WILD COOT: I am not the minister
A STUDENT EMAILED ME and said he did not understand the last article that was published. He wanted me to explain it as if I was a professor, but I am not the minister.
I was really flattered because I did not know students were interested in reading what the Wild Coot says since the big-up people may not read it. Maybe the big-up people might read these articles and dismiss them just like they dismiss the opinions of the International Monetary Fund (IMF) and the international rating agencies.
What I mean, and I might be wrong, is that the Central Bank is being asked to undertake the liabilities of the Treasury. But that does not fool anybody. How?
The Central Bank has limited capacity to earn money (this is demonstrated by its annual losses). But it has overwhelming capacity to create money – called printing money. It can give overdrafts to the Government and can buy treasury bills from the Government, thus putting money into the hands of the Government at times when the Government is short of cash.
However, there is a limit that should control this. This law stipulates that facilitating the Government must be a percentage of the expected revenue of the country. Actually, the $300 million in ‘printed money’ bandied around is in excess of this limit.
Over and above the accusation of printed money, the Central Bank has been calling on hotels and restaurants to come in and borrow money so as to effect repairs and so on. Where is the Central Bank getting this money from to help? The Central Bank also holds the money borrowed from abroad on behalf of the Government. This is a possible source of money to be lent to these entities and to back the guarantees promised to entrepreneurs.
The public has been waiting for a long time for income tax and VAT refunds. I am sure that people and businesses will be anxious to be paid and will take the measures outlined in order to rescue their businesses. The measures are fraught with possible hitches.
There may be a delay in getting certification from the Revenue Authority, or problems might arise in securing approval from the Small Business Development Unit. Additionally, it depends on whether or not the commercial banks and credit unions will cooperate. Their cooperation will depend on the confidence that they will give to this arrangement.
This arrangement may well be out of order and should cause the banks and credit unions plenty of worry, especially in the light of the Central Bank’s ability to fund all of these liabilities. The overall risk to the various banks and credit unions must be considered.
Were I a banker in the system, I would be wary of committing my bank to this undertaking, seeing as how the Central Bank may already be over the legal limit for Government accommodation.
If we listen to our leaders, we would think that both the IMF and the international rating agencies have it in for Barbados and that whatever they say is wrong. However, balancing the scale of veracity of the entities, I leave it to Barbadians to pronounce on a verdict.
It does not make sense for the Central Bank to plough millions of dollars through repayment of refunds and so forth, and at the same time increase the volume of spending power by these promises. Would this not negatively affect the cherished reserves? One step forward, two steps backward.
Student, do not take it from me as I might be losing my marbles. I ask again, did the Central Bank receive the BDS$1 billion that appeared in the commercial bank’s balance sheet that fertilised the payment and remittance of a large amount of interest? That would come in handy now.
Young man, it is not to say that the Central Bank does not know better. Let me quote from a paper written by two of the big-ups in the bank on the question of domestic and external debt.
“When a country experiences simultaneous sharp increases in both domestic and external debt, economic growth is likely to be stunted because as Krugman (1988) argues, the servicing of rising public debt requires high rates which in turn discourages capital formation.
“When tax rates are not raised, the effect is the same because more often than not, such countries run high fiscal deficits and resort to unsustainable deficit financing. They lean heavily on Central Bank finance, leading to excessive money creation whose consequent inflationary pressures pushes down economic growth.” The language is plain.