeneous as evidenced, for example, by the characterisation of some jurisdictions
as commodity based producers and others as services based or the differences in
the land mass of Guyana and Suriname relative to the rest of CARICOM. However, economic size remains an impediment
in much that we do. The most recent example has been the loss of correspondent
banking relationships by some of our countries. This may affect a
jurisdiction’s ability to send and receive international payments, or drive
some payment flows into the unregulated sector, with potential consequences on
international trade, growth, financial inclusion, as well as the stability and
integrity of the financial system.
On average small economies
have been the most affected by the reduction in the number of foreign
correspondent banks serving banks in these countries as the absence of a
sufficient volume of business may deter correspondent banks, given the fixed
costs associated with opening and maintaining a relationship.
The challenge therefore is
how do we overcome these perceived constraints to generate sufficient economic
growth that reduces unemployment and poverty and raises the level of
socioeconomic development while enabling a sustained increase in living
standards across the region. The Human Development Index Report for 2016 suggests
that CARICOM economies have made progress in this regard with only Haiti, the
largest economy on a population size basis, being classified as having a low
level of human development while Guyana has a medium level of development. Led
by Barbados and The Bahamas, all other CARICOM countries were deemed to have
high levels of development.
The progress in human
development reflects the emphasis which Caribbean nations have placed on human
development but in some respects it is remarkable because rates of economic
growth in the region have witnessed a marked decline since the 1960s. In a
recent CDB Working Paper entitled “Enhancing
Productivity and Growth in the Caribbean” it was noted that “the average
annual growth rate fell from 6% in the 1960s to less than 1% in recent years.” A
2015 IDB study points out that that for the preceding 25 years Caribbean
economic growth was 1.7% compared to 3.7% for the world and 4.6% for emerging
markets.
The secular shift from
robust growth to the current anaemic performance that is well below the global
average has been attributed to several well-known factors such as the oil price
increases in the 1970s, the loss of preferential trading arrangements, reduced
access to official development assistance, the impact of recessions in the
region’s main trading partners and natural disasters.
The recent global financial
crisis is but the latest of these exogenous factors that has had a profound
impact on regional economies which are yet to recover sufficiently to achieve
pre-crisis growth levels. In the early stage of the post-crisis period, growth
was driven by the commodity-based producers but, over the last three years,
activity in the service-based economies has exceeded, if only modestly, that in
commodity producers as commodity prices have weakened. To put this in
perspective, while the average growth for the region recovered to 1.7% in 2014, regional output declined by 0.7%
in 2016 due to the weak performance of commodity-based economies.
Forecasts for 2017 and 2018 are for a moderate recovery as the
world economic outlook remains positive and the regional economic outturn continues
to be driven by international economic developments. However, the regional underperformance
suggests that that economic growth cannot be linked solely to activity in our
main trade partners. Rather it reflects the impact of the structural factors
identified earlier as well as the slow adaptation to the changing global
environment. Of particular note is that the region as a whole ranks in the
bottom half of most of the World Bank’s Ease of Doing business indicators. This
is a source of concern as foreign investment is a vital element of regional
growth strategies.
Notwithstanding the exogenous shocks which these
economies face, it is increasingly clear that a sound macroeconomic framework
is a prerequisite for sustainable growth. At the same time, structural
weaknesses often undermine resilience and compromise the buffers necessary to
cope with economic shocks.
Several regional economies face chronic external
current account imbalances which are funded by a combination of foreign direct
investment, public sector borrowing and the depletion of international
reserves. Persistent fiscal deficits resulting from deliberate fiscal
strategies or the inadvertent outcomes resulting from economic or natural shocks
have led to the significant build-up of sovereign debt in several jurisdictions.
These trends tend to place pressure on foreign
exchange holdings in fixed rate countries and exchange rates in floating rate
economies and have forced several regional governments to embark on adjustment
programmes designed to address these imbalances of large deficits and high debt
ratios. Fiscal space to use
countercyclical policies have been eroded as high interest costs have resulted
in the need for large primary surpluses in some countries in order to restore
balance to the public finances.
It is in this context that I refer to the Barbadian experience. The
Barbadian economy has encountered multiple policy challenges in the aftermath
of the global financial crisis, as policy makers in a low growth environment
have sought to preserve exchange rate stability through the maintenance of
adequate foreign exchange buffers, to alter the path of public sector debt
dynamics and to create a macroeconomic environment for long-term sustainable
growth. The macroeconomic strategy has focused on demand management so as to
reduce outward foreign exchange flows while alleviating the financing pressures
that have been placed on government by large fiscal imbalances. This strategy
has been buttressed by measures to enhance the economy’s long term competitive
position through fiscal incentives for the foreign exchange earning and saving
sectors.
