Today’s interview is with the new President of the Barbados Economic Society.
Congrats on becoming the new President of the BES. When was the official start date of your term?
Thank you. December 19, 2017.
I know that you’ve been in the press a bit and I saw the last BES press release on your thoughts about the economy. I think everyone accepts that we’re in a precarious position. One of the things people ask me all of the time, and I assume that they will ask every economist, is should we devalue. What are your thoughts?
No. Why? Because I don’t think it adds any material benefit to us. I think that clearly we’re a very import-dependent economy and devaluation would just increase the cost of those imports because we don’t have the excess capacity to produce what we currently import. Not in any meaningful way, at least. On the export side, it’s not like we have lots of hotels that are empty. The hotels are very much doing well, at least in the tourist season. So, making the currency “cheaper” would not necessarily bring additional benefits to Barbados without improving the current capacity.
People have been talking about going to the IMF. What are your thoughts on that?
Yes, we should go to the IMF, and not because the IMF can solve everything. But simply because we have a balance of payment deficit that is getting worse every year. The reserves have been declining at a faster rate every year since 2013/2014 and part of the reason is that government’s debt has become so high and the credit ratings have become so poor that government has to pay external debt out of reserves. We need to be at least able to match those outflows in order to stabilise the reserves and give us time to make the necessary adjustments on the current account – which would be imports and exports – to stabilise the reserves even further and put them on an upward trajectory.
But if we go with the IMF, the IMF obviously has their prescription, usually involving devaluation.
Sometimes, it might. In 1991/92 we didn’t devalue and we were in an IMF programme then. What it means is that we’d have to make further cuts and adjustments on the fiscal side. Either way, the prescription is going to be to restore the balance between inflows and outflows of foreign exchange. The IMF might suggest devaluation and we might suggest a fiscal adjustment, and I suspect a fiscal adjustment would need to be even greater if we reject devaluation.
So what is the difference then between going to the IMF and what we’re already doing? There are a number of economists that have said that we have our own almost home-grown adjustment programme, so what is the benefit in your view of going to the IMF when we’re already allegedly implementing measures now?
There are two things. The IMF provides the foreign currency that we need right now to stabilise the reserves. It’s all well having a home-grown programme, but we don’t have the time or enough of a buffer from a foreign exchange perspective to allow us to make the adjustments sustainable without running out of reserves first. The IMF provides the FX.
The second thing is that the IMF provides credibility once you’ve passed the tests. Too often we’ve set targets for ourselves and we have failed to reach the targets without any real consequences, so to speak. The IMF puts benchmarks in place, where if you pass the benchmarks, if you meet the standards, then you get financing. So there’s a carrot and stick situation. And that additional credibility is favourable with the credit rating agencies and the international investors, and that might help to restore access to the international financial markets.
The argument of going to the IMF for credibility was used for Jamaica, and Jamaica still missed their deadlines. The programme came to a halt and they had to redo the entire programme and that sent the economy into a further decline. In addition to missing the deadlines and the obvious implications of that, the credibility factor was lost as well. So my fear is that if we’re not doing well at execution now, what makes people believe that the IMF coming will necessarily make us any better at execution?
I think that’s where a credible plan needs to be put in place; not just a plan with quantitative targets, but how are we going to get things done. Part of the reason why there is a Barbados Sustainable Recovery Plan, and this whole process of trying to get the social partnership back together and an oversight committee in place, is to make sure that we have an implementation plan as well as macroeconomic targets. So, I think it involves consultation with other members in the private sector and the unions, which may be in a position to help with the implementation. Many of these issues may require some adjustments to the size of the government’s labour force, and obviously the unions can determine how easy or difficult these adjustments can be achieved.
I remember when the social partnership attempted to meet last year, in the discussions they were very much, on the private sector side, anyway, trying to get the unions on board and agitating for the government and the unions to reach a final position with respect to civil servants’ wages. That to me never happened. And, if it’s not happening in this current environment, where it is fairly obvious why you need an agreement on the way forward, why would the IMF coming change that dynamic?
