A financial analyst and an economist have cautioned the Central Bank of Barbados against purchasing Treasury Bills to meet Government’s revenue shortfall.
The warnings were issued this week by Carl Ross of the United States-based global financial consultant company, Grantham Mayo van Otterloo, and financial group economist at RBC Royal Bank, Marla Dukharan.
Addressing an Investor Forum at the Hilton organised by Royal Fidelity, Dukharan pointed out that the challenges facing Barbados pre-date the global recession.
“The problem is structural in Barbados because the deficit was over three per cent of GDP. Even before the crisis, debt was around 60 per cent of GDP. I think that substantiates the claim that this problem is relatively unrelated to the crisis,” she said, while noting the rapid increase in Barbados’ debt.
“The level of debt that is short term increased from nine per cent of the GDP in 2008 to 27.7 per cent of GDP [in 2013]; it tripled from 2008 to 2013.”
Dukharan, who specialises in assessing the impact of global economic trends on the Caribbean, said the debt is being driven primarily by Treasury Bills, which the banks and the National Insurance Scheme had taken up.
“The NIS is probably the biggest financier of the fiscal deficit, in addition to the Central Bank which buys Treasury Bills by printing money and in essence intervening in the T-bill market and keeping interest rates low.”
She added, “The IMF has heavily cautioned against the level of printing because that has a direct impact on reserves. It promotes the net outflow of US dollars via a higher import bill”.
She predicted that the island may not emerge from the ongoing recession anytime soon despite improvements to global economic conditions.
Meantime, Ross also warned of the perils of printing money to meet the administration’s financial shortfall.
“In the fixed exchange model that you have, the more the Central Bank finances the Government’s deficit, the tighter the exchange controls have to get to keep the system intact. That’s the policy trade off that the Central Bank is going to have to manage. The tighter the currency controls get, the more creative the private sector gets in figuring how to get around the currency controls,” he added.