Most economists would agree that making economic predictions is one of the more challenging exercises that the economics profession has to confront from time to time. Yet, given the nature of economies and the relationships that exist among economic variables, we as economists are left with little choice but to continue to do forecasting with the hope that on average our predictions would fall within a certain error of margin and be as close as possible to the actual out-turn.
That is so because economic planning and effective management of an economy dictate that some level of forecasting of key economic variables must be done to help guide policy formulation and strategies going forward.
Hence, despite the limitations of economic forecasting, I have no choice but to address the issue of the performance of Caribbean economies in 2014 because the pains and cries of frustration coming from various sections of the populations of several Caribbean countries make such an exercise essential, if only to give people some sense of what lies ahead. Even though the voices of despair sound as loud as possible in many of our regional economies, this column focuses on Barbados and Grenada essentially because these two countries are facing almost identical economic challenges that would require inflexible measures to resolve.
In Barbados, the Minister of Finance has apparently finally come to the realization that the continued reliance on increased taxation to arrest a growing and clearly unsustainable fiscal deficit has not worked and cannot work.
Hence, a reduction in current expenditure is now the preferred option that the Government of Barbados is willing to pursue in its quest to bring down an over $800 million fiscal deficit the country is now battling. The main thrust of the Government’s efforts is the imminent retrenchment of over 3 000 officers in both the general public service and statutory bodies. The sad reality, though, is that all of the measures announced by the Minister of Finance combined cannot eliminate the huge fiscal nightmare the Government faces. Tougher and more severe interventions are necessary.
What will the Government do?
The answer to the question posed above is anyone’s guess. However, I am pretty confident that if the Government is serious about resolving the fiscal difficulties it has created over the past six years, with its ridiculous increases in spending at a time when the performance of the global economy was relatively weak and unemployment was on the rise in the local economy, then, much more than the planned 3 000 public officers would have to be laid off since the option of cutting wages and salaries is off the table.
In Grenada, the Government has just begun the implementation of a three-year structural adjustment programme with the assistance of the International Monetary Fund, even though a formal agreement between the two sides is yet to be signed. That adjustment programme would see high taxes imposed on a population that is already overburdened with relatively low wages and salaries and extremely high unemployment that stands at over 40 per cent.
Like Barbados’ Government, the authorities in Grenada are trying to close a $15 million fiscal deficit by relying more on increases in revenue via higher taxation rather than seeking to cut current expenditure. Evidently, that strategy has failed in Barbados and will do likewise in Grenada. Therefore, tougher measures on the expenditure side must be implemented in Grenada to end the fiscal crisis facing the Government.
Take it or leave it, 2014 will be a real belt-tightening year for both Barbados and Grenada. That is my economic prediction. Does anyone doubt me?