I guess the challenge is that the IMF probably won’t change that. We need to change that ourselves, which requires strong leadership on all sides. I don’t think it is an easy fix, but we have to get to a stage where people fear for the Barbados economy’s long-term health enough that they will make the necessary decisions and changes that they need to make. But I don’t think the IMF can force those changes.
Do you think people have a clear understanding of the consequences of the decisions we face? One of the questions that we get asked is what happens if we run out of reserves. We’ve never run out of reserves as a country, so this is not a ‘real’ scenario in most people’s minds. They have never lived through a situation where there are no reserves. So, just to help clarify this issue for the people that will be reading this, in your view, what happens if we run out of reserves, if the reserve cover actually gets to zero?
Two things. The reason why we have a 2:1 peg is because the central bank guarantees that rate if the commercial banks come to the central bank [for foreign exchange]. If the commercial banks go to the central bank and the central bank has no reserves to guarantee the rate, then the rate is set basically by whatever the market determines. So the first thing that would happen is that you may have a devaluation, if commercial banks set the rate at a much higher level than it is today.
The second issue is that sometimes because of the seasonality of foreign exchange inflows and outflows, we have to use the reserves to pay for food and medicine and construction materials and so on. If we run out of reserves and the commercial banks aren’t getting enough FX from tourism and international business, and we have to dip into reserves and we have none, then essentially we go for a period without being able to import food. It is then that the average person would certainly feel the impact of having no reserves.
Part of the challenge that we have in the country is that we’re not earning enough foreign exchange and we have sizeable FX expenses, which is why the reserves are being drawn down. One of the questions that we get asked is what do we need to do to actually earn more foreign exchange. All of the measures that the government has put in place have been along the lines of retaining what little we currently have. What would you suggest the country do to actually earn more foreign exchange?
Earning FX and saving FX are kind of similar. Alternative energy, for example, is not an earner of foreign exchange but it achieves the same thing. So, moving more towards sustainable energy, whether it be wind or solar, would help. I think that back in Q1 2015, the central bank reported that Barbados produced an external current account surplus, which in my lifetime has been a rarity. The reason for the surplus was that oil prices had fallen so low that our inflows of foreign exchange more than matched our outflows of foreign exchange, at least on the current account. If we can replicate that over time, we can have a significant growth in the FX reserves.
The second thing is building out capacity in other areas. For example, we do really well in tourism but I think we can do more. If you look at Aruba, Aruba gets about 1 million stayover arrivals every year and we get about 600,000. Their economy, the size of their population, the size of their country, is much smaller than ours. Is there perhaps room for us to grow significantly more in tourism given what Aruba has been able to accomplish? And then there’s international business. International business is a favourite of mine because it is a weightless export. We have lots of professionals here and I often say, why can’t a Barbadian set up an international business in Barbados, an accounting firm, for example, and offer their accounting services to Canada or the UK, because we do the same professional qualifications and we can probably charge a slightly lower price for the same value. Those are just examples of how we can earn more foreign exchange.
The other area that I think we need to go into over the long term is being able to earn FX from income as opposed to being a net payer of income to other countries. So if you look at the current account, you’d see that we earned as much from exports of goods and services as we paid in imports of goods and services in 2017. The reason why the current account was in deficit is because the income that we earned from non-residents was significantly lower than what we paid. And part of that is because we have to pay dividends to non-residents, people that invest in Barbados, as well as to pay interest on debt. If we can somewhat reverse that so that we’re investing more externally and we’re earning dividends from overseas then we can close that gap in the current account and earn more foreign exchange as well.
To me what you’re pointing to is an opportunity for the private sector.
Maybe yes, it possibly is.
