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Economists use several metrics or macroeconomic indicators to assess the health of Barbados’ economy. Dr. Justin Robinson, Professor of Finance and Dean of the Faculty of Social Sciences at the University of the West Indies, Cave Hill Campus goes as far as to compare them to “your blood pressure, your heart rate, and your blood sugar.”
We know then that these indicators help us to understand how the economy is performing, but what are the benchmarks that tell us if we are where we need to be?
Inflation, the average increase in prices over a period of time, usually a year, has been on everyone’s lips recently.
Professor Robinson explains that as a small open economy – a country with a small population that relies heavily on international trade – much of the inflation we experience in Barbados is “import cost-pushed”, or, put simply, due to increases in the cost of imports. As a result, Barbados is currently feeling the effects of the high inflation that countries around the globe are grappling with.
He notes, however, that typically, inflation in Barbados hovers around 3-4 percent, which is a comfortable level for us.
Another concern for many Barbadians is the unemployment rate. Economists count someone as unemployed when they are actively looking for work but are unable to find a job. Someone who is retired, is a full-time student, or who has otherwise chosen not to work, is not considered to be unemployed.
This is important to understand when speaking of the unemployment rate. Professor Robinson recalls the rate being as high as 24 percent in the mid-1990s and as low as 6 percent, but says that the benchmark in Barbados for an acceptable rate is around 10 percent. “Ten percent is sort of a psychological cut-off we use.”
Given Barbados’ heavy dependence on imports, it’s critical for us to have an adequate amount of international (or foreign) reserves. Historically, $1 billion was viewed as the minimum, but the professor says that the focus now is less on the absolute dollar value and more on the number of weeks of imports that our international reserves can buy. That is called “import cover”, and the generally accepted benchmark for it is a minimum of 12 weeks.
Having debt is standard for economies, but what is an acceptable level of debt? Professor Robinson reveals that “right now, the whole economic policy of Barbados is grounded in getting us to a debt-to-GDP ratio of 60 percent.”
Why 60 percent? He says that is an internationally recognised benchmark at which the debt level is considered to be sustainable, and one that international financial institutions and rating agencies consider in their assessments.
There are two additional considerations when it comes to debt and Barbados’ ability to manage it. The first is what percentage of our foreign earnings is being used for debt service. Professor Robinson discloses that at present, that figure for Barbados is approximately 4 percent, which he considers acceptable. Anything above 10-15 percent, he says, is problematic.
The second is the impact that servicing the debt will have on Government’s finances:
“What should a government really be doing with tax revenues? You really want it to pay for schools, to pay for the hospital. But if you are collecting that money and you are using a growing portion just to pay down debt, that’s really seen as counterproductive. That’s why you want to keep that debt-to-GDP ratio at a low level, so that debt service doesn’t eat up a lot of your revenue and you can’t provide social services.”
Speaking of Government’s finances, Professor Robinson acknowledges that in Barbados, we tend to run fiscal deficits – Government usually spends more than it earns – but cautions that those deficits should not be above 2 to 2.5 percent of GDP, and they definitely shouldn’t be larger than the growth rate.
Underpinning the success of Barbados’ economy is our ability to manage and maintain our fixed exchange rate of Barbados $2 to US $1. But how does staying above these benchmarks, specifically those related to international reserves, the debt-to-GDP ratio, and the fiscal balance help us to do so?
When Government spends more than it earns, that extra money is in the economy and likely being used to purchase imported goods. If at the same time, Barbados is importing more than it is exporting, we are spending more foreign exchange than we are earning. In combination, this can put pressure on the international reserves, which are needed to support the fixed exchange rate. Having to use too large a percentage of our foreign exchange earnings to service debt can have the same effect.
And it’s important to remember why this is all so critical:
“If you want to maintain a fixed exchange rate at two to one, then you need to have a certain level of foreign reserves to protect that. But your ability to maintain those foreign reserves depends on the government being fiscally disciplined, because if you run deficits, that promotes a leakage of foreign exchange.
“It’s all in the fiscal. The fiscal is really what drives our ability to preserve stability within the economy, and the fixed exchange rate is the anchor of our stability.”