Notes From The Margin

March 19, 2008

A Suggestion on BOLT’s

Minister of Tranport, Works and International Transport John Boyce made a comment in the house yesterday about the Government’s potential use of Build Operate Lease Transfer (BOLT) arrangements in the future.

ANY FUTURE BOLT – Build Operate Lease and Transfer – arrangements that Government signs will be designed to bring economic benefits
to the country.

Minister of Transport, Works and International Transport John Boyce told the House of Assembly yesterday during debate on the 2008-2009 Estimates of Revenue and Expenditure that BOLT arrangements were supposed to generate savings and not additional costs.

The previous administration made use of several of this type of arrangement. However the nature of the implementations often left questions on the transparency of the deals. This was noted in an IMF  report on Barbados.

The report makes a number of reccomendations with regard to this Public-Private Sector arrangement.

We on the margin would be much more reassured by the implementation of a legal framework to govern the use of BOLT’s and similar arrangements than simply Mr. Boyce’s statement of “Trust us”.

January 31, 2008

Economic Advice From Prof. Howard

Local Economist Prof. Michael Howard who has become a regular commentator on Government’s economic policies today wrote an guest column in the daily Nation offering his views on the way forward for Prime Minister Thompson’s government and Owen Arthur’s stewardship.

His comments on former PM’s Arthur are interesting:

Whether he knew it or not, Arthur was also influenced by Rostow’s misleading “catch-up” notion of Barbados becoming a “developed country”. We may have already reached there since we are now in Rostow’s stage of “high mass consumption”.

Arthur’s expansionary policies eventually led to “overheating” of the Barbadian economy. Overheating was caused by heavy expenditure on the World Cup, the bunching of lumpy capital projects, and high levels of conspicuous consumption. The positive aspects of overheating were increased employment and economic growth.

The Barbados model has now reached a critical turning point where serious decisions have to be made to reduce high levels of spending, maintain capital controls, and curb illegal immigration. Without capital controls the exchange rate will come under significant pressure, as the economy faces a possible recession.

( If you want a quick overview of Rostow’s Theory click HERE.)

The point on the removal of capital controls we have spoken about on the margin already. It does seem to be a judgement call. As we said in our post “Capital Account Liberalisation – Good or Bad? ” it seems that no one REALLY knows what will happen when capital controls come off. Prof. Howards view that the world economic situation is less favourable MAY be right.

Interestingly his other points include tax policy:

It’s likely that it may happen in a cosmetically changed format and Thompson may claim that it was his idea! Arthur’s tax policy seemed logical to us on the margin, and it favoured gradual incremental change over a period of years rather than sharp adjustments. In lowering the income tax rate he was able to address the issues with the NIS pension fund without the population feeling poorer. With his policies he began moving the economy away from income taxes which inhibit investment and towards VAT. Arthur had indicated publicly on more than one occasion that he considered moving to one tax rate for both onshore and offshore sectors to be desirable.
On the issue of VAT Prof. Howard had this to say.
We on the margin agree with the professor on this point, and are concerned that once exceptions are made to the VAT tax, it becomes easier to make further exceptions. “You zero rated sports equipment so why not this?” Also the more zero ratings the more loopholes there are for abuse. (Are rally cars sports equipment? How about clothes to train in?) The objective is socially laudable, but we believe that the Government should find another way of achieving it.
We aren’t sure that we agree with Prof. Howard on one of his later points on the cost of living.


“Reliance on imported food is a major cause of the high cost of living in Barbados.”
We believe this argument ignores the fact that (1) Many of the input into local agriculture are imported, (2) Much of the imported food is so subsidized that it lands at costs BELOW the cost of local production. While the lack of competition in the distributive sector is definitely a factor it is in our view simplistic to view them as a major part of the problem of local agriculture withering, without a full examination of ALL of the factors involved.
That said we are happy to see input from some of the best brains “On The Hill”. Barbados is at a stage of it’s development where precious few countries have gone before. Input such as Prof. Howard’s is invaluable in helping both policymakers and the public understand the issues of the day.

January 25, 2008

Reality Begins to Set In….. Mr. Thompson Does Some Management of Expectations

Barbados’ new PM, met with the private sector this week, in his first address to the business community Mr. Thompson made his first attempt to reign in some of the overly optimistic expectations that some people may have.