That is one of my pet peeves. One of the reasons why AE exists it to support the private sector. Economists traditionally have supported governments and society at large and we feel that, while there is more we can do, it is on the right track. So you do have a situation where for big decisions government entities, development banks and certain types of NGOs know to come to an economist for support. They know to ask for help. They know they need forecasts, they need scenarios, they need estimates and so on. But in the private sector a lot of decisions are still based on what essentially boils down to gut. And while that is useful, and I’m completely supportive of the instinct that business people develop for their field and industry, one of the challenges I think we have, and why Barbados is lagging behind some of the other islands with respect to our private sector, is maybe because there isn’t enough information to ground decisions in fact.
Which brings me to another set of questions around the economics profession generally. The BES is probably one of the quietest associations for professionals. Just so that the readers understand, to be a member, do you have to be an economist?
No you don’t. We have members from various industries and professions.
Do you think that we have a situation in Barbados where people do not understand what it is that economists actually do?
I think it’s possible. People often see economists as related to government, as you implied, and that is why those that are a part of the private sector may not look to economists because they may not be as interested in what is going on in the public sector. I also think that they see economics as very much an academic field. Lots of models, forecasts that aren’t perfect. So from their perspective it is not very practical. I think, as you said, changing that is very important.
I’ve never seen that as a mandate of the BES. To me, the BES has always had a focus on overall macroeconomic development. During your presidency, will you continue to focus on supporting the entire economy and the initiatives that are going on at the national level?
We definitely want to play a role on the macro side, but also on the private sector side. One of the things we’d like to do is to offer training courses to private sector organisations; it could be a simple training course on how to create a regression in Excel, because the average person will not have EViews or Stata or one of the other modelling programmes. So how do you create a simple regression in Excel? How do you interpret the results and how can you use it for forecasting? My experience working in the private sector suggests that there are many questions that people have that can be answered with economics or econometric tools; things like marketing, for example, or how you allocate resources most efficiently, which is central to the area of economics. So that’s what we want to do if we have enough resources and time this year.
Your term is one year only?
I know you had said you wanted to support the macro economy; is there a facility right now to allow you to do that?
There are a couple of ways that we can do that. One of the things that we would like to do is to speak in the press and have our various sessions to discuss these issues. Ultimately, the insights do get filtered up to the various politicians and decision-makers. What we’d like to do as well is, given that we have so many consultations on the sustainable recovery plan and where do we go from here, whether we go to the IMF or not, we want to have a seat at the table as well. It is something that we have discussed as an executive and certainly it is something I have queried already, maybe as a private sector organisation, because we are not public sector and we’re not a union.
Is there anything that you’d like the private sector to do to support the work of the BES? Is there any support that you need from the private sector?
Data is always important, if that’s available, because making recommendations and estimates without the appropriate data is always quite dangerous and personally I like to have my facts before I go speaking on things. I also find that often our decision-making doesn’t seem grounded in much modelling or fact. It’s like, let’s do this and have this outcome when clearly it seems as a professional looking in from the outside, you’re not going to get the outcome you wanted or there will be issues. So I think the private sector can help in terms of pushing for a rigorous approach and a fact-based approach to policymaking.
Thank you very much Shane for taking the time to talk to me today.
A little bit about Shane:
Shane Lowe is the current President of the Barbados Economics Society. He has a keen interest in and working knowledge of Caribbean economies having worked as an Economist at both the Central Bank of Barbados and in the private sector. He has published both independent and co-authored empirical research papers in the areas of fiscal policy, financial stability, external competitiveness, tourism sustainability and economic development in peer-reviewed journals and as part of the Central Bank of Barbados’ Economic Review and working paper series. More recently, his research has focused on understanding the drivers of consumption volatility in small, open economies as well as on applying optimisation techniques to determining appropriate solutions to existing economic policy problems. Shane is currently a PhD candidate and graduate of the University of Glasgow where he earned his Master of Science in International Financial Economics with distinction. He previously obtained a Bachelor of Science in Economics and Accounting from the University of the West Indies, Cave Hill, and is also a holder of the Global Association of Risk Professionals’ Financial Risk Manager certification.