THERE IS A PICTURE on Page 18 of the BARBADOS BUSINESS AUTHORITY of July 20 that speaks volumes. It depicts the trend in international reserves of the country as at July 2015.
The news was not sweet – US$484 million. No wonder the July instalment on the Credit Suisse loan gave trouble to pay. This is down from US$700 million in 2011, as a comparison.
The Budget just a few weeks earlier gave us the impression that we were sitting comfortable. The graph presented does not say whether or not the instalment of $88 million for Credit Suisse was yet paid.
The bond issue of BDS$70 million could not help. We needed foreign exchange. Hard cash. With an unreliable prediction of a one per cent growth and with the advent of the slow season, there is great fear that things will go from bad to worse.
Foreign exchange has a wide context in terms of its application to Barbados. If we can get it through the usual sources, then all is well, but if we cannot and have to go to the lender of last resort – the IMF – then we would be obliged to genuflect and bow to the stipulations, probably a devaluation. The IMF will not forget the incident in Japan which some of us hailed as asserting our independence.
How does foreign exchange accrue to Barbados? We have to earn it in one form or another, or it may be a gift, loan or grant or perhaps an investment.
The keeper of the fort is the Central Bank. It has the responsibility of overseeing its collection and disposal. Foreign exchange that the Central Bank holds in its own right is deposited with reputable correspondents abroad. Unfortunately, in these days the interest earned is very small. That foreign exchange is only part of Barbados’ international reserves.
Commercial banks are allowed to hold part of Barbados’ foreign exchange and use it in the general run of business – for example, if a person wants to pay a bill in US dollars. Commercial banks also hold foreign exchange on behalf of customers like hotels or manufacturers.
This foreign exchange cannot be counted as part of the total holdings of Barbados as it is at the whims and fancies of the customer owner. Most international businesses have this type of account. The average citizen is required by law to surrender foreign exchange to the commercial banks.
One factor that makes foreign exchange from tourism unreliable is the workings of the hotel industry. Some hotels have their initial bookings paid abroad. Barbados then is at the mercy of the hotel to repatriate the full benefit of the tourist coming to the island. What is required to run the hotel locally (wages, local provisions) can be remitted and a question mark is raised over any other receipts. That is why the wisdom of giving a hotel a 30-year tax break comes up short.
In the case of Sandals, its first obligation is to settle abroad the cost of putting up the hotel. While levelling the playing field by giving local hotels similar tax breaks would be fair, it would be an act of lunacy. The benefit of Sandals may be more tourists to the island but little spending.
Foreign exchange is earned from international businesses that operate in Barbados. Indeed, at times earnings outstrip those from tourism. While the bank balances in foreign currency is at their disposal, the profits made from their businesses (usually large profits) are subjected to tax and bring in foreign exchange.
Foreign exchange also comes from remittances. However, difficult financial conditions in countries abroad can affect these remittances as we have seen in recent years.
We have been relying on borrowing so as to prop up our balances, but the junk status of our bonds makes access to the market difficult and costly. Certain international institutions such as the International Development Bank provide infrastructure loans, but such loans add to our overall debt. Investors looking for a niche project can bring foreign exchange to the island either for housing or for a financial project.
On a totally different matter, the Wild Coot has noticed that presumably in an effort to thwart stealing in stores, they have installed at the entrance a gadget that can detect metal on a person.
This I have seen at Massy stores, at Courts and at PriceSmart. I sedulously avoid passing through these contraptions, as I believe that my pacemaker could be affected. Those who like the Wild Coot need to support their heart may consider this a warning to be careful.
• Harry Russell is a banker. Email quijote70@gmail.com
