BEHIND THE HEADLINES: To devalue or not?

TONY BEST,

Added 18 March 2017

behindtheheadlines-new

Teenagers at some of Barbados’ leading secondary schools half a century ago readily translated Virgil’s Aeneid.

Back then they cited “facilis descensus Averno” to warn that “the descent to hell is easy”.

Today’s eager beavers at the University of the West Indies at Cave Hill say it differently: “the road to hell is paved with good intentions”, while those pursuing holy orders at Codrington College would use the above aphorism to remind congregations that “hell is full of good intentions, Heaven is full of good works”.

But if that proverb speaks volumes about the consequences of wrong-headed public policies we endorse at election time, it isn’t far-fetched to ask: what leads a country to devalue its currency when people know that a strong dollar offers financial stability?

Ask most Bajans about devaluation of their birthplace’s currency, which is worth 50 United States cents and they would say: “Hell no, not in my lifetime”. Just look at what devaluation did in Jamaica or Guyana and they would say: “We aren’t going there”.

Actually, the devaluation issue was placed squarely on Barbados’ front burner in the past few days by several professionals and institutions, including two of the world’s leading credit rating agencies, Standard & Poor’s (S&P) and Moody’s Investor Service and by Charlie Skeete, a retired senior economic adviser at the Inter-American Development Bank (IDB), and Winston Cox, a former governor of Barbados’ Central Bank.

“Devaluation must be on the table” for consideration, said Skeete after S&P and Moody’s had downgraded Barbados’ credit rating and had complained about the factors which could force such dreaded action on the country.

Cox, who served on the IDB’s executive board, rejects devaluation out of hand, insisting it isn’t a cure for Barbados’ fiscal ills.

After all, it wouldn’t address the problems the country faces as Bajans realise the dire economic and financial predicament their birthplace must solve, he said.

“Devaluation would not reduce Government spending,” added Cox. “Devaluation doesn’t address the possible credit default mentioned by Moody’s and it will lead to inflation which in turn would lead to higher Government spending.”

For the most part, Skeete agrees with Cox but adds a caveat: devaluation is something that’s forced on you after a country has pursued incorrect policies. Devaluation then becomes Hobson’s choice, which is no choice at all.

The wide deficit in Barbados; dwindling foreign reserves, servicing a mountain of debt that now stands at 111 per cent of the country’s gross domestic product; what was described as the “persistent decline in reserves”; and the decision of commercial banks to reduce “their exposure to the sovereign” debt are on the list of factors that put pressure on the currency.

“We consider the policy of ongoing dependence on Central Bank financing at odds with the Government’s goal of defending Barbados’ long-standing currency peg with the US dollar,” S&P complained.

“It significantly curtails the Central Bank’s ability to act as a lender of last resort in the financial system.”

In other words, the Government itself was undermining the nation’s decades old stance of defending the dollar or, as Virgil warned, paving the road to hell.

S&P went further. “The Central Bank’s ongoing financing of the Government’s deficit impairs the credibility of monetary policy,” it insisted.

Minister of Finance Chris Sinckler has unwisely embraced the policy and when Dr DeLisle Worrell, the former Central Bank governor, eventually gathered up the intestinal fortitude to object to it, he lost his job in a very highly publicised disagreement with his boss.

Skeete told BARBADOS BUSINESS AUTHORITY after the S&P and Moody’s downgrades that Barbados’ policies brought it to the current situation.

“You cannot have a fiscal deficit that is a multiple of the rate of economic growth and then not face the prospect of devaluation,” he said. “In addition, you cannot print money at the pace at which we were printing it. I believe, I don’t know this for sure, that when DeLisle couldn’t get the Minister of Finance to understand that he was staring a devaluation in the face, he had no choice” but to state his disagreement with the policy.

Clearly, with an election around the corner, the administration isn’t going to commit hara-kiri, an ancient form of ritual suicide, by rationalising state enterprises through mergers or outright privatisation.

With more than 60 of them relying on the Government for their financial lifeblood, taking action would mean substantial job losses and almost certain defeat at the polls whenever elections are called within the next year.

Undoubtedly, an eight per cent fiscal deficit; high wages; a large import bill; anaemic economic growth of less than two per cent; and  debt obligations which requires 27 per cent of Government revenues to service are contributing factors to the quandary Barbados must confront.

“There is nothing simple about devaluation. There is nothing simple about monetary economics,” Skeete insisted.

“There are good economists out there who are innocent of the subtleties of monetary economics.”

That brings us to the politics of the situation.

Both S&P and Moody’s don’t expect the Stuart administration to act decisively in the remaining months of its current second term that would begin to change Barbados’ financial fortunes but which would dent the Government’s financial management credibility even more.

What a mess.

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