The Barbadian economy registered relatively buoyant economic activity
between 2004 and 2008 when substantial foreign direct investment flows had a
favourable impact on the construction sector. However, since the crisis, economic
output has been depressed, induced initially by the dampening of global
economic activity with its adverse spill-over effects on the key tourism and
international business services sectors as well as on private sector investment
inflows.
In response, policy makers avoided any significant counter cyclical
thrust, given the size and openness of the economy and its vulnerability to
foreign exchange leakages that have the ability to undermine the credibility of
the exchange rate peg.
A sharp downturn in 2009 when declining activity in the tourism and
construction sectors spread to the rest of the economy has been followed by
tepid growth. The protracted weakness has been influenced by the implementation
of fiscal adjustment measures targeted at reducing imbalances in the accounts
of central government and public enterprises, slowing the surge in public
sector indebtedness and containing the outflow of international reserves.
Improved tourist arrivals since 2015 have raised hopes of a more vibrant
recovery but the slow recovery in foreign investment flows associated with
planned infrastructural projects continued to contain capital formation which
remained below the level needed for sustained growth. For example, the average capital
formation as a share of GDP was only 13.0% for 2010-2015 compared to 18.2% in
2008 when the financial crisis started.
As indicated, Government’s policy goals were targeted towards fiscal
consolidation. Initial efforts to contain the central government deficit before
2013 were influenced by the favourable size of the foreign reserves buffer and
on-going access to external capital markets. However, the sharp deterioration
in the public finances in FY 2013-14 led Government to embark on a 19 month
fiscal adjustment programme in second half of 2013. Despite some progress,
Government recently embarked on a more aggressive adjustment effort, including
addressing interest costs on selected debt on a voluntary basis, to reflect
current borrowing constraints.
The impact of the fiscal developments was manifold. First, fiscal
adjustment attempted to compensate for the substantial loss in taxes from
foreign sources by substituting with domestic taxes. As a result, sequential
reforms were made to the personal income tax and property taxes, new taxes were
introduced to stabilise revenue and the value added tax was reformed and the
rate increased.
Secondly, potential growth enhancing capital expenditure absorbed much
of the initial non-interest expenditure adjustment. However, state enterprises
were able to cushion the impact on growth through their capital works
programmes. However, since some of these enterprises lack the financial
capacity to service the ensuing debt, central government is expected to absorb
the costs over the medium term.
Thirdly, the persistence of large deficits and rising debt led to
deterioration in the sovereign credit rating, with adverse effects on access to
capital markets at reasonable costs. Increased reliance on domestic financing
while servicing debt has added to the depletion of reserves.
Fourth, government encountered cash flow difficulties that encumbered
its ability to make payments on a timely basis, including to some of its public
enterprises.
Fifth, policy makers were forced to review how longstanding entitlement
programmes, particularly for education and health, should be financed in an
environment in which financial resources were insufficient to meet demand.
Sixth, policy makers have had to review the size of the public sector,
its scope of activities and its efficiency in delivering its services. Jobs
were cut from the public sector roll in 2013 and steps taken to identify
agencies which could be merged to avoid potential duplication of services. This
review is on-going. In addition, some state assets have been identified for
divestment, creating resources to ease short term financing flows.
Some of the challenges being
experienced in Barbados are being replicated across the region. Deficits, debt
and access to low cost finance are interrelated. It is important for us to
recognise that every dollar of the fiscal deficit has to be financed or arrears
will accumulate. The sale of state assets, when judiciously applied, can
enhance cash flow by providing one-time revenue. But in general, only
productive assets can be quickly sold for what there are worth, while the sale
of such assets may have, inter alia, competition, relative prices, income
distribution and foreign exchange effects. Moreover, divestment does not
substitute for the need for fiscal adjustment.
Against this backdrop, what therefore can we
conclude about the future growth prospects for the region? We need to address
our macroeconomic imbalances. Historically, regional governments have used
deficit financing to stimulate economic activity. However, the large debt burdens which many
face and which have led investors to shift away from providing financing could
impact this strategy. This does not mean that our economies cannot grow, but we
may need to rely more on private sector flows to drive economic activity, at
least in the short term. We need more investment spending to drive our
productive capacities and raise the ratio of capital spending as a proportion
of GDP.
Current budgetary constraints raise the question of
how will governments allocate their resources in the future. Social
expenditures? Capacity building infrastructure?
However, while macroeconomic stability is necessary
it is unlikely by itself to be sufficient to propel regional economies forward.
We will need to inter alia raise productivity levels through process
improvements and innovation. We need to take advantage of ICT technology and, as
old sectors fade, we have to encourage new sectors such as alternative energy,
design services, cultural industries, animation and software development, for
these are areas in which size need not be an impediment.
Our future can be bright but there will be some
bumps along the way. Our ability to recognise and act on these challenges in as
expeditious a manner as possible will allow us to achieve our long term objectives.
Remarks by Governor (Ag.) Haynes at the Sagicor CHSBM Conference - Risk Management for Competitive Intelligence.pdf (405.07 KB)