Contact: Reginald R. Farley Executive Director Email: reginald.farley@icab.bb
Institute of Chartered Accountants of Barbados Room 29 Hastings Plaza Christ Church BB15150 Barbados Tel (246) 429-5678 Fax (246) 426-0970
Institute of Chartered Accountants of Barbados
Media Release August 16, 2013
INSTITUTE OF CHARTERED ACCOUNTANTS OF BARBADOS BUDGET COMMENTARY 2013
Structural Adjustment
The Minister of Finance on Tuesday August 13, 2013 presented a structural adjustment type Budget to the parliament of Barbados. Faced with a sharp reduction in foreign exchange reserves, chronic fiscal deficits, and economic stagnation, the Minister of Finance, Hon. Christopher Sinckler M.P. presented the first Budget since the DLP was returned to office after the General Elections of January 2013. The Budget featured a 19 month structural adjustment programme aimed at halting the economic slide, preserving the existing fixed exchange rate with the US dollar, reducing Government’s fiscal deficit, and laying a foundation for economic growth. The fiscal measures may not be desirable, they are in fact painful, but are indeed essential if the country is to have any hope of recovery. The Minister of Finance in the Budget stated that the specific objectives of Government’s policies in the short to medium term were as follows: 1. “Maintenance of stability in foreign exchange market and through it a protection of our fixed exchange rate regime.
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2. A faster rate of fiscal consolidation in the public finances underpinned by appropriate and credible downward adjustments on the expenditure budget. 3. And a faster return to economic growth in the short to medium-term through primarily better facilitation of private and public investment projects.�
Fiscal Adjustment The sharp reduction in net foreign exchange earnings of over $300 million during the second quarter of the year was identified as an urgent and pressing problem which the Minister attributed to “a decline in the level of overall confidence in our economy by foreign and domestic investors alike". Viewed against this backdrop it would be recognized that the fiscal measures announced in the budget were designed not only to correct a fiscal imbalance but to depress aggregate demand in the Barbadian economy as a means of protecting the foreign reserves. As such the fiscal adjustment measures are designed to reduce spending power in the economy by $435 million over the 19 month adjustment period through expenditure cuts of $285 million and tax increases of $159 million. The Institute of Chartered Accountants of Barbados (ICAB) has consistently expressed its preference for cuts in Government expenditure rather than increases in taxation given the existing high level of taxation in Barbados. However, given the gravity of the economic circumstances and the urgency of the need for measures to restore confidence in the exchange rate and restore fiscal discipline, the fiscal adjustment measures deserve the support of all Barbadians during the adjustment period. We caution however that the pain of the adjustment will only be worth it if Government maintains fiscal discipline beyond the crisis period by ensuring that its expenditure level does not again become unsustainable. The Budget indicates that the cuts in transfers and subsidies to Transport Board, NCC, QEH, UWI, BADMC, and SSA are to be addressed by revenue raising measures within the respective agencies. With the exception of UWI (students to pay tuition fees from 2014) and SSA (to be funded from the special additional land tax), no details have been provided. It is therefore impossible to gauge the full extent of the sacrifices to be made by taxpayers until information is provided on any increases in user fees or reduction in services delivered. Government should move quickly to provide these details which form an integral part of the Budget.
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Economic Growth In the Budget the Minister asserted that “the surest way for any country to pull itself out of any economic slump is to grow the economy consistently and at sustainable rates…… The broad objective going forward is to return the Barbadian economy towards the achievement of a sustainable growth rate of 3.0 percent by 2017 and 4.5 percent by 2020”. The Budget identified the drivers of growth as: 1. 2. 3. 4.
Increased public and private, foreign and domestic investment Better business facilitation Increased Productivity Increased competitiveness whether on price or quality of product/service
ICAB has for some time expressed its concern about the fact that indicators suggest that Barbados is losing its competitiveness and attractiveness as a place to do business. According to the World Bank, Barbados declined in the Doing Business rankings from 84 to 88 out of 185 countries and six out of ten competitiveness indicators deteriorated between 2012 and 2013. A reversal of these negative trends is essential if Barbados is to build a platform for growth driven by exports of goods and services. In the Budget the Minister announced several initiatives to address these challenges. ICAB will await the outcome of these initiatives to assess their impact and contribution to the medium term economic growth target of 3% per annum. Tourism Government must be applauded for reducing the VAT to 7.5% on tourist accommodation and direct tourism services. This will reduce costs and improve price competitiveness of the Barbados tourism product. The measures announced for hotel refurbishment and enhanced marketing are very timely. ICAB is concerned, however, that the quantity and source of funds for these projects may limit the potential benefits. Given the fact that US$50 mil is not enough to meet the needs of hotel refurbishment for the entire hotel sector what mechanisms will be used to chose and allocate funds to the beneficiary properties? The fact that the US$50 mil funding for tourism marketing will come from a US$100 mil Policy Based Loan puts the speed of implementation of the project at the mercy of the loan approval process of the IADB, which is not usually known for making quick disbursements. The plan to restore 1,000 hotel rooms to full use national is worthy of support. However, operating hotels is not a core function of Government, therefore the success of this project will be highly dependent on Government’s ability to engage international hotel brands to manage the properties. 3
International Business The Minister has sought to address the concerns of the international business sector by announcing the implementation of previously announced policies for the sector as well as some new measures. The following will therefore be positively viewed by the international business sector: Regulations to the International Corporate & Trust Provider Act Reduction of bureaucratic irritants by issuing: o 3 year licences for IBCs – Government needs to consider granting licences for an unlimited term but they should be subject to revocation for breach of laws, etc o Special Entry & Reside Permits to a wider range of persons Establishment of a National Business Facilitation unit in the Ministry of International Business Consultant attached to the Inland Revenue Department to handle tax law issues An additional $7mil for Invest Barbados. Renewable Energy The announcement that the Electric Light & Power Bill is ready for debate would be warmly welcomed by the sector as this remains a major roadblock to the participation of independent power producers in the production of electricity for distribution on the national grid. The Government also announced the use of its vast area of roofing on its many buildings for the production of electricity. This project, which is to be funded by the use of PPPs and international financial institutions, should make a meaningful impact in reducing Government’s energy bill as well as have a positive demonstration effect. Agriculture The major agricultural initiative announced was the Barbados Cane Industry Project which is to be started next year and includes a US$270mil loan for a new single sugar factory with co-generation capability. There is a need for substantially more information to be provided before an opinion can be expressed.
The Challenge of Implementation Critical to the success of the measures announced in the Budget, will be overcoming the challenge of implementation. Nowhere is this more critical than with the $1.8billion package of investment projects which are targeted at stimulating economic growth.
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ICAB has for some time called for the establishment of a special office for implementation. The Minister announced the establishment of a Specialized Major Project Coordination Team which will be headed by an experienced project manager and report directly to the Cabinet Committee on Infrastructure. This team must be given all necessary resources and authority to cut through red tape and overcome inertia to get the job done. In addition to ongoing monitoring and reporting to Cabinet the team must be mandated to report to the public monthly on the progress of the projects. ICAB notes with interest that there was no mention of CLICO in the Budget. Any requirement for Governmental involvement in the settlement of this matter has the potential to change the fiscal situation in a major way within the adjustment period. Depending on the nature of the settlement there could be a requirement for direct expenditure and/or Government guarantees, etc. This represents a risk which must be monitored and mitigated if the announced plans are to be achieved.
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