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Central Bank warns of exchange rate dangers posed by deficit

The Central Bank of Barbados today gave its strongest hint yet of a possible currency devaluation if Government fails to control the country’s massive fiscal deficit.

In a statement to announce a panel discussion on the economy on September 8, the bank warned that in order to continue to safeguard the current exchange rate of BDS$2 to US$1, a smaller deficit was critical.

“On the downside, we have to bolster our levels of productivity and reduce our fiscal deficit either by raising more revenues or reducing expenditure. A smaller deficit would stabilize our foreign reserves, safeguard the peg and arrest the growth of debt so that it falls below the growth of GDP [gross domestic product],” the bank said.

Professor of Economics at the Cave Hill Campus of the University of the West Indies (UWI) Winston Moore was hesitant to mention devaluation.

However, he told Barbados TODAY this afternoon that there was a direct link between the island’s fiscal deficit and the exchange rate.

“Essentially, if you are supposed to maintain a peg, we have to maintain enough foreign exchange reserves to defend the peg . . . and what defend the peg means, is that whenever one of your citizens, businesses, whatever the case may be, wants to convert two Bajan dollars into one US dollar . . . the Central Bank has enough reserves to facilitate that conversion,” Moore explained.

The UWI economist is one of the panellists for next week’s discussion which will be carried on local radio and television and streamed on the bank’s website.

“If you think about one of the reasons the deficit is so high right now, it is that  . . . lots of money [is] spent on transfers, subsidies, goods and services and so on. Essentially all of those have some foreign exchange component,” the top university economist told Barbados TODAY, adding that when Government’s expenditure budget was large there was a greater demand for foreign exchange.

Like the Central Bank, the economics professor advised the Freundel Stuart administration to reduce the demand for foreign exchange if it wanted to protect the peg of the Barbados dollar with the US currency. He said while Barbados’ foreign reserves of 13 weeks import cover were presently above the international benchmark of 12 weeks, a persistent deficit problem could jeopardize that position.

“If you have a fiscal problem, you know that at some point in time, the reserves would get pretty close to that international benchmark. So you got to make sure that you make the adjustment, sooner rather than later,” he warned.

Meanwhile, a noted economist who preferred not to be identified, told Barbados TODAY it was “silly” for the authorities to publicly hint at a possible threat to the Barbados dollar.

“To me it is such a silly thing for a country to do. We have achieved so much as a country and it makes no sense as educated individuals in a country to be throwing around a term like that. If you go in town and you ask any Barbadian how much money they want for one US dollar, everyone would say two Barbados dollars. No one would say three, four . . . so everyone believes in the peg. So why would you want to do anything to cause or put that peg in trouble? I think it is a little bit silly on both sides,” the leading economist emphasized. However, political scientist Peter Wickham disagreed.

Winston Moore & Peter Wickham

Winston Moore & Peter Wickham

“I don’t know that it is a significant issue though. It could very well be coincidental [being mentioned by the bank]. I honestly would not read anything into it. I mean it is a public discussion and the defence of the peg is something that has been mentioned repeatedly of late as a key part of the strategy of the DLP Government. I don’t think there is any significance to it one way or the other,” Wickham told Barbados TODAY.  The respected Caribbean pollster also gave Government a passing grade on the issue of the peg.

“It is not anything different to what the Minister of Finance was speaking about the defence of the peg as a priority,” he said.

9 Responses to Devaluation?

  1. Rawle Maycock
    Rawle Maycock September 3, 2016 at 3:13 am

    You guys and some of the stupid people that are allowed to have a say on the affairs of Barbados are sick! Go back to some of naked departure talkshow where I participated, and you would’ve hear the anologies,of the posibilities of a Barbados devaluation

    • Sunshine Sunny Shine September 3, 2016 at 5:41 am

      What makes your assertions better than what these men are asserting? If you have proof about Barbados’ possible devaluation of the dollar, why would one need to go to a talk show to find out what was said, especially one as controversial as naked departures? State your facts, provide your evidence, and support your claims. The Barbados dollar was the subject of much devaluation talk over many years. It has not suffered that fate thus if praised is deserved it must be given. Since the two political parties are responsible for the governance of Barbados, there must be given kudos for keeping the peg intact in spite of how despicable they have become over time. Do you understand economics that you are beating yourself on the chest and saying look to me, I am a talk show host, go to my site and listen to a professional discussion on Barbados and devaluation? Give Jack his jacket when he deserves it and rip it off of him when it becomes necessary.

