THE INTERNATIONAL MONETARY FUND (IMF) uses a model called the monetary approach to the balance of payments to tell developing countries what to do. At its core is that the printing of money is not good for the countries’ foreign reserves.
The latter is a representation of the balance of payments, which is the money balance left after a country trades with and repays the rest of the world.
The genesis of the printing of money starts with the government’s fiscal position. When the position worsens, the government has three ways to finance the deficit: (1) taxation; (2) foreign borrowing and (3) local borrowing, of which printing money is an undesirable part. Having initially denied that it was doing so, it is now fully accepted that the Central Bank continues to print money.
The danger in printing money is that it eats away at the foreign reserves and threatens the value of the country’s exchange rate. In short, it puts devaluation in play as a policy option. It is observed by the fledgling Minister of Finance that contrary to all that is being said, the foreign reserves have withstood the persistent printing of money by the Central Bank.
Lower oil prices
What the minister does not say is that the country has benefited substantially from the much lower oil prices, even though the consumers are not able to boast to the same degree. The country’s foreign reserves could have been at least $400 million less at this time. In this regard, the typical effect of the printing of money has been stunted. Minister Chris Sinckler continues to wallow in his [ways].
The most recent IMF Article IV report revealed the following positives: (1) the economy grew by barely 0.8 per cent; (2) the unemployment rate fell marginally to 11.3 per cent and (3) the external current position improved significantly. The latter, which represents the trade balance with the rest of the world, improved primarily because of lower oil prices and other prices. The impression being given is that Government’s policies were responsible for the improvement.
The rest of the report focused on the following negatives: (1) the fiscal deficit was broadly unchanged; (2) the national debt continued to rise and (3) the Central Bank persisted with its very heavy printing of money. These three things constitute the essence of what the Government’s policies, over the last eight years, were targeted at correcting.
Is it not strange that after so many years of trial and error, the fiscal deficit, the national debt and the printing of money have all worsened? The strangeness is observed in the comments of the IMF. There is a need to eliminate impediments to growth and bolster competitiveness. The high and growing public debt continues to have a negative impact on growth. The printing of money is inconsistent with the maintenance of the exchange rate anchor.
There are two things which the IMF explicitly welcomed: (1) the new measures in the August 2016 Budget, including reductions in current expenditure and new revenue measures, and (2) the recent improvement in the commercial banks’ non-performing loan ratio and liquidity.
The main new revenue measure is the two per cent tax on the customs value of all imports at the border with some exceptions. The tax must also be applied on domestic output to ensure fair treatment under WTO and CSME regulations. So the tax is being applied very broadly and is to be paid by everyone. This makes the name fascinating, the National Social Responsibility Levy.
Poor to be affected
As applied, the levy will affect the poor more than the rich. Yet it is socially responsible. It will drive up the cost of living, yet it is a social responsibility levy. It is imposed on domestic output. But it is imposed on imported consumption items.
The minister of finance admits that the tax will hurt local domestic output more than imported products, but calls it a social responsibility levy. He further admits that it will negatively impact economic growth and suggests that it will be reviewed.
Amazingly, there was a recent IMF study done to simplify the country’s tax system and a major concern was the distortionary effects of the system. Yet the IMF agrees with the new measure. It is simple. The IMF does not really care about how the revenue is raised, once it helps to reduce the fiscal deficit.
This recent levy embodies all that is wrong with the economic leadership of the country. There is little thought given to the why, once the how is determined.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: clyde_mascoll@hotmail.com