Every economy is demand driven. In other words the level of aggregate demand in the economy determines the amount of economic activity in the country. The term aggregate demand is “the total demand for goods and services in the domestic economy. It is the amount of goods and services in the economy that will be purchased at all possible price levels.”(INVESTOPEDIA.com).
Therefore, when aggregate demand falls persistently over a prolonged period of time, the country plunges into recession. This results in a decline in the levels of investment and unemployment rises at an alarming rate. The Federation of St. Kitts and Nevis has been in recession since 2008. This has been evident by the decline in activities of various sectors of the economy notably tourism, retail/wholesale and construction (ECCB Financial and Economic Review 2011).
The National Debt which escalated to EC$3 billion at the end of 2011 was accumulated as a result of reckless spending that was used to fuel growth in the economy. This resulted in a debt service burden that proved to be so crippling that it consumed 47 percent of Recurrent Revenue. Coupled with this, personal emoluments pegged at around 30 percent of recurrent revenue, forced the Federal Government to drastically reduce its investment in the social services, education and health sectors of the economy. During this period, the debt service ratio rose to 200 percent of Gross Domestic Product (GDP).
It must be borne in mind that the internationally sustainable level of this ratio should be 60 percent. The Caribbean Development Bank in 2007 stated that “the high level of debt service is an undue burden on recurrent revenue and impedes the growth of the economy.” Hence, the Federation had no choice but to reach out to the IMF for assistance. This was the beginning of the IMF recommended structure adjustment (the austerity measures).
They included “hair cut” by which investors were expected to accept a reduction in their investment and a subsequent fall in the return on their investment (ROI). The ramifications of this program are both short-term and long-term. It has severely hamstrung the Government’s ability to raise finance on the open market since potential investors will be inclined to react with skepticism and nervousness. The Government has no fiscal space by which to stimulate the economy, unless they are able to borrow, aggregate demand will continue to fall.
The land for debt swap with the National Bank, another of the IMF recommendations, must be managed in a responsible manner, free of the hype and political rhetoric that is now surrounding it. The fact that the land has now becomes the property of the Bank, one of the major institutions of this country, ought to force the Bank to take a new and creative look, as to how it can use this opportunity to foster growth within the economy.
It should be remembered that land in and of itself has no intrinsic value. It is how the land is utilized, and made productive, that counts. It is about time that the political leadership of the Federation, on both sides of the political divide, begin to educate their constituents as to the true financial state of affairs of the country in a bid to unify them to deal with the difficulties that are coming down the pike. They must be told in a clarion voice that only they can save themselves.
They must be told to reach within themselves as a people if they are to withstand and repel the ravages of the marauding bands of foreigners, including economic citizens, whom they are told to fear. There is no room for xenophobia in today’s world. Let the people of this Federation combine and harness their resources, let them reach out to the Diaspora if need be, but let them find some way of utilizing the land that is now with the Bank, before the people from Dubai and that part of the come. This is the kind of action that will give fillip to the economy and stimulate aggregate demand.
When will this political Rhetoric stop? When will our politicians become more responsible instead of looking for every opportunity to spin the truth for political leverage, even at the expense of their constituents. The boost that the banks in the Federation are very liquid is nonsense. Banks make their money from loans not their liquidity. The fact that they are so liquid means that they are not originating sufficient loans, which means that they are losing revenue for they have to pay interest on money they hold for their depositors.
The banks must find innovative ways of getting that money out in the real economy, which will stimulate aggregate demand by making loans to the productive sectors of the economy at realistic rates of interest. This has not been forthcoming and the Banks have not been encouraged or directed in that direction through any monetary policy objective either from the Eastern Caribbean Central Bank (ECCB), or any Government initiative.
Austerity measures no longer work, as is evidenced by the social turmoil across the European Common Market. The austerity measures recommend by the IMF has further reduced aggregate demand. By emphasizing the reduction in Government spending and instituting spending cuts wherever possible the IMF has virtually brought the economy to its knees. As a result the Government finds itself in a dilemma. The income stream from taxes is dwindling, as a result of falling aggregate demand, and yet the Government is told to broaden its tax base.
The Government is therefore expected to introduce new taxes or raise existing ones in the ensuing budget. This will further reduce aggregate demand and increase the level of unemployment in this country.
It is therefore concomitant on the Government to become proactive in designing a development strategy and policy which will be applicable to a small island state such St. Kitts and Nevis bearing in mind, that classic economic theories will not always work, given our rather unique situation. The Federation has a small population with a narrow tax base. The cost and maintenance of its infrastructure such as an international airport and sea ports are usually spread over larger populations in developed countries. It is time the Government beginning to think outside the box.
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