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    September 22

  • 08:06 AM

THE ISSUE: Insufficient reserves could spell disaster

SHAWN CUMBERBATCH, shawncumberbatch@nationnews.com

Added 10 August 2016

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Should the state of Barbados’ foreign currency reserves be cause for concern?

Eyebrows were raised recently when Central Bank Governor Dr DeLisle Worrell announced that measures to reduce the amount of foreign exchange leaving Barbados were forthcoming.

This followed the release of the Central Bank’s half-year economic report, which showed a $43 million fall in the international reserves “to $884 million, equivalent to 13.6 weeks of imports of goods and services”.

The bank said this compared with “the $84 million decline for the same period last year”.

Worrell said the aim was to have foreign reserves of $938 million by year-end, “an increase of about $54 million over the course of 2016”.

To achieve this, the economist explained, Barbados would depend on about $150 million in private inflows for “known investment projects” ($55 million) and net foreign financing for the public sector (about $99 million).

Also, “foreign exchange outflows will be tightened by the measures to be announced in the forthcoming budget” of Minister of Finance and Economic Affairs Chris Sinckler.

It is old news that Worrell’s announcement about tightening of access to foreign exchange raised concern within the business community about the likely reduced access to foreign exchange once such a policy is implemented.

In response, Sinckler was quoted as saying the policy had more to do with Government’s own access to foreign exchange and not the private sector’s ability to source it.

He is expected to give details in his upcoming Budget presentation.

It appears that even as they got some much needed breathing room from the fact that Barbados is spending less foreign exchange on oil imports, the authorities have been hemmed in partly by the fact that the island is also earning less foreign exchange.

To illustrate the challenge, latest Central Bank figures show that virtually the same amount of foreign that is coming into Barbados is flowing out.

Between January and June last year about $3 billion in foreign exchange flowed out of Barbados, while during the same period this year the outflow increased by about $84 million.

No breakdown of the variety of ways the foreign exchange left Barbados was given.

In terms of inflows, $2.9 billion in foreign currency flowed into Barbados in the first six months of last year, versus more than $3 billion for the same period this year.

The majority of this came from the tourism sector, with travel receipts numbering more than $1 billion between January and June of 2015 and this year.

Outside of tourism, so far this year major foreign currency inflows have come via private financial inflows ($588.4 million), merchandise exports ($484.5 million), other services ($482 million), income ($265 million), public financial inflows ($83.6 million), and transfers ($70.1 million).

While last year there was a category titled “unidentified inflows”, which accounted for $99 million, there was no such additional amount of foreign currency entering Barbados this year.

Since Barbados’ currency is pegged at a fixed two to one rate against the United States dollar, it is important for Barbados to have a healthy stock of foreign exchange always in hand.

But just how much is enough? Economist Professor Winston Moore examined the issue three years ago. Moore’s analysis was released in November 2013 and at that time he said based on the usual benchmarks the 13.3 weeks of import cover “appears to be adequate”.

However, the economist said Barbados’ various vulnerabilities, including its small size and open economy, meant it was not that simple an issue.

“In short, it is important that we monitor the level of international reserves in countries such as Barbados. It is equally important that we independently determine what level is the minimum that we need to comfortably meet our obligations,” he said.

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