Printing of money a concern
The pending Ministerial Statement by the Minister of Finance must deal with the printing of money at the Central Bank as a matter of urgency.
It is what matters most at this time, once the Central Bank started to lose foreign reserves rapidly since April of this year.
Prior to this period, it was said that the economy was stable and the foreign reserves were adequate. There was confusion over whether the economy needed a $600 million stimulus or a $400 million programme of austerity. It was indicative of the state of confusion among the economic advisers.
At this time, there is a need for stimulus on the capital account and austerity on the current account that is balanced, since growth is an essential ingredient of any economic recipe for Barbados.
The opportunity for all-out stimulus went as early as 2010, but growth was and is still the key. These circumstances from a policy perspective had never confronted Barbados and the notion that a simple fiscal adjustment was needed to protect the foreign reserves was always flawed theoretically and practically. It is now believed that the new need is a foreign loan, which has to and will come, but at a high price.
In the two previous recessions of 1981 and 1991, “large fiscal deficits coincided with absolute declines in excess liquidity in the financial system . . . and significant interest rate hikes and increases in reserve requirements were implemented to curb the growth in private sector credit”.
In this recession, none of the above coincided with the large fiscal deficits. For the last five years, Barbados has been experiencing a fiscal crisis of a kind never seen, even in the most difficult of times in the early 1990s. The new phenomenon of having to borrow to pay civil servants has taken root.
Every effort is still being made to accommodate the excessive spending of Government by men who previously castigated the Erskine Sandiford administration at the start of the 1990s.
For the recession period of 1990-1992, the Central Bank held an average of $69.3 million in treasury bills. The holding of treasury bills by the bank is the secondary source used to print money to help finance the Government’s fiscal deficit and the intent of the law was never for the amount to be close or exceed the primary source which is Government’s overdraft facility with the bank.
The latter requires parliamentary approval and is set at ten per cent of the forecast Government revenue in a given fiscal year. If the forecast is $2.5 billion, then the limit is $250 million.
Given the bank’s small holding of treasury bills for the period 1990-1992, the Sandiford administration broke the limit on its primary source of printing money, the overdraft facility with the Central Bank, which triggered a major debate in Parliament. The bank is now holding a whopping $372 million in treasury bills, the secondary source of printing money, without having to go to Parliament for approval. It was never the intent of legislation for the board of the Central Bank, chaired by the governor, to have such power as to “endanger monetary stability”.
If “the minister is of the opinion that the policies being pursued by the bank are not adequate for, or conducive to, the achievement of the purposes of the bank as set out in Section 5, the minister may issue a written order to the bank determining the policy to be adopted by the bank, and the bank shall thereupon give effect to that policy while the other remains in operation”.
As far back as September 2011, the holding of treasury bills was increased to $250 million which was to return to its original limit of $120 million by March 2012. As stated above, the amount is now at $372 million and it is inconceivable that experienced economic advisers are ad idem with the minister on the unlimited amount of money being printed by the Central Bank to finance Government’s fiscal deficit.
In the circumstances, “the order acknowledging the Government’s assumption of responsibility for the policy shall be published forthwith in the Official Gazette”.
Furthermore, “the minister shall cause to be laid before Parliament, as soon as may be after the minister has informed the bank of the policy determined, a copy of the order determining the policy, and statements by the minister and the bank in respect of the matter which occasioned the issuance of the order”.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected]