A YOUNGSTER, now about to enter university to study medicine, told me that if he were to be successful, he would specialise in studying how the human brain works. But he raised another subject. He said he had read what the governor of the Central Bank said in June 2012 and he was full of praise for the sentiments contained in the article.
For example, he had committed to memory nuggets of the article produced. “Exchange rate depreciation always depresses output in small open economies, because there is zero elasticity of substitution between consumption or in production.” He took this to mean that people in a small country will still demand the same amount of foreign goods and their local production will not increase, and that this would be a recipe for a further devaluation.
He again quoted: “Small open economies cannot make up for lost export demand in an international recession by switching to local demand through currency depreciation. That is because their range and scope of their imports vastly exceed those of their exports.” He said that for him, this meant Barbados would still be importing the same amount of foreign goods at a greater local cost, but maybe for more foreign money.
He was in high praise when he quoted from the article. “Much is made of the fact that currency depreciation increases the profitability of exports (tourism, etc.), by reducing the real cost of domestic value added without acknowledging that this is a miserable strategy – the country may sell more abroad, but it will earn less real income by doing so.” He interpreted this to mean that a strategy of the exclusion of the taxes from hotels was a further lessening of earnings. He also thought that locally-owned hotels might very well be hoarding their earnings abroad and are contributing to the reduction of available foreign exchange in the country.
This youngster was very observant. He liked the remarks of the governor when he said: “Above everything, they should protect the value of the currency by allowing the shock to fall in real income.” He even referred to remarks made by Minister of Industry and Commerce Donville Inniss that the two per cent recently added on to imports and locally produced goods was meant to dampen the demand for foreign goods, a point that the minister of finance may have forgotten to mention.
This youngster quoted again: “If there is to be any fiscal management, it should be in the service of maintaining the exchange rate anchor by matching import spending to foreign exchange inflows. Targeting the money supply or inflation, with a flexible exchange rate – the conventional policy prescription – produces a worse result.” He was in complete agreement with the latter statement of the governor.
He was now left to wonder, in the light of his reverie of these pearls of wisdom, how come there has been an apparent about-turn in conception of the way forward. He was thinking seriously of changing his proposed faculty syllabus to economics or even law where he had the latitude of “on the one hand”, “on the other hand”, and “on the third hand”, a facility not available in medicine.
But there is a catch that has “cuffuffuled” the Wild Coot. If the Central Bank does not print money, if the commercial banks do not support treasury bills, if the bonds from the savings of Barbadians are not available in adequate number, if . . . , from where would the Government get money to pay civil servants, to run the hospital and clinics, other statutory corporations and to pay bills, given that the taxes collected are not enough?
Maybe the easiest target then is the Central Bank and the printing of money. Alternatively, the Government faces the decision to send home workers. This will mean goodbye to being elected again, and that is a political priority, even more important than any consideration of the value of the currency. Thus all of the claptrap spouted about disagreement with the rating is only political rhetoric. So!
The governor may be stuck with his own words. Why would he continue to print despite a public warning from the International Monetary Fund and the consequent downgrades, and his own words resonating in his ears? Is he between the devil and the deep blue sea, or lost with Matthew in the Caribbean Sea?
Barbadians are reminded that according to the Central Bank, remittances sent to the commercial banks in foreign currency must be paid in local currency unless the person holds a foreign currency account.
• Harry Russell is a banker. Email: [email protected]
