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The model is broken (speech)

By Ronald Harford via Nation News (Barbados)

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Ronald Harford


Republic Bank Limited chairman Ronald Harford recently delivered a speech that has been generating discussion in banking and business circles.

Addressing the 41st Caribbean Association of Bankers Conference at the Radisson Grenada Beach Resort last month, the veteran banker said Barbados and its neighbours were now paying for their longstanding adoption of a “broken” economic model. This week, BARBADOS BUSINESS AUTHORITY brings Part I of that address.

In the year 2014, the economies of the Organisation of Eastern Caribbean States and without a doubt, the wider Caribbean, stand with their backs against the wall, thrust into that position by behemoth forces. To be specific, the region’s development to this point has been hamstrung by an unsustainable economic model and the uncompetitive nature of its key sector, tourism.

Let me be clear from the onset, the main cause of the region’s struggles is not the global financial crisis, which started in 2007, although it has stifled the flow of capital to the region. Neither is it the resultant global economic recession, which we could all attest, constrained demand for tourism and Caribbean exports.

No, these events merely exposed the region’s Achilles’ heel, namely the broken model on which the economy is based. For a greater appreciation of the unsuitability of the region’s economic model, one only has to review key trends in governance and fiscal management that developed over the years.

One of the greatest shortcomings of the Caribbean’s political system is that it allows successive administrations to focus too much attention and resources on appeasing the electorate, at the expense of activities that are beneficial to the future common good. Equally damaging, is the low level of accountability of our leaders, who are permitted to avoid hard questions such as those related to corruption, expenditure and unrealised budget plans.

The sad reality is that our political structure in some ways impedes the region’s long-term development. Fiscal management in the Caribbean is severely deficient. Many governments run perennial deficits and create debt, the proceeds of which go to unproductive uses. These unproductive uses have neither consistent nor self-sustaining sources of revenue to repay debt.

Governments therefore tend to fill revenue shortfalls with deficit financing and lengthy delays in paying for goods and services. This is basically servicing debt with more debt, a perfect recipe to allow debt to accumulate to unsustainable levels. For years, buoyant economic activity masked the true effects of the profligate fiscal policies adopted by many regional governments.

During this period, the state used the funds from deficit financing to employ an ever increasing proportion of the labour force and direct scandalous amounts of public resources to unproductive means in the form of transfers and subsidies. For political reasons, governments establish these expenditure patterns and they become entrenched.

For instance, St. Lucia’s 2014 Budget allocated 74 per cent of expenditure to recurrent spending and was based on a fiscal deficit of 5.7 per cent of GDP; 94 per cent of Trinidad and Tobago’s 2015 budget was dedicated to recurrent expenditure, with a deficit of 2.3 percent of GDP. In December 2013, the International Monetary Fund indicated that Barbados had the highest relative wage bill in the Caribbean, equivalent to 10 per cent of GDP. Its fiscal deficit is expected to reach 12.4 per cent of GDP in 2014. The country’s wage bill consumed 39 per cent of recurrent revenue in the 2013/2014 fiscal year, compared to 33 per cent for St. Kitts & Nevis, 41 per cent for Jamaica and 16 per cent for Trinidad & Tobago.

Grenada’s wage bill is expected to reach 55 per cent of recurrent revenue in 2014. During the same period, Barbados current expenditure was 141 per cent of current revenue while, the ratio was above 92 per cent for both Jamaica and Trinidad and Tobago. Grenada’s current expenditure was 106 per cent of revenue.

This pattern of spending serves to crowd out the private sector and thus, impedes the dynamism of the economy. Worse still, it leaves the affected countries, with onerous debt and fiscal balances for generations to come. Consequently, Antigua & Barbuda, Grenada, St. Kitts & Nevis, Barbados and Jamaica all have debt levels close to or above 100 per cent of GDP, while several regional governments are now confronted by double-digit or high single-digit fiscal deficits.

The deterioration of public accounts to such an extent undermines growth, as countries now have to direct significant resources to repay debt. According to the Eastern Caribbean Central Bank, debt service payments averaged 22 per cent of revenue in the OECS in 2013 (financed largely by deficits as pointed out before). The regional financial sector has a long history of funding government’s fiscal deficit and buying public debt. Here then is the problem. Insurance companies by law are mandated to purchase government debt to cover long term liabilities. Banks and Insurance companies are now financing Sovereigns with 100 per cent to 200 per cent debt to GDP.

