The foreign reserves picture appears to be getting gloomier, with noted Caribbean economist Marla Dukharan that in February 2017 the reserves had recorded “its fastest pace of decline” since November 2013.
And the situation is not expected to get any better anytime soon, according to the RBD Group economist.
In the April 2017 RBC Caribbean Economic Report, Dukharan quoted Central Bank data which showed that the reserves fell by 29 per cent in February when compared to the same period last year, to approximately $658 million – or about two months of import cover, “partly due to the domestic monetary base expanding 18 per cent year on year in February 2017 to $2.35 billion”.
At the end of December 2016 the reserves stood at about 10.3 weeks of import cover or $681 million.
It was the 21st consecutive month of declining reserves, the report said.
In a supporting interview, Dukharan said this suggested that the underlying problem was “not temporary in nature”.
And while Government has said that foreign exchange inflows were expected from a number of sources, these were “one-off” or “exceptional” inflows and not necessarily the way in which the country would typically earn foreign exchange, she cautioned.
“The US inflows raised from debt – from the development banks or otherwise – have to be repaid with even more US dollar over time, and the Barbados Government is already running a primary fiscal deficit,” she said, adding that further debt would drive total debt servicing costs even higher.
Dukharan also cautioned that in light of chronically weaker US inflows, borrowing more United States currency now could make things worse in the medium to long term, adding that US inflows for projects were also largely temporary and would flow back out as materials and equipment were imported for the execution of those projects.
“While authorities may suggest that reserves are likely to increase in the near future based on these inflows, I want to caution that any such increase in reserves would be temporary, and would not suggest that the underlying problems have been resolved. The major factor driving reserves lower is the fiscal deficit, and until this is addressed, reserves will continue to come under pressure,” she warned.
The regional economist said it was also important to watch the extent to which the Central Bank was financing Government’s programmes and the negative implications it had for the level of reserves and the exchange rate.
Data to February this year showed that the Central Banks holding of Government debt expanded by 47 per cent year on year to $2.02 billion or 72 per cent of the bank’s total assets, up from 56 per cent in February 2016, or more than twice the level it was in May 2015.
“This demonstrates that Central Bank of Barbados printing and financing of the Government’s spending is still underway,” Dukharan said, adding that coupled with that was the estimation by the International Monetary Fund (IMF) that about 74 per cent of the assets of the National Insurance Scheme was Government debt, which could affect the scheme’s ability to honour its liabilities.
She said it was difficult to imagine that Government would reduce reliance on the Central Bank and the NIS to finance its spending, given that the latest Budget made provision for a wider fiscal deficit for the 2017/2018 financial year.
She said the most two recent downgrades of the island’s ratings “reflect the risk of holding Barbados Government debt, given unsustainably high fiscal deficits leading to weaker reserves and debt overhang”.
And with general elections due within the next year, Dukharan said it meant things may not operate “normally” and therefore Government was less likely to exercise fiscal prudence and implement any major policy shifts that could jeopardize their chances of staying in power.