How many of us remember that Grenada has had a very long history of engagements with the International Monetary Fund (IMF) dating back to the 1970s? How many of us can recall the exciting times of involvements with the IMF during the days of the People’s Revolutionary Government (PRG) in the midst of a brutal “Cold War” that gripped the entire international community? How many of us can testify to the effects on people and country of those structural adjustment programmes of the past, home-grown or otherwise?
You see, quite often, we as a people tend to forget, naturally or conveniently, some of the important aspects of our recent economic history, even in cases where the implications for Grenada have been severe, to say the least. Consequently, as the saying goes, “History repeats itself” yet regrettably things go unnoticed as if they never occurred. To put this matter into proper perspective, let’s take a tour down memory lane with respect to the IMF and structural adjustment programmes in the Caribbean in the past twenty-five or so years.
During the early 1990s, Barbados faced a serious challenge to its fixed exchange rate – a challenge that was created virtually entirely by the then Erskine Lloyd Sandiford Administration. The excessive and unnecessary printing of millions of dollars by the Central Bank of Barbados to finance the government’s deficit-spending resulted in a massive run on the country’s international reserves, bringing the economy to the point where it could no longer afford the existing parity of USD 1.00 = BBD 2.00. That experience coupled with a decline in tourism due to the Gulf War propelled Barbados into a serious foreign exchange crisis in early 1991 as a result of the overheating of the economy. The government’s current fiscal deficit exceeded 7 percent of GDP at the time of the crisis.
Unlike its Caribbean neighbours such as Guyana, Jamaica, and Trinidad and Tobago, Barbados avoided one traditional IMF approach to economic stabilisation: devaluing the local currency to cut aggregate domestic demand and boost exports. Instead, Barbados undertook an alternative IMF channel of adjustment. More specifically, the country avoided currency devaluation by carrying out drastic fiscal adjustments. The government at the time raised taxes and public sector tariffs, cut public sector jobs by over three thousand, reduced public sector wages by 8 percent for 18 months, and privatised public sector enterprises.
From 1990-1993, the total fiscal adjustment by the public sector was equivalent to 7.3 percent of GDP. This was achieved primarily through raising revenue and cutting capital expenditures. Real wages declined by 10 percent during the 1991 crisis.
Barbados began a Social Partnership in 1993 with the signing of a protocol between the trade unions, the government, and the private sector. All parties agreed to tie salary adjustments to profit sharing and improvements in productivity. This unique Partnership has helped to guide the economy through various crises since its inception.
From 1994 onward, real GDP growth was around 3 percent. Inflation was below 2 percent in the 1990s, climbing to over 8 percent by 2007. Unemployment fell to around 7 percent in 2007 after being over 27 percent in 1993. Foreign exchange reserves, which had fallen drastically by 1992, equalling less than 4 percent of the basic money supply, averaged nearly 60 percent during the latter half of the decade.
Since the crisis in 1991, budget deficits of around 3 percent of GDP were easily funded by the local financial system, reducing dependence upon external funding. By the end of 1998, nearly 84 percent of the central government’s debt was held domestically.
By 2009, the fiscal deficit was 8.2 percent and the projected deficit for 2010 was 7.4 percent. The debt-to-GDP ratio was over 100 percent and growing. To address these imbalances in the economy, the government of Barbados, led by the late Prime Minister, David Thompson, proposed a Medium Term Fiscal Strategy aimed at ensuring fiscal sustainability over the next three years.
Among other things, the Strategy involves ensuring that a balance budget was obtained by 2014/2015 and a small fiscal surplus by 2015/2016; reducing central government’s debt-to-GDP ratio to near 70.0 per cent by 2017/2018 and returning real GDP growth to an annual average rate of approximately 3.0 percent by 2012.
To achieve these targets over such a short period of time will require a pullback by government eerily reminiscent to what occurred in 1991. Indeed, the only anchor in the economy at present is the level of foreign reserves, which unfortunately are in gradual but steady decline.
So why has this writer taken all the pains to put before you the Barbados’ experience of 1991 in some details? What? I thought by now you would have made the connection!
Isn’t Grenada going through what it calls a “home-grown” Structural Adjustment Programme with the aid of the IMF? Although a devaluation of the Eastern Caribbean Dollar is not a policy option of the present Programme, don’t you see clear similarities between some of the fiscal austerity that Barbados implemented and the measures already put in place here in Grenada by the government?
Drawing from the Barbados’ experience, what so far is the key missing element in the Grenada Programme? Is it that difficult to see?
Indeed, this writer has taken you down a short but important memory road with respect to the Structural Adjustment Programme that Barbados implemented in the early 1990s to save its domestic currency – a Programme that could have been easily avoided had it not been for the stubbornness and gross incompetence of a government led by Erskine Lloyd Sandiford!
That expose with respect to Barbados’ Structural Adjustment Programme of 1991 is vital to us in Grenada because according to one of your humble servant’s favourite maxim, “those who ignore history are doomed to repeat it.”
Do we want to be doomed forever or do we wish to return Grenada to economic prosperity once again in the not too distant future? I am fairly confident that we all would select the latter portion of that very sombre question. Kudos!
(Dr. Brian Francis, a former Permanent Secretary in the local Ministry of Finance, is currently a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Barbados of the University of the West Indies)