This debt is of course, unsecured. The opportunity costs of holding government debt can be significant for banks, since they may be able to generate greater rates of returns in an open currency market by investing in gilt-edged securities or lending to the private sector.

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11 comments

  1. The decision by the PM to cut salaries has not happen and the tax breaks he promised to give has not also happened. However STEP, NICE, constituency ti canal projects have continued, subsidies have continued with no accountability, borrowing from local banks by government has continued, jobs for girls and boys and children has continued. What we need is financial literacy with our people and reporters to understand the accounting and economic jargon. Unless we can"t understand the terms, our dire situation and what can be done to get us out then we wont pressure governments. We won't ask the right questions to the opposition before they come in and we can pressure government institutions and staff to be accountable. I am ready to learn but who will lead the "Financial Literacy Charge/war"?

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  2. One thing that was mentioned is that the caribbean countries have not fully explore the agriculture industry. To them it is only sbout bsnanàs and sugar cane. We have so manu yropical foods which are healthy and uet we cannot come up with a way to export them. Another thing is there is no "one caribbean" after so many years of talk and so different organization we cannot come work together to form industries that are viable. All coutries have tourism and a lot of tourists dont want sea and sand anymore, we have not ventured into the other types of tourism. We need to br thinkers

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  3. HG you are right. But also the governments and public servants are too numerous. The central banks create money out of thin air. The fractional serve banking system is fraud. The politicians are their puppets.
    Panama has no central bank and uses the US$. No bank bail inns or outs. Just profitable banking and a lot of lending the the public. Affordable interest rates.

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  4. What he says in his speech is correct.I also agree that interest rates are too high.as a young person it is extremely hard to get a loan, especially a student loan.the banks take you to hell and back n still you get denied.how can they make money if they are not willing to take risks when borrowing?

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  5. Beautiful and truthful speech. It is a fact that the banks world wide operate like cold blooded criminals, second to them are politicians. There is no fixing this corrupt bleeding system, at least I don't see how it can or will change.

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  6. Mr. Harford's attempt to articulate the economic problems of the small island states in the Caribbean did not go far enough. He may have hinted at some of the underlying problems but he failed to include the economic strangling hold the banking sector has over those small nations. If only the banking sector would make loans affordable to local private entrepreneurs this could help resuscitate the dying economy. For example, current interest rates are in the range of 9% to 15%. The Eastern Caribbean Central Bank is quite aware of the pervasive economic malaise of the region but fail to reduce its prime interest rates to help elevate the hardship. Most developed countries central banks did lower the interest rates. Mr. Harford should take a holistic approach in addressing the economic distress of the region if he wants to sound fair and impartial. As of now his argument sounds bias, frivolous and inappropriate.

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    • If your business relies on constantly borrowing money, then it's not much of a business. Interest rates are a cost of borrowing and a reward for saving.

      His main thrust that the government trying to appease electorates is spot on. Too much (borrowed) money spent with little oversight and any end objective. The increased spending on salaries in the last 10 years quickly gets forgotten because the workers see it as a "right" which should be increased every year.

      Governments themselves have no money. They have what they raise via taxes and borrow. 75% of SLU's spending is on recurring spending. The amount paid on servicing the interest is ridiculous. Even Kenny now understands this which is why he was trying to cut the civil service salaries.

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    • You are 100% right about banking interest rates being to high in the EC. I feel that a 5% rate and if the Government gave tax breaks to the banks we could see a nice turn around. But we are stuck between worried banks and Governments who are cash hungry and debt crazy, together this spells gloom and doom for the local market.

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      • Dream on my friend. Fractional Reserve Banking and the way the Central Banks create money is a flawed system. It will always fail by its design. This guy spoke a lot of truth but he is a bankster, the fraternity of criminals.

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    • Even if he short in his analysis there is no denying the truth in his revelations.

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    • You must be joking, old chap. Really?

      You expect people to take you seriously at all? "Hinting"? And "... [S]ounds}bias, frivolous and inappropriate."

      Where did you study? At UWI only?

      You must be either out of your cane-cutting, or banana-pruning mind, fella. You rhyming just like an echo of Ti Chas and that other country-bookie guy.

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