In the Monday, December 1 issue of the Barbados Business Authority, the Governor of the Central Bank of Barbados defends his thinking, and we get a firm insight as to how he is steering the Barbados financial ship.
I agree with him that “the thing that we have to worry about in the country is foreign exchange”. If we were to renege on a foreign sovereign debt, our credit rating would be “junkiest”. I have spoken about the dangers of vultures buying our debt at a discount from lenders whose obligations we have not met – if that ever happens. If our foreign exchange declines, we are more likely to devalue. While this may be so, and the foreign lenders are paid, our reputation and our survival still depend on the many suppliers and universities abroad whose payment is overdue. One thing is baffling, why did we print so much money if foreign exchange was a concern? Is the $9 billion in savings a response by the public?
The high tax regime serves two purposes. It is supposed to produce an increase in taxes for Government (this is questionable), and it also dampens demand for foreign exchange. Our governor admits that the local debt is high and I suppose that he means high in amount and high in interest cost, (may I add high in short-term bonds?). He says that those costs are a redistribution problem and I agree.
It is in the redistribution that we may have an issue. Government interest on bonds has to be attractive so as to encourage banks and pension funds to buy them, and they must buy so as to preserve Government’s lifeblood.
As it is, Government now needs a transfusion as the university, the hospital, the VAT and tax refunds, etc., are all in arrears, not to mention the fact that Government has to tighten its belt and shed flagship statutory corporations. Furthermore, the interest rate has to be attractive enough to tempt banks to invest their statutory money (sometimes more than 20 per cent of deposit funds), and banks will only do that on short terms – another problem for Government.
The redistribution process may not be efficient, as it does not feed the flow of layoffs both in Government and in the private sector as it has to consider those who invest – a small number of the population and those who save – the large number who earn one per cent or less, the $9 billion savings (some small accounts are debited $10 on a monthly basis).
Something is wrong with the redistribution system and the governor should look at it again.
There is an additional major problem that the Central Bank is trying to resolve by offering loans to entrepreneurs – a job that it is ill suited to do. Why?
The Central Bank must be aware of the many complaints from the public about the charges of the banking sector, although I have said many times that it may be afraid to intervene, since it may not want to be seen among other things as dictating to the banks. Meantime, the public takes refuge by stowing what little wealth it has in savings. A vicious circle!
The problem is that the pie becomes smaller as efforts to redistribute continue. The more efforts are made, mainly in talk, the worse the situation becomes and confidence withers. There is something wrong with that. That economists and PhDs join in the debate should matter. Reminds the Wild Coot of the old lady watching the Independence Day Parade in Heroes Square. All of the soldiers were marching left, right, left, right while her son was marching right, left, right, left. She turned to her neighbour and whispered: “My son is the only one in step.”
Yes, I agree with the Central Bank governor; it is a matter of redistribution, but the deck needs reshuffling.
The one thing that the governor is right about is that we cannot afford to renege on a foreign debt, and that so far we have not done so. However, certain entities among the foreign suppliers and companies that have not been paid for goods and services to Barbados have withdrawn credit and exports vital to Barbados. What does the withdrawal of credit by foreign institutions mean? Is payment withheld by us so as to keep our foreign exchange level publicly respectable? ‘Sumtin wong!’
It is a waste of time for Clico policyholders to call on Government for payment.
Harry Russell is a banker. Email [email protected]
