WHAT MATTERS MOST: Governance issues need fixing
A RIFT BETWEEN the governor of the Central Bank and the Minister of Finance has finally revealed the true seriousness of Barbados’ economic condition. The governor found ingenious ways to accommodate the minister over the last six years, to no avail, before finally indicating that enough is enough.
Some saw the criticisms as personal. What ignorance! It is time to address some governance issues.
This article identifies one governance issue that must be amended to prevent the mess experienced since 2009/2010 from recurring. Whereas the amount of the Government’s overdraft facility at the Central Bank is determined by the yearly passing of the Appropriation Bill, the purchase of Government securities by the bank does not require parliamentary approval.
The lack of such approval is wrong and is very much responsible for the state of the Government’s fiscal accounts and the foreign reserves.
In Jamaica, the Parliament approves both the advances/overdraft facility and the purchase of securities by the Bank of Jamaica – the country’s central bank. This means that genuine debate on the economy, with respect to the fiscal and monetary issues, is conducted in the Parliament. In Barbados, such specifics can be avoided in the annual Estimates Debate and the Budget Speech. This too is wrong.
The amount of the Government’s overdraft facility at the Central bank is determined as a percentage of the Government revenue approved in the Appropriation bill. It is ten per cent of the expected revenue for the coming fiscal year. This is called by other names, including the printing of money.
Threat to monetary stability
The Central Bank of Barbados Act, under Section 42 (1), provides for the bank to: (1) make temporary advances [the overdraft facility], subject to repayment within three months following the end of the financial year in which they were granted; (2) purchase securities that were offered to the public at the time of acquisition; and (3) purchase securities from account holders of the bank.
In 2011, it was recognised that by September 30, the limit on temporary advances would be fully utilised. Therefore, a decision was taken to increase the limit on the purchase of primary securities to $250 million from $120 million. This issue was raised in this column on March 15, 2012.
At the end of 2011, the Central Bank held $223.7 million of Government debt in the form of securities. Since then, the figure has soared spectacularly, reaching $1 813 million, or $1.8 billion, at the end of 2016. This is the elephant in the fiscal room, where the printing of money was and still is occurring.
As far back as November 20, 2013 in a speech delivered to the Chamber of Commerce, Opposition Leader Mia Mottley addressed concerns about the threat to monetary stability caused by the printing of money and insisted that the bank should write to the minister of finance in accordance with Section 48 of the act. She noted that “. . . under section 49, the minister has the power to accept or not accept and counter these recommendations, BUT if he does NOT, then he MUST publish his policy instructions in the Official Gazette.
“We have interpreted this to mean that there can be no trifling with Barbados’ monetary stability away from the glare of the public. Further, given the severe and deleterious consequences to our foreign reserves presented by the printing of money to purchase securities from Government, it is clear that this behaviour is to be monitored and avoided at all costs”.
The solution is to prevent such behaviour. In this regard, we cite a 2002 report edited by the Commonwealth Parliamentary Association: “There has sometimes been a tendency for the central bank to be exempted from the Auditor General’s remit. The study group can see no reason for this. Central banks are part of the public sector like any other agency.”
The report accepts the setting of monetary policy by the bank, but notes its open-market operations on behalf of the Treasury. It concludes that “their performance of these functions should be open to scrutiny by the Auditor General in the same way as any other public sector agency is expected to account for its performance”.
What is stated above does not stop the bank from being fully audited by a private sector accounting firm. More importantly, it improves the governance of the fiscal and monetary affairs of a country in transition in a way that is more transparent. Governance issues are crucial to Barbados’ economic and social progress in the future.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: [email protected]