How important are Barbados’ foreign reserves and how much is enough?
It was the event that shocked Barbados’ economic stewards – the spark leading to the unexpected introduction of more than $400 million in mainly austerity measures last year.
The sudden loss of an estimated $300 million in vital foreign reserves in the first half of 2013 is the occurrence in question.
While the island had lost reserves before such a massive decline was hitherto unheard of. Coming as it did in the heart of a protracted recession when foreign exchange earnings from tourism and international business and financial services had plummeted, as had foreign direct investment, the worry was magnified.
Some individuals, including economists, hold the view that foreign reserves to cover 12 weeks of imports is the minimum standard Barbados should adhere to. Others think the minimum should be about 15 weeks, while monetary policy managers including Central Bank of Barbados Governor Dr DeLisle Worrell say Barbados does not have to worry once $1 billion in reserves are in hand.
“The combination of the anticipated increases in earnings from tourism, increased foreign direct investment (FDI), and the dampening of imports, is expected to result in a recovery of the foreign exchange reserves in 2014,” Worrell said last year as he reviewed the economy’s performance during the first nine months of 2013.
Also last year, respected economist Sir Frank Alleyne, speaking at a meeting in the St Michael North West constituency of Minister of Finance Chris Sinckler, said the standard cover for a country was 14 to 15 weeks of foreign exchange reserves.
“In 2003 the number of weeks of foreign exchange reserve cover was 15, in 2005 it was 15 weeks, in 2006 it was 16, in 2008 it was 16.4, in 2009 it was 20, in 2012 it was 19.5, and at March 31 this year it was 16,” he said.
Sir Frank, who called people talking about a foreign exchange crisis in the country as “political nuisances and humbugs”, said that no time between 2006 and March 31 this year did the foreign exchange reserves fall below 16 weeks.
Before that, during parliamentary debate on the August 2013 Budget, Prime Minister Freundel Stuart alluded to the importance of foreign reserves, pointing out that Central Bank advice of a $300 million loss in foreign reserves warranted the immediate need for a new fiscal consolidation programme worth more than $400 million.
“Our most serious challenges took shape, on the advice we got, just after April 2013 and that is the point at which we were told, and since the advice made sense we took the advice, . . . that we had to take stock and to take corrective action so that we did not allow the national economy to be structurally undermined, therefore exposing households and businesses to unnecessary risk,” he said.
Deficit problems
“So we have been trying to deal with our debt problems, our deficit problems and our foreign reserves issues; that is what this Budget is about.”
Illustrating the importance of always having a substantial supply of reserves in hand during a December 2013 ministerial statement in the House of Assembly, Sinckler said “broad objectives” Barbados had in mind, included strengthening the reserves to “at least six months or 24 weeks of import reserves cover”.
“We are confident that if such investments are matched by investments from our domestic and foreign investors that 2014 will truly begin a substantial turnaround in the Barbados economy. Now is the time to forge ahead with those plans and I encourage our colleagues in business to match us in this regard,” he said.
Earlier this month, Sinckler reiterated this, saying “the quality of life in Barbados is built around sound institutions, a strong social consensus and a strong economic policy framework supporting the fixed exchange rate regime”.
“. . . In 2013, economic policy in Barbados was driven by two dramatic and unexpected developments that no responsible government could afford to ignore. Firstly, after remaining stable at 16 or more weeks of import cover for the 2008 to 2012 period, foreign exchange reserves in Barbados began a sudden and dramatic decline from around April 2013 (about four to six weeks after the general elections).
“The sudden and dramatic decline in the foreign exchange reserves cannot be justified by any developments in the underlying economy or dramatic policy reversals by this administration.”
“Secondly, Government revenues experienced a major decline in the second half of 2013, the full facts and figures for which I presented to the House of Assembly during the course of my Ministerial Statement on the 13th of December.
“These two developments, rather than any change in the fundamentals of the Barbados economy, were the major causes of the economic challenges and subsequent debt downgrades that Barbados faced in 2013,” he added.
Beyond having adequate amounts of foreign exchange to do its business and run the country, there are also other reasons why having a healthy supply of reserves is highly desirable. This includes the impact on the island’s treasured fixed exchange rate vis-à-vis the United States dollar, and its standing in the international community.
This was evident when rating agency Moody’s, following a downgrade of the island, warned that it “could downgrade the rating further if international reserves continue to decline and/or the government continues to rely heavily on short-term debt and Central Bank financing”.