A serious split has apparently surfaced between the government’s top financial and economic advisers over the future course of Barbados’ economic policy.

At stake are effective ways to kick-start a sluggish economy while at the same time grappling with the need to bring down the nation’s gaping fiscal deficit, according to highly placed sources, some of whom attended a recent meeting of top civil servants chaired by David Thompson, the Prime Minister and Minister of Finance. (Editor’s note: Shortly after this piece was written, Mr. Thompson announced he was taking a two-month medical leave of absence, and Attorney General Freundel Stuart was sworn in as Acting Prime Minister).

Conversations with sources familiar with the impasse indicate that the disagreement was essentially between advocates of fiscal restraint, a group reportedly led by one of the Ministry of Finance’s major financial decision-makers and a senior official of the nation’s Central Bank. On the other side of the policy dispute are proponents of increased spending designed to continue the economic stimulus and create jobs.

“The division has serious implications for the country’s economic future,” said an official who requested anonymity because he wasn’t authorized to speak on the issue. “If we can’t decide on ways to bring down the deficit, we would jeopardize our ability to borrow on the international financial markets and that in turn would affect our foreign reserves. It may also delay the presentation of a budget and would result in increases in the costs of borrowing.”

At the meeting called by Mr. Thompson, senior public servants, many of them permanent secretaries, were reportedly warned about the negative impact of unchecked spending, which officials fear could reduce the nation’s credit rating to “junk bond” status, a development that could cost the country dearly by increasing interest rates on loans. Should the credit rating fall below its present BBB, it is feared that the country wouldn’t be able to raise the US$200 million it needs to meet its debt obligations and boost the reserves.

“It’s clear that the deficit needs to be addressed urgently or the rating would be downgraded,” said a source. “The deficit and the high debt are like the big elephants in the room. Given the difficulty Barbados recently experienced when it went into the market for $200 million but was unable to get it at favorable terms, it’s clear these are issues that must be addressed urgently. The Central Bank shares that concern.”

Worries are also being expressed about the long-term future of the National Insurance Scheme (NIS).

“Right now, the NIS is healthy and there isn’t any concern about the short or medium term,” an official pointed out. “What is worrying is that if policies don’t change and the NIS continues to be used as a kind of ‘piggy bank’ then its ability to meet its long-term obligations would be eroded. That’s the real fear.”

“But proponents of a continued stimulus insist the government must undertake many of its development programmes in order to create jobs and allow the Thompson Administration to implement its promises to the electorate.

“The bulk of the spending is expected to be financed through the NIS and the plans include expansion in housing construction, a key plank in the Democratic Labor Party platform in the last election,” said the official. “But how long can you go on borrowing from the NIS while at the same time reducing the foreign reserves? That’s the key question which must be answered.”
Interestingly, a cabinet minister who is part of the discussion has advocated a middle position between the opposing arguments, calling instead for a ‘balancing act’.

He explained that the government wanted to place emphasis on spending in the productive sectors of the economy, such as tourism and manufacturing, which would spur growth, keep people working and bring the recession to an end. But there was recognition that the deficit must be tackled, the minister added.

In the meantime, though, the question of the next budget looms large: When will it be presented to lay out a blueprint to lift the country out of its current economic malaise?

“The delay in the budget is linked to the policy differences,” asserted a source.