Home' Trinidad and Tobago Guardian : March 2nd 2017 Contents MARCH 2 • 2017 guardian.co.tt BUSINESS GUARDIAN
NEWS | BG5
Much of the discussion
surrounding the dis-
missal of the Governor
of the Central Bank
of Barbados, Delisle
Worrell, last Thursday
involved one main issue: his apparent refusal
to continue "printing money" to finance the
deficit spending of the Barbadian government.
In fact, Worrell was quoted as saying in Jan-
uary: "We cannot continue to have a deficit
and we cannot continue to have a wage bill as
high as we are, simply because the only way
we are able to do that is by the Central Bank
Worrell may have developed cold feet about
printing money lately, but the RBC Carib-
bean December 2016 report indicated that
government debt accounted for 65 per cent
of the assets of the Central Bank of Barbados
in October 2016.
Essentially, the printing of money (prop-
erly defined in economic theory as "money
financing of the budget deficit") is the process
by which the money supply of a country or
monetary region is increased.
This increase is financed directly by the
Central Bank as opposed to the traditional
method of taxation used by governments to
gain revenue and thus facilitate expenditure.
In the case of Barbados in particular, the
government would issue bi-weekly treasury
bills (short term, low interest debt), which
would be purchased by the Central Bank thus
effectively "creating" money for the govern-
ment to use to meet its fiscal obligations.
This new money would then be spent to
pay the government's short-term expenses
such as salaries for public servants, interest
on debts owed as well as goods and services.
A situation like this is quite obviously un-
sustainable with the government going further
and further into debt to cover its bills.
In its August 2016 Article IV report on Bar-
bados, the International Monetary Fund (IMF)
estimated that Barbados central government
debt, including securities held by the country's
National Insurance Scheme (NIS) exceeded 141
per cent of its gross domestic product (GDP)
as at March 2016.
The IMF noted: "The large funding require-
ments, totaling about 45 per cent of GDP, have
been mostly met by the Central Bank of Bar-
bados (CBB), the NIS and growing arrears."
The Washington DC-based international
financial institution also pointed out that the
country's finances were deteriorating and that
funding challenges had intensified.
According to the IMF report: "The Central
Bank has had to significantly increase its fund-
ing of the government as commercial banks
reduced their lending, including the amount
they rolled over.
"About two-thirds of this funding came
from the CBB on-lending commercial banks'
excess reserves and a third reflected the cre-
ation of new money."
In the short term, being able to print money
staves of the need for a government to retrench
public servants and averts a liquidity crisis.
Over the long term, however, economic the-
ory indicates that printing money can lead to
higher inflation, asset bubbles and significant
exchange rate pressure.
With inflation at less than one per cent
last year and no evidence of asset bubbles,
the main problem the Barbados economy has
with printing money is the drawdown of the
island's foreign reserves.
As a result of the Barbadian economy's
high dependence on imports, adding to the
country's money supply creates increased
demand for foreign exchange to purchase
foreign goods. This depletes the country's
foreign reserves position further without any
new additions of foreign exchange to buffer
At the end of December, Barbados had
US$340 million of international reserves,
which was equivalent to 10.3 weeks (about
two-and-a-half months) of import cover,
according to the Central Bank of Barbados'
2016 economic review. That is a 27.5 per cent
decline from the reserves position at the end
of March 2016.
In fact, the IMF in its Article IV consulta-
tions openly highlighted the practice of the
Central Bank printing money to finance the
The IMF said: "The CBB has
continued to fund the gov-
ernment through money
creation as well as using
commercial banks' excess
The IMF's executive directors also frowned
on the practice of the Central Bank of Barbados
continuing to print money, stating:
"Directors emphasised that the continued
financing of the fiscal deficit by the Central
Bank of Barbados (CBB) is inconsistent with
maintenance of the exchange rate anchor.
They encouraged the CBB to allow domestic
interest rates to rise in line with increases in
US interest rates and ensure adequate inter-
national reserve buffers."
In other words, the IMF said, seven months
ago in August 2016, that Barbados' precious
exchange rate stability at a B$2 to US$1 peg
was being jeopardised by the country's central
bank financing the country's budget deficit.
And that the central bank should use monetary
measures---by increasing interest rates---as
well as fiscal consolidation---by cutting ex-
penditure and increasing revenue---if it wants
to maintain its exchange rate anchor.
The Barbados government and the Central
Bank of Barbados have done neither the fis-
cal adjustments nor the monetary adjustment
recommended by the IMF.
Barbados has now found itself in an unfor-
tunate position where it can continue to kick
the can down the road or take the painful, but
necessary, adjustments required for long-term
Part of that adjustment may require taking a
look at the size of the public service once again.
In 2014, the public service was reduced
with an estimated 3,000 workers being sent
home. Another round of job cuts may be on
the cards to bring expenditures and revenues
Additionally, the Central Bank could re-ex-
amine its exchange rate regime, a fixed 2:1 peg
with the US dollar in existence since 1975, to
determine whether it was time to move to an
exchange rate system that reflected the coun-
try's present economic realities. This has been
resisted by Barbadian politicians and central
bankers of all stripes.
What is for certain is that persistently high
debt levels by the Freundel Stuart-led admin-
istration constrains government spending on
social programmes and infrastructure.
It also threatens the country's sovereign
debt ratings which increases costs of borrow-
ing (the country was downgraded to B- from
B by the international rating agency Standard
and Poor's in September 2016) and increases
the likelihood of painful austerity and adjust-
Reporting by Andre Worrell
T&T's money creation
As recently as 2014, T&T had its own experience
with "money creation."
In his 2015 Budget presentation Finance Minister
Colm Imbert noted that the previous administra-
tion had used up to 98 per cent of the government's
overdraft limit at the Central Bank.
According to Imbert, in 2010, the government's
surplus at the Central Bank stood at $6.5 billion, but
in September 2015 that surplus had been converted
into a deficit of $8.5 billion.
Section 46 (2) and (3) of the Central Bank Act clear-
ly state how the power of the bank to make advances
to the government is regulated.
It states: (2) "The total amount of outstanding
advances made under this section shall not at any
time exceed 15 per cent of that portion of the esti-
mates of annual revenue of the Government which
comprises the sum of total recurrent revenues and
capital receipts (exclusive of local and external loans)
for the financial year in which the advances were
And (3) "All advances granted under this section
shall be repaid as soon as possible and, in the event
that any advances made in an earlier financial year
remain outstanding in the current financial year, the
power of the Bank to make further advances to the
Government under this section shall be limited to
the amount by which the total amount authorised in
the year of the earliest outstanding advance exceeds
the unpaid balance thereof"
If the T&T government's overdraft with the Cen-
tral Bank is limited to 15 per cent total recurrent and
capital revenues, that means the current adminis-
tration's ability to get advances from the Central
Bank has declined by close to $2 billion.
In the 2015 and 2016 budgets, estimated revenue
was about $60.3 billion, which means that the over-
draft was just over $9 billion in both years.
In the 2017 budget, the revenue estimate was ad-
justed downward to $47.44 billion, which means
that the Central Bank can only advance $7.11 billion
to the government.
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