THE ISSUE: Safety in a sound monetary policy
Is Barbados facing the threat of a currency devaluation?
Devaluation of the Barbados dollar is not an option.
Minister of Finance Chris Sinckler has made that clear repeatedly amid concern about the foreign exchange reserves, the Central Bank’s printing of money to help Government pay its bills, growing debt and a series of credit rating downgrades.
Addressing the issue in August, he said:
“There is no imminent or perceivable conditions under which a devaluation of the Barbados dollar will be allowed to happen, or be chosen as an option by the Government.
“This is established, long-standing Government policy and the cornerstone of the county’s social, economic and political stability. It will not change.”
Sinckler reiterated his position last month during the Barbados Chamber of Commerce and Industry’s monthly luncheon.
He said: “We have all agreed that the currency adjustment and devaluation is not, and will not, be in the best interest of Barbados. We simply cannot afford the luxury of having an exchange rate adjustment. So we are at a stalemate.
“So their position is, ‘you have to get your deficit down’ to what they call management levels . . . at least at the rate of growth, preferably below the rate of growth, so that it adds no more to the growing levels of debt.”
Central Bank Governor Dr DeLisle Worrell has also insisted that devaluation is not an option.
Addressing Barbadians in New York earlier this year, he said: “We ensure there will never be a change in Barbados’ dollar.”
Since 1975, Barbados’ currency has had a fixed exchange rate vis-à-vis the United States dollar. It is pegged at 2:1. While Barbados has held its ground even in difficult economic times, other Caribbean countries have devalued their currencies. The Guyana dollar was devalued in 1987 and 1989, the Trinidad and Tobago dollar was devalued in 1985, 1988 and 1993, and Jamaica had a series of currency adjustments dating back to 1983.
Barbados’ holding of an adequate amount of foreign reserves is key to maintaining the fixed exchange rate.
Professor Winston Moore, who heads the Department of Economics at the University of the West Indies, Cave Hill Campus, explained the issue recently.
“Essentially, if you are supposed to maintain a peg, we have to maintain enough foreign exchange reserves to defend the peg and what defend the peg means, is that whenever one of your citizens, businesses, whatever the case may be, wants to convert two Bajan dollars into one US dollar the Central Bank has enough reserves to facilitate that conversion,” he said.
In the recent economic report for the nine months ended September 30, the Central Bank reported that the foreign exchange reserves were $900 million (14 weeks of import cover).
“Maintaining the value of our currency hinges on crafting fiscal policies that aid in dampening the demand for foreign currency. Government’s fiscal consolidation has assisted in the maintenance of a level of reserves that are above the 12-week benchmark,” it said.
The problem for Barbados, as highlighted by several local economists and the International Monetary Fund, is that in order to maintain the fixed exchange peg certain steps have to be taken.
One of the areas raising major concern is the Central Bank’s continued printing of money to help ease Government’s cash flow problems.
The IMF outlined the danger of this in its 2014 staff report on Barbados when it said that “monetary policy should be consistent with the exchange rate regime”.
“The authorities wish to retain the nominal exchange rate anchor, yet monetary policy has not been supportive of this aim,” the IMF warned.
“The [Central Bank] should end direct financing of the Government. The scale of intervention in the [treasury] bill market should be limited and interest rates allowed to rise in the short term. This will provide reassurance that monetary policy is consistent with the currency peg and signal operational independence of the [Central Bank].”
In the two years since that advice, the printing of money has continued. The Central Bank’s latest report disclosed that between April and September alone, it printed $114 million to support Government. (SC)