Barbados' critical economic path

Reports of foreign reserves shortfall and replacing VAT

BY RICKEY SINGH Observer Caribbean correspondent

Monday, March 08, 2010

BRIDGETOWN, Barbados -- The signal that emerged from last Monday's Public/Private Sector 'Economic Consultation' of a deficit in Barbados' public financing, with reserves falling for the first two months of this year, is hardly the kind of news Prime Minister David Thompson's administration wishes to receive as it grapples with pressing fiscal challenges to stave off an economic crisis.

As the Barbados Central Bank would be first to admit, when there is a shortfall in expected foreign reserves for the first two months of the year, then the country seems headed for a very serious challenge for which all loopholes must be sensibly plugged.

One very significant and controversial idea being unofficially floated in credible circles is the scrapping of the Value Added Tax (VAT).

It has been providing millions of dollars annually (at least $500 million) to the national treasury. The suggestion now is to replace it with a "sales tax".

Without going into details, it should be borne in mind, for a start, that VAT is recognised as being compatible with World Trade Organisation regulations.

The jury remains out at this stage on the implications for government and the public at large in the implementation of an envisaged "sales tax".

One very relevant factor is the private sector in Barbados would be expected to be involved, at the outset, in the proposed alternative tax since it has invested heavily over the years in accounting procedures to ensure satisfactory functioning.

The prevailing depressing scenario in Barbados may come as quite surprising to a number of its Caribbean Community partners, given the fact of the country's long-held envied reputation for good fiscal and economic management.

But something seems to have gone dramatically wrong if one were to follow the lively public discussions involving Prime Minister Thompson's administration, the Opposition Barbados Labour Party (BLP) as well the local trade union movement and a few independent economists.

IMF influence

Contradictory statements, at times quite acrimonious, are flowing about a "wage freeze" and cuts in public expenditures amid warnings from the parliamentary Opposition of grave consequences should the Government genuflect to the influence of the International Monetary Fund (IMF).

The ink had not yet dried on a February 26 statement from a five-day consultation visit by an IMF official that the "economic outlook is quite uncertain for Barbados" -- which "has been severely affected by the global economic crisis" -- when there came a rather provocative claim from the former prime minister of 14 years, until January 2007, Owen Seymour Arthur, at a public lecture to the 'Young Economist Association of the University of the West Indies'.

An economist by profession and current consultant with various regional and international organisations/agencies, Arthur has dismissed as "a hoax" the Government's medium-term fiscal programme of some BDS$1.03 billion.

Warning that in its desperation the Government would seek to have the private sector and labour movement to "rubber stamp" a basically IMF-influenced programme that includes "a five-year wage freeze; increases in VAT and excise tax along with those for government services such as the NHC (National Housing Corporation)," Arthur declared:

"We all agreed that given what has happened in the past year, expenditure should be cut, but the issue now is whether this country should now be forced, for the first time since independence, to surrender its sovereignty in such a way that its government cannot even borrow a small loan to help build a school... Let there be no doubt that the IMF is back in control."

Naturally, Prime Minister Thompson -- heading a government for the first time since his Democratic Labour Party's landslide electoral triumph over the BLP in January 2007 -- is not amused.

Thompson's take

Following his hosting of the one-day Public/Private Sector Economic Consultation, he urged Barbadians to sign up for what he identified as "Team Barbados" by which his administration plans to mobilise support across the nation to overcome the social and economic challenges.

Without calling names, the prime minister stressed the need for an immediate end to words like "wage freeze" and "moratorium", declaring that they could "now be banished from the Barbadian vocabulary".

Ironically, his own minister of economic affairs David Estwick had contributed to calls for a wage freeze.

The country's leading trade union leader and independent senator, Roy Trotman, who heads the Congress of Trade Unions and Staff Association had his own spin at the consultation.

He said the labour movement was seeing "some of the same old IMF in much of what is before us as your (the prime minister's) 'action plan'".

Core features of the stimulus plan, for which Thompson hopes to secure support with his proposed "Team Barbados" approach, include replacing a $500-million deficit to a surplus within a five-year span; reducing climbing unemployment and invigorating the vital foreign exchange earner -- tourism.

The BLP lost no time in pouring cold water on the likely success of such a plan. Its leader, Mia Mottley, who participated in the consultation, argued that Thompson would have to look for co-operation from other quarters in the context of his so-called "Team Barbados" approach unless he did much "rethinking" and come with a revised plan.

In the current scenario of growing complaints against rising costs for water, electricity, transport, food, rentals and general cost-of-living, unemployment is estimated at approximately 11 per cent of the labour force, the highest in at least three years.

Prime Minister Thompson, however, continues to demonstrate optimism, against the odds, for a turnaround in the country's economic fortunes.

"Together, as Team Barbados," he said, "we can ensure our economy and society reap success out of these tough times."

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