Does Barbados have printing PTSD or are the printing fears justified?
by Marla Dukharan (originally published August 16, 2022)
Barbados is emerging from one of the most difficult periods in its history. Following a decade of economic mismanagement that led to a balance of payments crisis in 2018, Barbados has survived the most comprehensive debt restructure known to man, a pandemic during which St. Vincent’s La Soufriere volcano dumped tons of ash on us, severe weather impacts in 2021, and an ambitious IMF supported reform program. Barbados has managed to improve its socio-economic stability despite severe challenges, for which I think the Gov’t should be congratulated. They are not perfect, and their work is not yet complete — far from it — but they have managed commendably, in my opinion. But the Gov’t has had to incur expenditure that it otherwise would not, and the fiscal consolidation they intended to pursue would have been unwise under the circumstances of the last three years. This has resulted in wider fiscal deficits and, therefore, more borrowing than planned, and the Gov’t is restricted in the amount and type of debt it can raise to finance its deficit. Not an easy situation to be in.
Recently I have been asked the question repeatedly — is the Central Bank printing money? The short answer to this question is yes and no. One of the roles of a Central Bank is, in fact, to print money, but the problem arises when the Central Bank prints money in excess to finance the Gov’t and/or where such printing isn’t sufficiently backed by FX reserves. The Currency Board arrangements of the Eastern Caribbean Currency Union and The Cayman Islands for example, only permits Central Bank ‘printing’ of local currency which is backed by USD. According to Barbados’ Central Bank Act, the Central Bank’s exposure to the Gov’t is capped at 3% of GDP, the Gov’t securities held by the Central Bank cannot exceed 5 years to maturity and must be repaid upon maturity, or if rolled, must be purchased by someone else — not the Central Bank. So, there are limits to the extent to which the Central Bank can finance the Gov’t, and at this point, we are nowhere near those limits. The ratio of the monetary base to net international reserves has fallen from a high of BBD15.50 : USD1.00 in January 2018, to BBD3.60 : USD1.00 currently, demonstrating that the BBD is increasingly backed by USD held in reserves.
The Central Bank is financing part of the Gov’t’s fiscal deficit as evidenced by the Central Bank’s balance sheet and their quarterly report, where on page 21, Central Bank holdings of Gov’t obligations grew from BBD703.8 million at the end of 2018, to BBD941 million at the end of June — an increase of BBD237 million or roughly 34%. Remember, however, that the Gov’t received the equivalent of BBD261.6 million from the IMF’s Special Drawing Rights (SDRs) disbursement to nations across the world to support pandemic-related spending. This IMF SDR injection is not a loan. This is a grant given to the Gov’t, which was then given to the Central Bank in USD to purchase Gov’t securities in BBD, basically returning the funds to the Gov’t but in local currency. The Central Bank exchanged one asset for another, in essence, and any ‘printing’ of BBD was backed by USD in this case. If the Gov’t took the SDRs for example, sold the USD to the market in exchange for local currency, and took the BBD and paid salaries, it would amount to roughly the same thing.
Now, having said all of this, I think it is imperative that the Government place urgent emphasis on reigning in its deficit, which is their intention. The ease and cost of doing business in Barbados, and indeed the cost of living, are affecting its external competitiveness, its attractiveness as an investment destination, and its longer-term growth prospects, therefore. The demographic challenges / aging population amplify the strain being placed on the National Insurance in particular, which could end up putting pressure on central government finances in the longer term if not addressed urgently. Already Barbados is one of the highest taxed and highest cost jurisdictions in the region, so the question of how to sustainably reduce the deficit is not a simple one. But if anyone can fix this, Prime Minister the Honourable Mia Amor Mottley can.
