In a small open economy like Barbados’ “if we cannot increase the level of foreign exchange, we have to ensure that we reduce the level of spending so that we live within our means”.
Governor of the Central Bank, Dr. Delisle Worrell, issued this word of caution to Barbadians last night while addressing credit union officials at the Central Bank of Barbados.
Explaining some of the functions of the bank, Worrell told his audience: “At the beginning of the year we always make a forecast of what we expect in terms of foreign exchange coming in. And then we compare that with our forecast of the demand for foreign exchange.
And that informs the estimates of expenditure which are tabled in March because the size of the deficit that the minister of finance wants to achieve is at a level which is going to contain the total demand in the economy so that it does not exceed the foreign exchange that we expect to be coming in.
“We do that at the beginning of the year, but then we monitor it every month. We receive foreign exchange everyday, then the first Friday of every month we all sit together and look at all the economic indicators to see what is happening to the foreign exchange. We then decide if some correction is necessary.”
Worrell told his audience that at the beginning of this year they had anticipated that the level of foreign exchange would have been much higher, but when they saw what had happened in May they realised that their total inflows for the year were going to be lower.
“We had to reduce the demand for foreign exchange and that was the reason for that big fiscal adjustment,” said Worrell. “That is how you take spending power out of the economy.
“What we decided is that as a practical matter we needed to do the adjustment over the 19-month period. Over that period, we expect now that total foreign inflows will be a little over $9.6 billion. As a result of the adjustment, we have now brought the total expected foreign exchange spending over that 19 month period to a level of about $9.5 billion.
“So as a result of the fiscal measures, we now expect that we are going to have an accumulation of reserves of $144 million as opposed to the situation you were seeing before the adjustment where we would have lost a considerable amount of foreign exchange.” Worrell explained. (NC)