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Is Barbados facing a foreign reserves crisis?
Concerns about the foreign reserves have been raised on this page before. In 2014, I asked: How important are Barbados’ foreign reserves and how much is enough?
The obvious answer was that as a small very open economy with a fixed exchange rate pegged against the United States dollar, and a country that imports the majority of what it consumes, foreign exchange is crucial.
In conclusion, I also referred to a then ominous warning from credit rating agency Moody’s.
Following its then latest downgrade, Moody’s warned that it “could downgrade the rating further if international reserves continue to decline and/or the Government continues to rely heavily on short-term debt and Central Bank financing”.
Last week’s 2016 review and 2017 forecast issued by the Central Bank warrants a return to this important issue.
This is primarily based on the announcement from Governor Dr DeLisle Worrell that “the Central Bank’s stock of international reserves at the end of December stood at$681 million, equivalent to 10.3 weeks of imports”, which is below the widely accepted 12 weeks of imports threshold.
The foreign reserves in stock at the Central Bank at the end of last year is the lowest in at least ten years and is about $246 million below the 2015 figure, which at the time was also the lowest in at least ten years.
It is clear from Worrell’s comments last Tuesday, and Prime Minister Freundel Stuart’s lunchtime address to the Barbados Chamber of Commerce and Industry the next day, that the authorities have pinned their hopes for improvement on private inflows and divestment of state assets.
Worrell said that at the end of December foreign exchange inflows of $250 million were pending.
Obviously, that number, if and when it is hand, cannot then be tagged onto the 2016 numbers.
If it were, the final figure would be more than $1 billion.
Even so, the nature of inflows in recent times is such that Barbados is not earning as much as it did before hard times hit in 2008.
Depending on foreign exchange from the sale of state assets is also not a sustainable policy.
The seriousness of the foreign exchange challenge facing Barbados is illustrated by the fact that it is facing such challenges at a time when it is saving a large amount of foreign exchange on fuel imports, as oil prices have been low for the last few years.
Add a host of other factors to the equation, including the Central Bank statement that “Government’s current account deficit for April to December 2016 is estimated at $510 million, a deterioration of $31 million on the previous year”, and the problem looms even larger.
Further, Barbados having a credit rating that is below investment grade means borrowing money from overseas is a no-no, and depending on the National Insurance Scheme and the Central Bank’s printing of money is not a viable option.
In the last decade, Barbados’ foreign exchange reserves have fallen from $1.54 billion (2007 – 20.9 weeks of import cover) to just $681.1 million (2016 – 10.3 weeks of imports).
While the problem is larger given wider economic and fiscal challenges, declining reserves are nothing new for Barbados.
In 2006, Central Bank economists Roland Craigwell, Darrin Downes, and Kevin Greenidge produced a paper titled The Demand For International Reserves In Barbados: Empirical Evidence For The Past Three Decades.
Their research concluded that over the previous 30 years, “the cumulative growth in the net international reserves (NIR) [was] been fairly impressive.
At the end of 2005, the NIR totalled nearly $1.3 billion, compared to $82 million at the end of 1975, representing an average annual increase of around 17 per cent or about $40 million per year.
They said the NIR rose sharply between 1993 and the early part of the new millennium, a period characterised as Barbados longest phase of economic expansion.
However, they added: “It is important to note, however, that the growth performance of the NIR in those years was bolstered by external borrowings and divestment proceeds. In anticipation of the harsh realities of a liberalised economic environment and the uncertainties created by the increasing global geo-political tensions, Government prudently sought to boost the NIR to provide a buffer against such exogenous shocks.”
The economists said the reserves “has come under severe pressure in recent years, registering a decline of $43.8 million on average each year since 2002”. They attributed this to “sluggish reserve accumulation include strong import growth, which has been fuelled by a surge in investment spending by the public and private sectors, cross-border investment and lacklustre export activity”.
And in a point made ten years ago, but which is relevant to current circumstances, they cautioned that “reserve holdings were influenced negatively by Central Bank lending to the central Government”. (SC)