Our worsening foreign reserves position

The accelerating loss of foreign reserves in 2017 is evidence of the failure of Government’s adjustment policies. Reserves, which fell $246 million in 2016, declined by $274 million in 2017. Since December 2012 the Central Bank has lost over $1 billion of foreign exchange.

The May 2017 Budget was intended to arrest the decline in foreign reserves, which had driven the level below the critical minimum of 12 weeks of imports at December 2016. The main adjustment tool was the NSRL, which was expected to provide $218 million in tax receipts. In fact, between April and December last year the NSRL yielded $97 million.

The NSRL has had an adverse effect on economic growth. In the absence of the tax, the Barbados economy might have achieved another 0.5 per cent on top of the one per cent growth rate actually attained. That represents a loss of about $50 million of national income.

The foreign exchange fee was introduced in the May Budget to complement the NSRL by slowing the outflow of foreign exchange. However, shortages of foreign exchange persisted, mainly because Government was obliged to repay $137 million of foreign debt. Foreign lenders were unwilling to roll over this debt because of Government’s poor credit rating.

The third element of adjustment in the May 2017 Budget was an across-the-board reduction of $82 million in Government expenditure. Actually, total expenditure increased by $57 million between April and December. The largest items of expenditure are wages, subsidies to state enterprises and interest on money Government borrowed to fund previous years’ deficits.

The Central Bank’s foreign reserves continue to be in free fall, with the failure of Government’s corrective strategy. The current costs of Government operations exceeded revenues by $288 million between April and December last year, and Central Bank’s lending to the public sector increased by $372 million during the year. Unless this gap is closed, foreign reserves will be exhausted, and Government will lose control of the exchange rate. The Barbados Sustainable Recovery Plan 2018 does not address this issue.

All is not yet lost. The first order of business must be to remove the emergency taxes that are strangling private business, and to cut public sector spending to eliminate the current account deficit.

In my paper, The Road to Prosperity, I have calculated that an immediate cut of ten per cent in subsidies, and redundancy of 1,500 public workers would suffice. That will halt the foreign reserves slide, and open the way for discussions with the IMF on a programme of financial support for a practical, well-designed strategy for public sector renewal. The full implementation of the seven-point strategy recommended in The Road to Prosperity will cure our economy of the twin illnesses of Government overspending and public sector ineptitude, and release the pent-up enterprise of our dynamic private sector. Barbadians must insist that our Government preserve our country’s reputation for taking tough short-term measures in the interest of future prosperity.

Note: Data used in this letter are from the Central Bank of Barbados Press Release, Jan 30, 2018.

Source: (Dr DeLisle Worrell is the former Governor of the Central Bank of Barbados)

3 Responses to Our worsening foreign reserves position

  1. Nathaniel Samuels March 3, 2018 at 3:48 pm

    My goodly Doctor
    Where was your professional opinion when it was needed? Was there not pending disaster with the Barbados economy? Why, if you gave information and it wasn’t heeded, didn’t you resign your position from the Central Bank?
    Your prescriptions might be good but we have to blame you for the position the country is in because you failed to act.

  2. Falernum March 4, 2018 at 10:56 am

    The bubble that is Barbados is about to burst. The notion that we can continue overvaluing ourselves is about to be proven a mistake. Barbados simply does not produce enough of anything or offer a consistent service quality to be competitive. We are not wonderful any longer We might have had those capabilities once in history, but we have squandered our chances of growth by not using enough strategic thinking. When assets such as land have devalued by 40% can anyone doubt that we are headed for the wall? We are hastening the debacle with our EXTRAVAGANT CONSUMER SPENDING AND GOVERNMENT’s HAPHAZARD FISCAL POLICIES !! Targeted selective taxation and a liberalization of foreign exchange deposits is now the best policy.

  3. Peter Thompson March 4, 2018 at 6:06 pm

    Nathaniel Samuels, I’m not a fan of Dr. Worrell’s, but as Central Bank Governor he controlled neither tax policy nor public sector employment policy. When he made suggestions to the Minister of Finance he was ignored and when he became insistent he was fired. Save your wrath for the Minister of Finance.


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