THE LEADERSHIP at the Central Bank of Barbados is symptomatic of the country’s economic management as a whole. It has abandoned best practices. In less than eight years, the bank has played its part in erasing a reputation for fiscal soundness that took decades to build, notwithstanding a few transgressions over the years.
Everyone knows that Barbados is in a fiscal crisis. What everyone does not know is that the Government also abandoned best practices to put us in the crisis. The best practice was embraced by all of the governments prior to this one and it was supported in academic writings, especially by Barbados’ foremost expert in public finance, Professor Michael Howard.
The first Barbadian to clearly articulate the practice of having current account surpluses for Government was Prime Minister Errol Barrow in his 1971 Budget Speech. Even in the most challenging of times, successive prime ministers tried to maintain the best practice.
A current account surplus is achieved when the current revenue of the government exceeds its current expenditure, where the current revenue is the total amount of taxes and non-tax revenue. The current expenditure is the sum of wages and salaries paid to public servants, interest payments on debt, purchases of goods and services for government departments, and the transfers and subsidies to statutory boards and other entities.
The philosophy behind a current account surplus is simply that any organisation, including a household, should cover its recurring expenditure with the income it earns. In the case of the Government, it has the capacity to tax that has been abused by the current administration.
Since 2008, the current Government forsook the philosophy of achieving a current account surplus. Furthermore, it practised the art of huge current account deficits with severe consequences for Barbadian taxpayers and the economy.
Unprecedented losses
Unfortunately, the Central Bank has suffered from embracing this bad practice. From the public utterances of its governor, the major policy focus of the bank has been fixed on how to accommodate the bad fiscal practice. This accommodation has resulted in unprecedented losses for the bank.
There is no doubt that the income of the Central Bank has fallen. This is a direct consequence of reduced income from its foreign investments as international interest rates declined. But it is also a consequence of the governor’s policy of protecting the Government at all cost. The latter is best explained in the bank’s move to lower the treasury bill rate last year.
As early as 2011, the commercial banks revealed that they no longer had the appetite for Government’s long-term securities, better known as debentures. The fear of the future value of money forced the banks to be hesitant about investing in more debentures. It was also recognised that the National Insurance Board could not sustain its purchasing of the securities indefinitely.
In the circumstances, the Central Bank became the major buyer of treasury bills and debentures from the Government, even though it was making and continues to make losses. Then in an effort to reduce the interest paid by the Government on the treasury bills, the Central Bank deliberately bid down the interest rate in the last quarter of 2014.
Around this time, the original offering of the savings bonds was put on the market but was not fully subscribed. In the meantime, commercial banks became less attracted to the treasury bills. A source of their income was being compromised.
As an apparent quid pro quo, the Central Bank removed the flooring on the savings deposit rate at the commercial banks, which reduced their expense and disadvantaged the depositors. A blinkered Central Bank governor pounced on his own policy by offering a new tranche of the savings bonds at a very attractive rate of 5.5 per cent. The obvious happened.
As expected, the income of the Central Bank was reduced and losses continued to accumulate. Eventually the size of the staff was targeted for reduction as the major solution to the bank’s financial woes. In the circumstances, it was just a matter of time.
The governor was and still is prepared to do what it takes to protect the Government’s woeful fiscal management without regard for the institution’s reputation that was built on best practice from its inception.
It is unfortunate that the bank has been an accomplice in such a fiscal conspiracy. Why did the bank not employ similar unprecedented tactics to prevent the Sandiford administration from breaking the ways and means limit in the early 1990s?
Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email: [email protected]
