Last week’s article raised a few matters with respect to the implications of lower oil prices for the Barbados economy. It was noted that over the last six months, international oil prices have declined by about 50 per cent, while the drop in the local price at the gas pump is in region of only 30 per cent.
Of the several issues mentioned, perhaps the most critical is the reduction in the foreign exchange required to import oil, assuming that the quantity remains the same. This is worthy of some elaboration in light of the emphasis that has been placed on protecting the country’s foreign reserves.
Given that the downward trend in the oil prices started around the middle of last year, a very legitimate question is why did the Central Bank’s stock of foreign reserves at the end of December 2014 not reflect the significant drop in foreign exchange required to import oil?
The answer to this question is indeed very intriguing. The first thing is that the reserves actually declined by $92 million over the period December 2013 to December 2014. Rather than address this issue, the last Press release of the Central Bank noted that “the fiscal consolidation measures of the past 18 months have stabilised the foreign reserves, and the foreign reserve movements in 2014 reverted to the normal pattern observed in 2010, 2011 and 2012”.
It is the language that intrigues. What does the phrase “reverted to the normal pattern” mean to the reader? Furthermore, the economic circumstances affecting Barbados have not remained static over the last five years as is evidenced by changing oil prices in 2014, therefore it is inappropriate to simply suggest that the foreign reserve movements reverted to the normal pattern.
It has been repeated ad nauseam that the main objective of the fiscal consolidation programme is to protect the foreign reserves. There is hardly ever a distinction made between the foreign reserves of the Central Bank and those of the total banking system, purely for the sake of convenience.
The distinction becomes relevant in trying to understand the underperformance in the foreign reserves in spite of the fiscal consolidation programme coupled with the fortuitous decline in oil prices. In the circumstances, the reserves should have shown some improvement, in the absence of the loan from Credit Suisse. So why has there been no genuine improvement as yet in the reserves
Banking system
Part of the answer refers to the fact that the private sector does not go to the Central Bank for foreign exchange to do its trading. Therefore the place to look would be in the reserves of the total banking system. Unfortunately these are hardly ever addressed by the policymakers.
It would not, however, be surprising to see a change in reporting in the not-too-distant future, in the same way that the policymakers conveniently stumbled on reporting the primary fiscal deficit in the last economic review. Since the banking system provides the foreign exchange for the importation of oil, the benefit will be reflected there, unless the banks sell some of their foreign exchange to the Central Bank.
A few years ago, when others were asking for a stimulus to the Barbados economy, an argument was made, using the Central Bank’s foreign reserves position, to suggest that it was unwarranted. Except that a few months later, the same policymakers talked about a $600 million stimulus that never was.
The convenience in the reporting is dependent on the argument that is being made.
In the circumstances, the projected upturn in the tourism sector will be initially evaluated on the performance of the Central Bank’s foreign reserves. This should prove very interesting as the policymakers cannot simply employ the phrase “revert to the normal pattern” in the face of lower oil prices and an upturn in tourism. Time will tell!
The greatest fear in the coming quarter is that the policymakers may continue to emphasise higher taxation at the expense of growth in the economy. There is no better time to allow spending to spur economic activity given the savings to be derived from a lower oil importation bill. However, the Government’s track record suggests that the temptation to narrow the fiscal gap through more taxation rather than pursue growth will take precedence once again.
The country is being given an opportunity to do what was always and still is right, but the wary among us will continue to see the glass as half-full and blame the true optimists.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email mascoll_clyde @hotmail.com.
