BEHIND THE HEADLINES: Relax, Dr Worrell, you are not alone
As Barbados inches towards Tuesday’s Budget Day consider some newspaper headlines.
“Danger In Central Bank Note Printing” reported the Nation almost 18 months ago when it told readers that former Prime Minister, Owen Arthur, had demanded that the leading financial institution end its policy of printing money to finance the administration’s gaping fiscal deficit.
“Continued printing of money on this scale to meet Government’s financial requirements will constitute an act of economic vandalism and must be brought to an end,” warned Arthur. In its first quarter 2015 report in March of that year, the bank had provided $341 million in financing to the Government.
Fast forward to April this year and a fresh headline harped back to the idea of vandalism. Addressing parliament during the 2016-17 Estimates debate, Arthur argued for a change in policy, insisting “the Central Bank is in a position where it must know that the printing of Barbadian dollars on a large scale is the fastest way you can lead to the devaluation of the dollar”.
Arthur had some company. Leader of the Opposition Mia Mottley complained loudly that the Central Bank was printing money to the detriment of the economy and to the private sector.
Looking on from his Florida home, Sir Courtney Blackman, the first Governor of the Central Bank who later became Barbados’ Ambassador in Washington, didn’t take sides in the dispute over monetary policy but offered a reaction.
“In certain circumstances, it is quite appropriate and indeed may be necessary for any central bank to create money in order to restore financial stability,” he said. “There is nothing heinous about it. As a matter of fact, it is normal for a central bank to create money for such a purpose.”
However, that statement raises the question: is the Central Bank endangering the exchange rate?
We are going to hear quite a lot about that after Minister of Finance Chris Sinckler lays out his Budget and analysis of the state of the country’s finances. He is bound to comment on the foreign reserves; the size of the fiscal deficit; interest rates, taxes; the strength of the Barbados dollar; and yes, the financing of the deficit and the Central Bank’s role in it. The Opposition is bound to react negatively to what he says.
That’s why no one should be caught off guard when, not if, the Central Bank becomes a major focus of attention during the debate.
But if there is a consolation in all of this for Dr DeLisle Worrell, the bank’s governor, it is that his peers in different parts of the world are experiencing essentially the same thing. From the Bank of England and its counterparts across Europe and Asia to the United States (US) Federal Reserve and the Bank of Canada the story is the same: central bankers in rich nations, emerging economies and developing countries are on the hot seat, criticised for interest rate actions, austerity, the strength of foreign currencies, you name them.
Ever since the US Great Recession in 2007-2008 almost wrecked Wall Street before jumping across the Atlantic to the United Kingdom, central bankers have been getting hit from all sides for their responses to the crisis.
“Central banks have taken the brunt of supporting the global economy, ever since 2009, the last time that governments made any concerted attempt to indulge in a fiscal status,” stated The Economist, a major global general news and financial publication with headquarters in London.
Under a headline, The Central Bank’s Dilemma, The Economist asserted that “life for a central banker is more difficult than it used to be.”
That’s because “the economic relationships that prevailed before the 2008 economic crisis may not hold good today”.
One such relationship links the rise and fall of unemployment and inflation. It was that conundrum which led Mark Carney, governor of the Bank of England, to predict that a fall in unemployment below seven per cent would be a necessary condition to tighten fiscal policy. The trouble was that joblessness dropped to 5.1 per cent and inflation stood at 0.3 per cent and there wasn’t a change in policy.
The Bank of Japan, headed by Haruhiko Kuroda, didn’t go unscathed. After forcing the bank to engage in an unconventional and large scale reflationary stimulus, at the end of the day Kuroda didn’t have much to show for his effort by way of positive results. Still, he didn’t back down from his stance. Now, he is studying its effects.
Canada hasn’t been sitting on the sidelines, hence a headline in Financial Post which posed the intriguing question: “Why Central Bankers Are Unable To Admit Failure Despite Running Out Of Ammunition?”
The answer is that don’t expect central bankers and ministries of finance to change course quickly if their strategies designed to deal with deficits, austerity and so on don’t pass muster, a point made by analysts Jeff Black and Christopher Condon in the Post.
Interestingly, eyes are being focused on the US Federal Reserve under Janet Yellen, the Fed chairman, and on Mario Draghi, head of the European Central Bank now that the International Monetary Fund, blaming the Brexit vote in England and other factors, has lowered projections for global economic growth.
Last month, the Conference Board of Canada joined the chorus by lowering its employment and growth projections for the North American economic colossus, a sure indication that growth would be anemic at best.
So, when the debate begins in the House of Assembly, Worrell can take comfort that he isn’t alone.