||Central Bank Of Barbados
During the past three months we have witnessed a dramatic change in the local and global economic and financial landscape. The deadly coronavirus pandemic has spread rapidly, forcing countries to adopt various restrictive measures, including closing their borders temporarily to international travel, enforcing public orders to shutdown businesses and for persons to remain indoors.
The pace of global economic activity has slowed considerably, with the sharp decline in international travel, depressed business activity, and disruption to global supply chains. An uncertain international economic environment has emerged, leading to declining oil prices and volatile financial markets.
These developments have adversely impacted the Barbados economy, which was previously expected to build on the gains of 2019, recording modest economic growth, continued fiscal consolidation and further accumulation of international reserves.
Instead, while the gross international reserves grew by $94 million and the Government achieved the targeted primary balance surplus equivalent to 6 percent of GDP for fiscal year 2019/20, real economic activity contracted by 3 percent during the first quarter of the year as the sharp decline in tourism negatively impacted other key economic sectors.
Furthermore, the forecast of a global economic recession during 2020 has now materially changed the economic outlook and the domestic policy stance for the remainder of the year.
First, the impact of the virus on the domestic economy threatens to be severe. The cancellation of global business and personal travel with the attendant effects on airlift and cruise visits to Barbados has already curtailed tourism activity and it is having negative spill-over effects on ancillary sectors.
The hotel and restaurant sectors have been hard-hit, as closures have resulted in the loss of jobs and earnings. However, there has also been a compression of incomes elsewhere, including in the tourism-related transportation and leisure sectors and in sectors affected by Government-imposed restrictions on business activity in an effort to quell the spread of the virus locally.
Over the past five weeks, unemployment claims have reached unprecedented levels, partly because of temporary layoffs associated with the restrictions on business activity. The extension of unemployment insurance will temper the impact of these lost jobs on spending in the short run, but individuals may also have to rely on domestic savings to compensate for lost earnings.
The full measure of these developments on economic activity is uncertain as the timing of the resumption of international travel and speed of recovery cannot be predicted with certainty. Preliminary forecasts of negative growth of approximately 8 percent for 2020 were based on a relatively swift recovery of the tourism sector, but given the deepening of the global health crisis, there is now increased likelihood of a double digit decline in economic activity in 2020.
However, investment projects currently under way and those expected to come on stream once the economy reopens, together with a moderate increase in public sector infrastructure spending, can help to cushion the effects of the broader downturn this year and strengthen growth prospects for 2021.
Secondly, the reduced economic activity will depress Government’s revenue in fiscal year 2020/21, result in increased spending by Government and temporarily shift the public finances away from the previously targeted 6 percent primary balance.
This policy adjustment is unavoidable, given the size of the external shock and the need to dampen the adverse effects of the crisis through increased health related expenditures and countercyclical measures in the form of income support, compensatory transfers for state-owned enterprises impacted by lower revenues and higher capital spending.
The deterioration of the primary balance will cause a deviation away from the plan to reduce debt in the short term. Government, however, remains committed to achieving its 60 percent debt-GDP ratio by 2033 and a resumption of fiscal consolidation efforts is anticipated over the medium term as the economy rebounds from the shock.
In this regard, Government is in on-going discussions with the International Monetary Fund (IMF) to modify current year programme targets and to augment resources under the Extended Fund Facility. Unlike, earlier IMF resources that were used solely to help build international reserves, these additional borrowings will be used as budgetary support to help reduce the financing gap created by a smaller primary balance in FY 2020/21.
Third, the loss in foreign exchange earnings from tourism will weaken the external current account. However, the buffer of international reserves of 19.4 weeks of reserve cover, accumulated over the past 18 months, remain more than adequate to meet external obligations including for external debt. In addition, Government has engaged the international financial institutions to provide additional budgetary support. These resources will also buttress the international reserves during this period.
Fourth, the contraction in economic activity will impact the financial sector. As businesses and individuals adapt to the slowdown, non-performing loans are expected to increase and financial institutions will need to work with their clients on a case-by-case basis to restructure existing loans and provide new credit, where applicable, to ensure that firms ride through the storm and are capable of growing in the future.
Monetary policy had remained unchanged since late 2018, in an environment of excess liquidity and low interest rates. However, to assist financial institutions that may encounter periodic liquidity shortages, the Bank has signalled a more accommodative stance, lowering its discount rate to 2 percent, while freeing up liquidity for these institutions.
This is an inordinately large economic shock that is ravaging economies large and small. What was initially a health issue has evolved into a major economic challenge. Some countries have introduced extraordinary measures to attempt to minimize the adverse effects of the crisis. Initially, our response has been perhaps more measured but, more aggressive action is now needed to address this crisis.
The commitment to fiscal discipline and the reserve build-up over the past 18 months will certainly better enable Barbados to continue to meet the challenge. This situation, however, underscores the need for larger buffers to safeguard the economy against its vulnerability to large shocks that may be caused by climatic events, pandemics such as this or crises that undermine global financial stability.
The IMF, the World Bank and other international financial institutions have begun to take decisive measures to help countries cope. We look forward to further changes in the global financial architecture that address the issue of vulnerability and very small middle-income open economies which are often marginalized.
Our efforts so far have been focused on addressing health care issues and on trying to stabilize a very difficult situation. Our economic focus has been to provide directly or indirectly, support to individuals and corporates, and to safeguard our financial institutions through regulatory policies.
As we seek to rebound from this crisis, we have to facilitate increased public and private sector investment that enables persons to return to the world of work while allowing the key tourism sector to recover from this shock.
We have to examine how we can strengthen our small business sector, through business development support and improved access to credit and technology, where necessary.
We have to enhance productivity so as to improve the competitiveness of the economy, create jobs and earn foreign exchange.
Our measure of success cannot simply be how quickly we get the economy growing again, for the world is likely to be different place. Rather, we need to take advantage of the opportunity provided by the crisis to refocus and to accelerate our efforts at economic diversification. This is absolutely necessary if we are to make our economy truly more resilient to external shocks.
First, we have to address the issue of food security frontally. Food imports in 2019 accounted for $658 million in foreign exchange flows. Reducing this leakage through increased consumption of domestically produced food saves foreign exchange, creates opportunities for agro-processing industries, strengthens inter-industry linkages and, equally importantly, creates a platform for enhanced food security.
Our challenge will be to incentivize farmers to produce quality crops in a secure environment on a reliable basis at competitive prices, but it is a challenge from which we cannot resile.
Second, we have to accelerate our implementation of alternative energy. Government’s 2030 goal of a fossil free economy appears ambitious, but it is necessary from both environmental and economic perspectives. The up-front costs may appear significant but the payback is worth it at the individual and the national level. We therefore have to ensure that any hurdles to implementation are urgently addressed.
Third, we need to capitalize on the potential of the digital economy. The shutdown of the domestic economy has forced several persons to operate from home. Businesses and individuals have demonstrated immense adaptability in a relatively short period of time.
We have witnessed the emergence of new businesses in the area of food delivery services and the re-purposing of existing businesses.
This is encouraging and augurs well for economic transformation, including through enhanced digitalization of economic activity. We must now leverage these gains by taking advantage of our human resources to build e-commerce platforms, webpages etc., thus creating greater domestic value added.
In the financial services sector, the disruption in economic activity has led to a sharp increase in direct payments by public and private sector entities, through the Automated Clearing House (ACH). We are working to make these payments real time and anticipate the imminent membership of two credit unions to the ACH.
This is part of a broader initiative to make the payments system faster, more accessible and more competitive. The transition from paper-based payments to electronic payments will ultimately enhance efficiency and productivity which will be required in a more modern economy.
Fourth, we need to ensure, through our educational and training systems, that our labour force is adaptable. Some jobs lost may never return. We need to ensure therefore that the labour market is characterized by a balance between the demand and supply of skills.
Adapted from the Central Bank of Barbados’ Review of Barbados’ Economic Performance: January-March 2020