Defining the foreign reserves
During the Budget debate last week, the Minister of Finance went to great lengths to demonstrate that he is in charge of the country’s finances.
However, in his attempt to underscore the point, he made a rookie mistake which perhaps may be lost on some people but not to those who took the time to listen to him carefully.
I must admit that it is indeed good news that it has only taken him six years to learn the definition of the net international reserves. For that, we must give thanks and praises. There may be hope yet but don’t hold your breath.
I quote directly from the Minister here. “Indeed, Sir, I believe that we have to be very wary of people who seem so hell bent on creating confusion in Barbados, especially on this issue of foreign reserves, that I understand their next false argument and scaremongering tactic is to suggest that by their calculations, Barbados is in a worst position concerning foreign reserves today than we were in 1991.”
“And how are we to imagine this unbelievable conclusion? By their ridiculous argumentation that the Central Bank of Barbados (CBB) is calculating foreign Sinking Fund Assets and Special Drawing Rights (SDRs) in the computation of the reserves and this should not be done because these are earmarked assets designated for specific purposes.”
He went on later to state: “The truth is, Sir, that from the very early days of foreign exchange reserves calculation, management and monitoring, authorities across the world, including here in Barbados, calculated Sinking Fund and SDR assets as part of the country’s international reserves. This is so because they are part of your reserves and it is also so because the country is free to, at any time it desires and sees the need to do so, draw down those resources to assist in the orderly management of its external payments.”
The minister failed to make connection with the fact that sinking funds referred to in the reserves definition cannot be used for any other purpose than to repay our external debt principal. Simply put, imagine you are part of a meeting turn, and the timing or maturity of your turn coincides with your household’s Back-to-School preparations.
As you are setting aside the little berry every week/fortnight/month, these sums can be regarded as part of your household’s total reserve (in much the same light as the country’s reserves) which will also include any other monies you have in a bank or credit union and any other cash, shares or securities in your possession. Indeed, these are your assets which are entirely at your disposal.
So, to apply Minister Sinckler’s logic, you the reader could decide to use your meeting turn to pay for a Kadooment costume instead of its original purpose – namely, financing your Back-to-School preparations — and expect that your children, grandchildren and/or nieces and nephews would have an orderly transition back to school.
However, it became quite clear to me thereafter that his demonstration of learning was a clear case of regurgitation of perhaps a Google search performed that afternoon and not a fundamental understanding of the said definition. I came to this conclusion because he went on to further state that “There are no conditions at present that would lead us to conclude that we need to reverse that stance. Equally, there is nothing in the current or medium to longer term trends to even remotely suggest that any adjustment to the official exchange rate in Barbados is required.”
The Minister’s statement was clearly at odds with that of the Governor of the Central Bank in his June 2016 press release that measures needed to be taken to restrict foreign exchange outflows. I can think of nothing else that could create more confusion in foreign exchange markets than when there is public disagreement between policymakers, who have both expressed the view that Barbados has to monitor its foreign exchange levels on a daily basis.
If we were to apply the same principle to our individual health, the only time we as individuals would need to be monitored by a doctor on a daily basis would be if we were in intensive care. We all know there is a difference between routine visits, being admitted to the general ward versus being on intensive care. This brings me to the Central Bank and its printing on money along with observations by the IMF.
In its February 2013 statement at the conclusion of the IMF Article IV consultation mission, the following was stated: “Under a new interest rate policy framework in place since April, the Central Bank of Barbados (CBB) has increased its holdings of Treasury bills in 2013, resulting in a decline in short-term yields. Direct financing of the government, which is exacerbating pressures on the balance of payments, should be reversed and short-term interest rates allowed to rise to levels more consistent with safeguarding the exchange rate anchor. This would demonstrate that monetary policy is supportive of the currency peg.”
In February 2014, the IMF Executive Board noted “Directors noted the authorities’ commitment to the nominal exchange rate anchor. They encouraged the central bank to reorient monetary policy towards supporting the exchange rate peg by curtailing direct financing of the government, and allowing domestic short-term interest rates to rise to a level that reflects a credible country risk premium.”
Before I become a candidate for the Barbados Labour Party in 2015, I was invited to provide an analysis of the 2013 IMF Article IV Consultation in February 2014 (https://www.youtube.com/watch?v=Ri6OfYP9Xqk). I was able to highlight for those who attended the state of the economy and the consequence that printing money would have on the economic fortunes in Barbados.
Since then, the Minister of Finance, acting on behalf of the Government of Barbados, has refused to publicly release any further IMF Article IV-related Staff Reports presumably because he fears me having a conversation with Barbadians about exactly what it is store. I think it is quite petty because markets require information upon which to base their decisions, and without it, rumour and innuendo will fill the void.
Fundamentally, the issue isn’t only the release of the information but a complete change in the both the monetary and fiscal policies being pursued by the Central Bank of Barbados and the Ministry of Finance.
(Ryan Straughn is a UWI Cave Hill and Central Bank of Barbados-trained economist. He is an endorsed BLP candidate to contest the next