Recently the Minister of Finance revealed that Barbados’ foreign reserves fell by $2 million between the start of the year and March 14.
This statistic confirmed that the tourism sector, though showing some recovery in arrivals, was underperforming in terms of its earning of foreign exchange.
The poor performance of the foreign reserves in January reinforced that the sale of the NIS shares at the Barbados Light and Power had to do with the foreign reserves and not concerns about the public sector pensioners in the future.
More recent information revealed that the recommendation of the Investment Committee of the National Insurance Board (NIB) to sell its interest in Light and Power Holdings Limited to Emera (Barbados) was varied at a special meeting on February 20, 2011. It was noted that the board agreed to ten per cent of its shareholding to Emera.
To confirm that earning foreign exchange was the intent, the NIB was informed that the Central Bank had denied permission to invest the proceeds from the sale of the shares overseas.
By the time the Minister of Finance made his comments on the foreign reserves in Parliament, the proceeds from the sale of the shares were in the financial system, yet the foreign reserves position at the Central Bank was not boosted.
In the face of the stated adequacy of the country’s foreign reserves, when expressed in terms of import coverage, it was a surprising decision not to allow the NIB to invest the proceeds from the sale of the shares overseas.
This is all the more surprising, when the Manager of Investments expressed two concerns: (1) the portfolio of the NIB continues to be heavily weighted in the Government of Barbados securities with the total exposure being 69 per cent; (2) there was need for diversification outside of the Government of Barbados as 91 per cent of the portfolio was also in Barbados.
The investment manager concluded that “this concentration risk and exposure to the Government of Barbados were approaching an unacceptable level”.
The Minister of Finance, in his typical crass and loud manner, attempted to dismiss the concerns of the NIB’s investment manager by quoting a host of percentages from previous years. What matters most is that in dollar terms, the NIB is far more highly exposed than it ever was, especially given the country’s fiscal crisis.
In the circumstances, it would be interesting to find out why the Central Bank’s foreign reserves were not boosted by the sale of the shares. Furthermore, according to the Estimates, the massive fiscal deficit for 2011/2012 has to be financed by $1 billion from domestic sources, with little or no foreign financing.
In the absence of meaningful foreign financing, the Central Bank’s stock of foreign reserves will decline. Foreign financing will be more than $400 million less this year than last year; tourism earnings are obviously down; and there is no intention to borrow on the international market. It was imperative for the Central Bank to receive some of the proceeds from the sale of the shares to Emera.
The foreign direct investment which this Administration was so critical of when in Opposition will have to deliver more than the promised US$250 million in 2011. Something has to give in the coming fiscal year if the fiscal crisis is accompanied by a worse than expected performance in the foreign reserves.
The Government will have no choice but to borrow on the international market and this is why the country’s credit rating is so vital.