The admission by the prime minister, who is also minister of finance, may have been the first time that Mr. Thompson has tried to lower expectations as to his incoming administration’s performance, at least in the short term.

Mr. Thompson told his audience that the new administration was taking office at a time when the world economy was at the height of uncertainty, with analysts predicting an imminent downturn in the U.S. economy, and a slowdown in some European economies.

If economic recession occurs in those countries, which constitute Barbados’ major trading partners, he said, “it would have negative implications for the Barbados economy and the economies in the rest of the region.”

One of the direct causes of the financial turbulence around the world, said the prime minster, is that it can disrupt capital inflows into developing countries like Barbados and put more pressure on their already large current account deficits. He said the government would continue to monitor the trends and take what he termed appropriate economic action in order to keep the economy stable.”

In the heady days following an election victory, readership of the comments on many of the blogs have revealed immensely high (some of which we would say are unrealistic) expectations of the newly elected government. In fact, even here on the margin we have had comments that reflect this….

  1. Don’t worry Marginal, the country is in good hands.We now have a team which is interested in the welfare of the electorate nad not in their self aggrandizement.

    From here on in everything will get better.

    Comment by Anonymous — January 22, 2008 @ 2:32 am

Mr. Thompson who now sits in the big chair must manage these expectations and ensure that the Government remains fiscally prudent. The promises of the election campaign must now meet the reality our resources, and the reality of the economic environment we operate in. Those constraints DID NOT CHANGE on election day and Mr. Thompson’s comments reflect a mature appreciation of the realities of the country’s position. The tone of his Prime Ministership will depend on how successfully he can communicate this to people like our anonymous commenter.


January 22, 2008

Our Thoughts On The Cabinet

PM Thompson showed the first inkling of his plans for the new term by naming a cabinet which is bolstered by some of the brightest brains in the island. We on the margin are particularly pleased to see Darcy Boyce being named to the cabinet as his skill set fills the most obvious hole in the qualifications of the elected cabinet.

Another interesting move was divorcing the International Transport ministry from the Tourism ministry and placing back with Transport and Works. The previous BLP administration had considered international transport to be the handmaiden of tourism with a focus on attracting new airlift. It will be interesting to see what new direction this brings.

International Trade, Foreign Affairs, and International Business have been joined under one Minister and one Junior minister. While we can understand the linkage, given the importance of International Business to the economy, we would have been more comfortable with it being given the exclusive focus of one minister. However we will have to see what results this brings.

Perhaps the most surprising omission was that of a Deputy Prime Minister while we have seen comments on Barbados Underground that the post exists only in tradition (let’s be clear it was the opinion of a commenter not David or one of the BU family) we on the margin view the post as having considerable importance. The Deputy Prime Minister runs the country in the absence of the PM. This is true when the PM travels or (God Forbid) becomes incapacitated or dies in office. It would be easy to dismiss the latter scenario as unlikely except for the fact that it has happened twice already.

However apart from the above comments we think that Mr. Thompson’s first cabinet appears to be a credible, well thought out team. The most obvious weakness has been adequately supported and it is clear that he has put his best brains in charge of the key ministries.

We wait to see what changes in policy will come from this new configuration.


January 10, 2008

Politicians, It’s One Week Before Elections, Do You Know Where Your Vote Is?

With one week left to go before elections, Barbados is in the grips of one of the most intense election campaigns in recent memory. The two parties’ campaigns appear to be evenly matched, and evenly funded, and to a certain extent evenly supported. We on the Margin have been watching the silly season unfold in all its glory, and we have to admit we are unable to predict a winner at this stage.

Yes, if you listen to Waiting In Vain and Royal Rumble and the other party hacks that inhabit the blogosphere, they all predict a resounding victory for their particular party. But having spent the last week talking to many people, we think that both parties are “Whistling past the graveyard”. For as much bluster as either side makes we’re not sure that either of them has captured the hearts of the electorate.  Barbadians are looking at both parties with a skeptical eye and the hard truth is that this election could go either way.