  2. Rawle Maycock
    Rawle Maycock September 3, 2016 at 3:13 am
  3. michael parker September 3, 2016 at 3:28 am

    how would this effect tourist rates, ie does this mean more for your pound/dollar.

  4. jrsmith September 3, 2016 at 4:55 am

    Our father of independence must be rolling around in his grave , he passed leaving behind a country bajans were very proud of , a little island uses to punch above its weight, a little (England) a diamond , a paradise .. this at the moment is what the politicians has done to our country they are preparing us for the devaluation of our (Dollar)..
    They have given Barbados away to the foreigners at what price we don’t know , they want to make us a (Republic) as like the ones across the sea, we are now at the 50th year cross road of so call (INDEPENDENCE .. DEPENDENCY) half of our country doesn’t have water running from they taps, half of our country waking up in darkness , had not the secondary system of trans port ( Mini Buses) bajans would have to walk to work if they have jobs.

    All the so call educators have stood by supporting the politicians who has given our country away and done nothing, but talk crap, as a bajan I am scared of what’s to come…

  5. Hal Austin September 3, 2016 at 5:43 am

    Since 2008/9 I have been calling for a devaluation of the Barbadian dollar in my Notes From a Native Son, fixing against a basket of currencies and commodities, reducing the foreign reserves from Bds$1bn to about $500000 and spend that money wisely.
    $50m of that saving could be used to establish a balance sheet post office bank, using the present 18 post offices to take deposits and pay withdrawals.
    The bank could enter a contract with a bigger bank to access the international payments system and avoid US bullying by not doing business with companies or individuals based in the US.
    With a devalued currency imports will become more expensive and exports (including tourism) cheaper, thereby rebalancing our current account deficit.
    Even Chris Sinckler can understand.
    Fixing with the Greenback was sound economics in the 1970s, when the central bank was founded and the gold standard had collapsed. Since the 1980s, and in particular since 2008/9, economics have changed – both theory and policy, except of course in Barbados.

    • Donild Trimp September 3, 2016 at 12:59 pm

      I was with you until you wrote the following

      “and avoid US bullying by not doing business with companies or individuals based in the US.”

      Think hard about that statement because it is nonsense.

      Do you really believe Barbados can implement a policy to curtail doing business with companies or individuals based in the US?

      You are a dreamer.

  6. Phil September 3, 2016 at 10:38 am

    FACT: Guyana whose ex rate was 1:1 against the USD, nationalized all its privately owned businesses, drove out the outside investors, their deficit rose to 167% of GDP They went to the IMF, and was forced to devalue. their ex rate is now Guy $ 206.00 to one USD. Jamaica did the same. their deficit rose to165% of their GDP. same thing happened and their ex rate is now Jam$ 129.00 to One USD. and get this… they both printed vast amount of their local currency just before they devalued. I’ explain that further down. Now, another FACT: Barbados’ deficit is currently 163% of its GDP. Isn’t it coincidental that Barbados is printing a vast amount of its local paper currency? Why? Your guess is as good as mine. Now let me explain.. It is common practice that when a dollar is devalued, it will obviously require more of that local currency to purchase especially imported items. It will necessarily follow that more local dollars will have to be in circulation and even more to purchase accepted foreign currency. USD, EURO D, Can $ and British Pound Sterling. I challenge anyone to debunk what I just wrote WITH GENUINE PROOF!

  7. Hal Austin September 3, 2016 at 12:40 pm


    Devaluation is not forever. Currencies can be revalued. At the end of the second World War Britain had a 250 per cent current account deficit, by 1960 it was 160 per cent.
    In those days, the £sterling was worth Bds$4.80. The crisis of 1967 led to a further devaluation, along with the creation of a prices and incomes board.
    The point is economies ebbed and flowed under boom and bust economics; that led to central banks targeting inflation twenty years ago which worked until 2008/9.
    Guyana is a unique case. A nation bigger han England with a population of about 750000 people. The population of Greater London of eight million.
    Guyana is big enough to house the entire six million population of Caricom in Greater Georgetown.
    Further, the UK has no natural resources, compared with Guyana which has gold, rice, timber, and lots more. Guyana’s problem is the racialising of everything, which it is now exporting to every other Caribbean island.
    What Guyana, and the rest of the English-speaking Caribbean, need is good government, rather than hustlers using politics to get rich.


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