Dickson Igwe. Photo: supplied

Is Barbados a case of giving a millstone to a drowning man instead of a life jacket? No. It appears to be the case of throwing a drowning man, fighting for his life in rough seas, a severely compromised and leaking life raft.

This story is part of a series looking at the Virgin Islands economy through the eyes of the world economy. It looks at a complicated Barbados economic model that ends with a large question mark.

A story in the news media, ‘Barbados Free Press’ of December 18, 2013, was titled, ‘’ POSTCARD FROM BARBADOS, ALSO KNOWN AS CYPRUS WEST.’’ It was written by economist and news contributor, James S Henry. This was a story that was very relevant to the British Virgin Islands of early 2014. Barbados is in some ways, a larger model of the BVI, in terms of geography, history, economics, and society.

In the op ed, the columnist described Barbados as, “the Jewel of the Caribbean, the tiny easternmost island in the Lesser Antilles, with 288,000 inhabitants, and lots of very rich foreign visitors and investors.’’ However, the island, according to the Economist was ‘’ in the throes of a FINANCIAL MELTDOWN.’’

OK. This is a perfect definition of a paradox in this layman’s estimation: a highly educated and democratic country, possessing public institutions that function, with an attractive culture, a wonderful topography, accommodating rich visitors and tourists, but at the same time facing a financial disaster?

Henry described Barbados as being under a FINANCIAL CURSE. The reason was this: the country was excessively dependent on high debt; it harboured an aggressive offshore haven industry; allowed very low tax rates for high net worth investors, foreign companies and banks; but high tax rates for the rest of the population. The writer stated that this was a cocktail that had brought the country to its knees.

Henry then offered the reader a sleuth of figures.  Starting in recent weeks, Barbados’ current account deficit has soared to 12% of Gross Domestic Product. The island is down to 10 weeks of reserves compared with 16.4 weeks last June. Deficit spending is 6% of GDP and headed higher. Barbados’ rate of public debt to Gross Domestic Product is 94%: the highest in the Caribbean.

The social and economic outcomes of these apparently dire economic figures were very bad according to Henry. Beginning with the economic fallout, he described how in October 2012, a 250 million dollar bond offering in the US market had to be cancelled, ‘’ after it was greeted with howls of derision.’’ Then in late November, Standard and Poor downgraded the long term rating of Bajan bonds for the third time in 2 years to BB-. The price of existing Bajan Bonds has nosedived. Investors are demanding a 9% junk bond rate to hold them.  Investor confidence in Barbados has fallen off the precipice. But there is no parachute.

That places Barbados in the same investment grade as Nigeria, a super corrupt, but oil rich African nation, with over 75% of the population living on the breadline. All of this was very bad news to the 126,000 long time contributors to the Barbados National Insurance Fund. At least 60% of the fund is invested in these very questionable Bajan Bonds. It gets worse. Apparently these bonds finance a third of Barbados’ national debt. So as a result of the fall in their value, the country is going to have to look elsewhere for money to pay interest on its debts, increasing its indebtedness.

Now to deal with Barbados’ economic woes, the country has decided to use the IMF playbook. It will adopt a policy of AUSTERITY. Apparently the International Monetary Fund is advising Barbados on how to get out of this economic mess. The IMF apparently comes with faultless credentials when it comes to giving countries such as Barbados successful economic surgery. The IMF is an organization that believes that austerity is a virtue. Past successes using this policy, despite the pain and suffering caused to millions of families as a result, gives the IMF credibility.

However, the negative social outcomes of the Barbados economic morass and its new austere environment are numerous: 3000, government workers out of 26,000, will be sacked by March 1, 2014: over 10% of government staff. All new government hires are frozen for 5 years. Senior officials are to get a 10% pay cut. There will be a civil service wage freeze. Furthermore, there will be cuts in government travel budgets, and college tuition subsidies.

A major medical clinic is suspended. There will be an increase in value added tax. One thousand private sector jobs are expected to disappear in a country with an 11% unemployment rate. There will be further spending cuts and tax increases. The preceding medicine is expected to bring suffering to over 20 thousand Barbadian families.  Barbados is following the Greek and Spanish rulebook it seems.    

Now here comes the paradox. The country appears to be in economic contradiction. While it appears to be clearly following the AUSTERITY RULEBOOK, it is about to do something else that leaves this Gazer into ESOTERIC ECONOMICS very perplexed indeed. It is going to do the very opposite of what austerity portends and then some. The country appears to want to be all things to all men. So it is about to borrow 225 million US Dollars from Credit Suisse Cayman on an emergency basis. This it will do to shore up its reserves, maintain the sacrosanct 1:2 peg of the Bajan Dollar to the US Dollar, and fund various pet projects. Doesn’t austerity state that the economy will self correct? And what are these pet projects? Are they pork? Or crucial developments that will generate much needed economic growth?

Apparently the terms of this loan are usurious. The bankers want 3 million USD in upfront fees. Then add International Monetary Fund conditionality, a waiver of sovereign immunity, and variable interest rates of 775 basis points over LIBOR, which the selfsame Credit Suisse and other global banks have been accused of rigging. Talk of going to the devil to borrow money? This is the case here. And it sounds like a definition of stupidity to this Virgin Islands Tinker, if one can ever define stupidity.  In fact, this loan is expected to, ‘’ aggravate Barbados’ fiscal problems. Debt consumes a third of Barbados’ government budget as it is.’’

Ok. Between 2007 and 2009, the USA used massive stimulus to stave off disaster when it faced a similar dilemma. Yes, an industrialized country of 300 million is different to a tiny speck of geography of under 300 thousand, sitting in the Caribbean Sea. But why is austerity the way for Barbados to go? Austerity in Europe has destroyed much of the social fabric and economy. So as a result, economic recovery is made more difficult.

Stimulus for Barbados would have meant borrowing on world financial markets. It would have seen economic affairs officials looking for the very best loan terms, even if that meant going to China with a begging bowl for say a billion USD 25 year loan, to take Barbados through the current economic morass. Yes, it would mean debt repayments on a unified loan going forward into the future indefinitely. That money could have been used to properly rescue the Bajan bond, stabilize the national insurance fund, fund core projects crucial to economic growth, and rescues thousands of Bajan jobs. That is the true meaning of economic stimulus: salvaging the economy by injecting cash into all areas of activity, not destroying demand, and further stifling economic growth.

Obviously aggressive stimulus would have as predicate, effective economic planning, to convince bankers that the money would go to projects designed to stimulate economic growth.

Instead, the prognosis for Barbados is dire this early 2014. And the country appears to be playing by the European austerity rule book. Most pundits will state that austerity has been a disaster for Europe. Then Barbados is bending over, pulling down its pants, to receive an injection of poisonous borrowing from SHYLOCK.

So what is the long term outlook for that country? That is impossible to say. One can only get down on ones knees and pray the country does not become the GREECE of the Americas. 

To be continued

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