What we have noted that this campaign has been more about accusations and counter accusations rather than issues. We would like to see some serious discussion about both parties’ visions for the next five years. While we wish that we could say that we thought we would get such reasoned debate in the next next week, we really don’t think so. We think that this next week will get wilder and dirtier with each passing day.

We on the margin would urge Barbadians,  think long and hard about both parties before you go into the polling booth. Whoever you choose is entirely up to you, but be sure to participate, be sure to cast your x. Be sure to treat that decision with the seriousness it deserves.  Hopefully we will all be better off for your doing so.


December 21, 2007

Owen Arthur Rolls The Dice….

Owen Arthur announced the general elections today as January 15th 2008 with nomination day being December 31st. Signalling the start of what must surely be one of the shortest campaigns in local political history. Both opposition parties have been quick to condemn the announcement coming before Christmas while saying that they are ready to go to the electorate.

NFTM tries not to get into the political scene however I’m sure that we will get into commenting now and again over the coming two weeks. We had quite honestly figured that the bell would have been rung later down in the year, however the election date is the sole prerogative of the PM and given the harsh criticism of the date by the opposition, it would appear that he has execised his choice to give tactical advantage to his party.

I’m sure over the next couple of weeks we’ll hear about:

The teifing and corruption is terrible!

What corruption?

We are united behind our leader!

They are a house in disarray!

So and so is a dis and dat

and all the other things that pass for intellectual discourse in a political campaign.

However, the fact remains that both parties come from the same ideological position (we’ve talked about this before in our post “Prime Minister Owen Arthur, and the Opposition Democratic Labour Party led by David Thompson, who was once the Minister of Finance, are virtual ideological twins”)

So whoever wins don’t expect much to change (both good and bad)


October 9, 2007

More Sage Advice From The IMF – “Cut Your Tax Incentives!”

We had a bit of a laugh in hearing the most recent advice from the IMF, in their latest Public Information Notice the IMF covers a seminar that was held t0 address selected cross border issues affecting the Caribbean and the three issues selected are financial integration, tax incentives and investment, and trade preference erosion.

On two of the three issues the IMF’s position isn’t that bad.

On Financial Integration:


... Directors considered that closer integration of the Caribbean’s still largely segmented financial markets can be expected to help generate higher economic growth by improving access to credit and lowering interest rate spreads. However, more integrated financial markets will also allow shocks to spread across borders more rapidly and pose greater regulatory challenges, especially with large financial conglomerates operating across different industry segments and in several countries.


On Trade Preference Erosion:


Directors recognized that the erosion of preferential access to European markets for bananas and sugar entails significant losses for several Caribbean countries….

… the strategy to address this difficult challenge will need to involve carefully targeted social safety nets to alleviate the impact on affected vulnerable groups; efforts to raise the efficiency of existing banana and sugar industries, where viable; and transition away to new economic activities, in countries where production is unlikely to be competitive even after significant efforts and investments.

Now we come to the fly in this ointment…..

Directors noted that, while the Caribbean countries’ heavy reliance on tax incentives may help attract investors, they are costly in terms of foregone revenues…..

… In light of this, and recognizing the intense competition for global investment funds which the region faces, Directors encouraged Caribbean policy-makers to weigh carefully the costs and benefits of tax exemptions and consider reducing them if possible; to step up efforts to improve other determinants of investment; and to make remaining tax incentives more cost-effective.

So if I’ve got this right, the incentive to get the revenue is costing you too much revenue, so you should cut the incentive to reduce your losses. But….. if you cut the incentive you may not get the revenue so you will end up foregoing even more revenue.

Hmmm so after some thinking we in the margin came up with this economic theory.

“While tax incentives may be expensive and may have costs associated with foregone revenue, not having the incentives is even more expensive” In short it’s better to have 75% of something rather than 100% of nothing. (And we aren’t even trained economists!)

This advice comes from the same people who managed the Jamaica’s and Guyana’s structural adjustment programs!



September 18, 2007

The Barbados/IMF Article IV Consultation (Sorry This Is A Long Post)

We agree with Barbados Underground’s call for more debate on economic matters, with a view to this … we are going to borrow a phrase here from our friends over at the Push Pull Blog, we are not trained economists but we have read the IMF Article IV report. Article IV reports are useful as they provide an unbiassed (if diplomatically sanitised) view into the quality of the economic management of the country. This year’s article IV makes interesting reading as the bulk of it centres around the Government’s announced plans to liberalise the country’s capital account.

