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riceThere have been studies on the development outcomes of countries that have borrowed from the International Monetary Fund (IMF). While some argue that governments benefit from receiving cheap loans to improve their fiscal positions, many argue that the losses to society in the short and medium term are too severe to bear.
Successive governments have received loans from the IMF to support their balance of payments and to deal with various crises, mainly caused by external shocks. Most recently, one government was known for its insistence on autonomy and demonstrated its ability to manage its own economic affairs. This led to the expulsion of IMF staff from Barbados.
Since 2018, Barbados has chosen to borrow from the Fund as a “last resort”. The loan programs, known as the Extended Fund (EFF) and the Resilience and Sustainability Fund (RSF), are known as the “Homegrown Programs” and all reports indicate that they have significantly improved Barbados’ fiscal position. The country has been able to reduce public debt and increase international reserves. After deficits in previous years, the primary fiscal surplus was 2.5% of GDP in fiscal year 2022/23. The budget target for fiscal year 2023/24 is to achieve a primary surplus of 3.5% of GDP, in line with the program target.
According to the report of the Central Bank Governor, the country’s economy has recovered strongly, driven by the rebound of tourism and related activities, with growth achieved for 11 consecutive quarters and international reserves reaching a record high.
The reality for households and businesses is starkly different. While only a tiny fraction of the population has enjoyed the benefits of economic growth, the majority of the population is living in a pinch. Young people are unable to secure jobs for which they are qualified, and many choose to emigrate or take low-paying jobs. Startups and early-stage growth companies face a maze of policy and program space to operate; and households continue to struggle to maintain an acceptable standard of living. Economic growth has not trickled down to ordinary citizens.
Research shows that the effectiveness of IMF loans is a complex issue, with results varying by country and economic situation, but over time few countries have been successful after signing these loan agreements. The result is often an increase in national debt burdens and a lack of investment in growth-enhancing areas over the long term.
IMF loans can provide much-needed fiscal resources during economic crises. They can also spur reforms that improve a country’s fiscal position, such as reducing government spending or raising taxes. However, the negative effects are often too severe. Austerity measures, including cuts in spending on social programs, are unaffordable. Moreover, these measures can depress economic growth in the short and medium term.
Although the IMF does not explicitly require austerity, it often attaches certain conditions that indicate the impact of austerity on the population. Since the devil is in the details, countries should pay attention to the specific situation of Barbados, which has to pay huge surcharges in addition to regular interest and other payments due to its high IMF debt.
There are two known types of the condition:
• Previous Actions: Measures a country takes in advance, such as tax reform or clearing existing debt, lay a solid foundation for the success of a loan program.
• Quantitative Performance Criteria (QPC): A measurable goal related to the health of an economy, usually involving limits on government spending or borrowing. Aims to control deficits and stabilize the economy.
Critics argue that austerity measures, often associated with QPC, can have negative social consequences, including reduced social spending – cuts in government spending can negatively impact social programs such as health care and education, disproportionately affecting vulnerable groups that rely on them, and dampened growth – although austerity measures are intended to improve fiscal conditions, they can hamper economic growth in the short term. Reduced government spending reduces demand for goods and services, slowing economic activity.
The latter point is closely related to the current situation of many small companies, which usually rely on government procurement to increase production capacity and develop their business. Currently, too many small companies in the construction, service and manufacturing industries are not benefiting from government procurement amid increased demand. Either too few companies are benefiting from this procurement system, or overall spending is reduced.
Caribbean countries that have reached agreements with the IMF have had little success. These countries often have high levels of poverty and inequality. Cuts in social programs have disproportionately affected their populations, making the situation worse.
Supporters of austerity argue that by reducing government debt, resources are freed up for long-term economic growth, which could ultimately benefit society as a whole. However, research shows that austerity policies actually hinder economic growth in the short term. There is little evidence that these measures themselves bring direct social benefits; they often exacerbate social problems, especially for the most vulnerable.
While researchers are still evaluating the impact of the Bretton Woods institutions’ policy prescriptions, small and fragile states are bearing the brunt of austerity measures that threaten to stunt social progress. We must ask our governors the proverbial question: Is it worth it in the long run?
The Barbados Small Business Association (www.sba.bb) is the not-for-profit representative body for micro, small and medium enterprises (MSMEs).
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