WHAT MATTERS MOST: Central Bank losses too much
NO EXPLANATION has been forthcoming with regard to the continued poor profit performance of the Central Bank of Barbados, which has now accumulated $22 million in losses between 2009 and 2014. However, there is evidence of a proposal to downsize the staff of the bank by as much as one-third of its current size.
While it is understood that “the bank is a risk averse institution and accordingly, investments are not held to maximise earnings but to maintain economic stability and government policy”, there is obviously a major cost to it making sustained losses. Between 1973 and 2008, the Central Bank accumulated profits of $276.7 million or an annual average of $7.7 million. In these 36 years, there was one loss of $4.5 million in 1989.
The recent losses of the bank cannot constitute an aberration since they have not only persisted but are increasing in size. Furthermore, the financial history of the bank is there to be analysed. But the concerns at the bank are not restricted to its finances. This was an institution that was held in the highest esteem by the people of Barbados and beyond. The reasons for its non-financial decline are less tractable.
The most compelling evidence of the need to be concerned about its financial status is seen in the Government’s decision to put capital into the bank in 2014. According to the 2014 annual report, “in accordance with the Central Bank of Barbados Act, the minister of finance transferred to the bank non-negotiable, non-interest bearing securities of $7.8 million from Government in order to preserve the bank’s capital from impairment”. This is really just a book entry as the Government is currently relying on the same bank to finance its excess spending.
Since the inception of the bank in 1972, the Barbados economy has had challenges caused by external imbalances or shortage of foreign exchange in 1976-77 and 1985-88 and those created by fiscal problems in 1981-82 and 1990-91. The most recent economic challenge, which became evident in 2008, cannot claim to have been caused by a shortage of foreign exchange or a fiscal problem in the initial stages.
The response of the Government to the reduction in growth prospects triggered the fiscal crisis that remains the elephant in the room to this day. It is a period to be regretted in the economic history of this country that has so far stretched over eight years with no tangible evidence of improvement.
Research conducted by the bank shows that prior to 2008, “Barbados usually maintained small public sector deficits, the exceptions being for fiscal years 1976-77, 1977-78, 1981-82, 1985-86, 1987-88 and 1990-91. It is significant that each of these deviations from the norm occurred in the year preceding, the year of or the year following an election. Premised on the notion that a fiscal stimulus will stimulate the economy by raising economic activity and increasing employment, these lapses in discipline suggest that inadequate attention was paid to short-term financing constraints or long-term macroeconomic implications”.
Since 2008, Barbados has maintained massive fiscal deficits. The economy is however smaller. The unemployment rate has almost doubled. The foreign reserves are less adequate. The Central Bank has had to print hundreds of millions of dollars, while making bigger losses. Clearly the recent massive fiscal deficits did not stimulate the economy. They certainly have done severe damage to the economic well-being of Barbadians and their institutions.
The Central Bank is the one in focus in this article. It is the one that accumulated profits of $276.7 million in its first 36 years and losses of $22 million in its last seven years. Given how the Government speaks about the private sector in relation to downsizing, it is amazing that the governor of the bank was even allowed to speak to the issue of downsizing of the bank staff in the circumstances. This is the same institution that was allowed to give $10 million to CLICO that has been repaid, but coincided with the year of its largest loss in 2009.
When the Central Bank makes a loss, it stops the Government from receiving non-tax revenue. When the losses accumulate, it causes the Government to find money that it does not have to inject as capital into the bank. But what is lost on the Government and the leadership of the bank is that there is ultimately a human loss that results from poor management. Such is the circumstance now confronting the longstanding staff of the once revered institution.
Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected]