BARBADOS DOES NOT NEED a large amount of foreign exchange reserves to function and too much could be “a drag on economic growth”.
Central Bank Governor Dr DeLisle Worrell shared that view in his July economic letter.
“Countries should maintain foreign exchange reserves sufficient to allow time to adjust to the vagaries of international markets, so that banks and traders do not become apprehensive about the value of the currency,” he said.
“Beyond that modest level, foreign reserves are a drag on economic growth, employing foreign exchange in lending abroad resources which might be better employed in the finance of investment at home.”
The veteran economist pointed out that “in practice” a reserve level equivalent to 12 weeks of imports “is ample for Barbados’ needs”.
“In 2013 fiscal actions to restore the foreign balance took seven months to become fully effective, and in that time the country lost foreign reserves to no more than about three weeks of imports, of the 16 weeks equivalent that we started with. Foreign reserves should be viewed as a ‘top up’ to the supply of foreign exchange,” he said.
“Even in difficult times, most imports are financed by normal inflows of foreign exchange for tourism, international business and finance, physical exports and capital inflows, for the most part. In a difficult year like 2013, 94 per cent of imports were financed from these sources, and only six per cent from the draw down of foreign reserves.”
Worrell said the “essential purpose” of foreign reserves was for “normal trade to continue during the period of adjustment while fundamental changes are being made to bring foreign exchange inflows and outflows into balance”. He was referring to the same 2013 period when Barbados’ foreign reserves plummeted.
“The maximum potential benefit is the amount of imports you can cover with the total accumulated reserves. Every country should balance cost and benefit in determining what level of reserves is adequate,” he added. (SC)