In a nutshell the IMF thinks that the Barbados is relatively well run.

The prospects for economic activity in 2007 are favorable but imbalances
persist. The economy is growing at a solid pace, and inflation is expected to decline.
However, in the absence of further policy tightening, the wider public sector position is set to
weaken, while the external current account deficit is likely to remain sizeable.

Barbados’ real effective exchange rate appears to be broadly in line with
fundamentals. The real appreciation of the past two years has lifted the exchange rate
somewhat above its estimated equilibrium but neither the small measured overvaluation nor
other indicators suggest a current competitiveness problem.

Capital Account Liberalisation

The discussion then turned to the Government’s announced intention to liberalise the capital account. The IMF did not seem to think the liberalisation would have any drastic immediate impact, but there were risks in the medium term. The remainder of the report discusses the ways for government to contain those risks.

The immediate impact of this step—a commitment under the CARICOM
Single Market and Economy (CSME) to enhance regional integration—is not expected to be
large, owing to the credibility of the peg and the fact that the current approval requirements
have not prevented most transactions from taking place. Indeed, removal of the remaining
controls on foreign-currency accounts, purchase and sale of real estate, and cross-border
borrowing and lending, may have a positive impact on the capital account, to the extent that
they have discouraged certain inflows. However, over time, liberalization may expose
Barbados to the danger of sudden capital account reversals, particularly if it permits sizeable
current account deficits to be financed by short-term inflows. In the absence of a larger
reserve cushion, such reversals could challenge the credibility of the peg or force sharp and
disruptive policy adjustments

The three strategies to reduce and manage these medium term risks are:

1. Fiscal Consolidation

2. Market Based Monetary Policy Instruments

3. Stronger Financial Sector Policing and Regulation.

Fiscal Consolidation

The main point of disagreement between the Government and the IMF occurs here. The IMF would like the Barbados government to commit to a more agressive programme of consolidation than it has. Their argument for this is that it will reduce the vulnerablity of the economy to external shocks. They argue that in the event of another 9/11 the economy would be able to recover far more quickly. They argue quite strongly for the following measures:

• Reduction of quasi-fiscal activities. The government is undertaking a number of
large public projects that will add some 10 percentage points of GDP to public debt.
Reining in such activities in the future will be crucial, and presenting all quasi-fiscal
activities on a consolidated basis in the budget will help rational planning.

• Improvements in tax administration. The planned establishment of a Central
Revenue Authority, bringing different tax offices under one umbrella, should
generate some small savings, while also facilitating a strategic approach to tax


• Increase in VAT rate and reduction in exemptions. With unchanged collection
efficiency, a rate increase from 15 to 17 percent would raise revenues by 1¼ percent
of GDP; curbing exemptions would create additional savings.


• Adjustments in the prices of public utilities. Adjustments appear warranted where
prices are below operating costs, including public transportation, natural gas, and
water—possibly combined with targeted support to protect vulnerable groups.



• Reduction of tax incentives. Tax expenditures arising from various incentive
schemes for foreign investors were estimated at 6 percent of GDP in 2005/06. A
reduction would be most effective if coordinated with other countries in the region
that apply similar practices.

The last point seems more theoretical than realistic to me, as it is lacks a balancing statistic on how much GDP was generated by the foreign investment (that you wouldn’t get without the incentives)

The Government’s response is summed up in the following paragraph:

The authorities reaffirmed their commitment to reduce central government debt
but were not convinced of a pressing need to adopt fiscal measures. They accepted that
fiscal policy would have to adjust in the face of an eroding reserve coverage and were
committed to act in such a situation. However, they were more optimistic than the mission
about future trends, while pointing out that current projects were unavoidable (new prison
and judicial center), had a positive economic impact (highway expansion), or were selffinancing
(multipurpose sugar factory). Regarding the specific measures advanced by the
mission, the authorities highlighted the role of tax incentives in attracting foreign investment
and expressed concerns about the inflationary and social consequences of raising the VAT
rate and the prices of public utilities.

