In a paid advertisement which appeared in the SUNDAY SUN newspaper of August 9, Governor of the Central Bank Dr Delisle Worrell wrote that the bank’s handling of the country’s foreign reserves over the past couple of years had “offered the world a textbook illustration of how a small economy that depends on foreign exchange for its prosperity adjusts when those foreign exchange levels decline”.
Despite the self-congratulation that seems to come with almost every piece economic news from the Central Bank, this last one provides us with a bit more insight into how, it seems, the Government’s fiscal adjustment policy almost came off the rails within a few short months.
Recalling the problem, Dr Worrell noted that by May 2013, what he termed “a persistent shortage of foreign exchange” had begun to appear.
It was clear, he said, that fiscal measures would be need to dampen the demand for imports. However, he said, the measures implemented by Minister of Finance Chris Sinckler in August 2013 under the fiscal adjustment programme had “proved insufficient,” and the reserves continued to fall.
It was not until further measures were undertaken, he said, that the reserves stabilised, adding that “the normal pattern of foreign exchange market behaviour has been evident ever since.” Those measures centred around the sudden sending home of some 3 000 workers.
Perhaps it was the Credit Suisse loan for around US$200 million which stopped the drain on the reserves until the savings from the retrenchment kicked in.
A chart published in the advertisement showed the country’s foreign reserves at the end of July at $991.7 million, still some $400 million below their level in 2011, $200 million below their level in June 2013 and nearly $130 million below their level at June last year. This is the reality of Dr Worrell’s textbook case.
Now, you say, it really doesn’t matter what the actual number is, as long as it comes out at more that the basic 12 weeks of import cover, considered to be the baseline.
Ernst & Young, in its commentary on the 2015 Budget, issued a few days after Mr. Sinckler’s speech in the House of Assembly in mid-June, noted that the figures published on the foreign reserves showed “a reduction in absolute reserves in March 2015 in comparison to March 2014” of about $35 million, but both were said to represent around 16 weeks of import cover. “One would have to assume,” noted the imperturbable EY, “that a lower rate of consumption led to the increase in (the number of) weeks’ import cover.”
Yes, and it is presumably lower oil prices which have helped the central bank show a slower decline in the number of weeks of import cover than the fall in reserves would suggest. Whatever the reason, one week of import cover worked out at about $73 million in 2013 but only $67 million now. This has helped the bank show marginally better import cover numbers.
Dr Worrell, in going where others fear to tread in terms of kudos for his austerity policies, has reminded us of how close we came to economic crisis.
A chart published by the bank in its September 2014 Press release shows the international reserves at halfway between the $800 and $900 million marks. Now, if you divide the international reserves by the number of weeks of import cover, you get the average cover for one week. As noted above, in 2013 it was about $73 million.
Dividing approximately $850 million (actual figure at end of December 2013 not stated) you get – yes, indeed – 11.6 weeks. In other words, it seems we may have plunged below the baseline for the first time, and there seemed no way it was going to stop.
That puts the events of late December 2013 into a fresh perspective.
Patrick Hoyos is a journalist and publisher specialising in business.