Further the government argues that the IMF has overestimated the risk of it’s debt burden as the bulk of it is local, and a significant portion of the local debt is held by the NIS Scheme.

Market Based Monetary Policy Instruments

There appeared to be agreement on this and the report notes that Government is likely to create additional Government or Central Bank paper instruments which will require funds to be held to back those instruments. It does note there are concerns on the cost of this.

Stronger Financial Sector Policing and Regulation.

Once again there is general agreement on this point, while there is acknowledgment of increasd risk with the open capital accounts the IMF seems to generally approve of the plans that the Government has implemented or is in the process of implementing.


We on the margin read the report to mean that the Barbados economy is on a generally sound footing. The impending liberalisation of the capital account will open new opportunities to Barbados as a financial centre in good times, however should there be hard times or rapid capital outflows there are substantial risks to the Barbados financial system and our fixed exchange rate.

The best defence in hard times is a tightly run economy. The IMF would like it to be more tightly run than it is, Government disagrees with the IMF prescriptions. Admittedly the rating agencies such as Standard & Poors seem to endorse the Government’s view on the risk associated with it’s current debt profile. (mostly local) We on the margin are of the opinion that eventually Government will adjust the VAT rate. However to our minds, the IMF prescription on reduction of incentives to foreign investment makes no commercial sense. Apart from the difference of opinion on strategies for consolidation, there is very little disagreement between the Government and the IMF.

IN the end, at the heart of the IMF report is a difference of opinion. Is the Barbados Government being overly optimistic? or is the IMF being overly conservative? The truth of the matter is, that we will only know the full answer to these questions when they are matters of history.


September 15, 2007

Why The IMF Will Probably Get the VAT Reform It’s Asking For

Was reading an interesting article in the Nation today about the recently released IMF Article IV consultation. We’ve downloaded the actual document for closer reading (if you are interested you can find it HERE) The following paragraph caught my eye….

IF GOVERNMENT were to raise Value Added Tax (VAT) to 17 from 15 per cent, this would boost revenues by as much as 1.25 per cent of gross domestic product (GDP).

This comes from the International Monetary Fund (IMF) as it continues to encourage the Owen Arthur Administration to increase VAT in a bid to reduce Government’s growing debt gap.


The IMF further stated that additional savings could be generated if more goods and services were drawn into the VAT net.

Now at first glance this would appear to be the usual thing you find in Article IV’s “raise taxes, cut concessions” . This is not the first time that the IMF has called for VAT reform and we’d be willing to bet that it won’t be the last.


If you consider that Government is engaged in trade negotiations at the WTO, EU, US almost all of which call for the removal of tariff barriers, the above paragraph becomes far more interesting. A check of the Central Bank statistics (HERE) reveals that the Government of Barbados currently makes more than 200 million dollars a year from import duties. That ‘s a significant amount of revenue that Government will have to give up.

Now civil servants have to be paid, (and flyovers have to be paid for 😉 )so Government has to find a way either to cut expenditure, or to increase revenue. On the cost reduction side, government has been “quietly” shuffling major segments of government off into corporations (GAIA, QEH, Post Office etc.) One of the effects of corporatisation is that it reduces Government’s wage bill by abolishing Civil Servant posts and essentially making them private sector employees. It also removes the cost of running those entities from the Government tab. That’s the REAL reason why this government has been so quiet about the Departure Tax at the airport because they don’t want to pick up money to put into it, it looks as if they are serious about it being self supporting. (Ditto for the post office, and QEH).

Now despite Governments best efforts to shrink, there will always be stuff to spend money on (flyovers for example) so Government will have to raise revenue somehow. The long term strategy of the Owen Arthur administration has been to reduce taxes on income and revenue (he has even publicly stated that his long term goal is to have the same rate for the “onshore” and “offshore” sectors), so he can’t find it through income tax. This makes raising VAT the most attractive option, because of its widely distributed nature a small (read “politically defendable”) increase in the rate will result in a major boost of revenue to the treasury.

And so the IMF will more than likely get it’s VAT reform. (but not until after the election). The economic issues here apply whatever political party is in power so regardless of who wins the next election this is likely to happen.


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