Barbados may have no choice but to keep its currency peg to the United States dollar, since ending it could be “a very painful experience”, according to a top international economist.
While steering clear of making any direct pronouncement on whether or not Barbados should devalue its local currency in light of the economic problems it faces, the World Bank’s Deputy Chief Economist for Latin America and the Caribbean Dr Daniel Lederman said ending the $2 to $1 peg could prove to be difficult.
“The smaller the economy is the more painful it could be because we are societies that have grown up viewing the exchange rate as the ultimate anchor of stability for our small economy,” the Barbados-based Caribbean Media Corporation (CMC) quoted Lederman as saying in the Turks and Caicos Islands where he delivered 18th annual William G Demas Memorial Lecture as part of the 47th annual meeting of the Board of Governors of the Barbados-based Caribbean Development Bank.
“It is not an easy choice and it might be no choice at all depending on what we believe is the likely response of domestic prices to the ‘flexibilisation’ of the peg.
“So I would not like to opinionate and I am sure the Minister of Finance [Chris Sinckler] and the Central Bank Governor in Barbados have looked at this tensions with the care and deliberations that it deserves and it is not an easy situation,” the World Bank economist said.
The fired Central Bank Governor Dr DeLisle Worrell had warned the Barbados dollar was facing devaluation because of the continued printing of money to support Government programmes.
Former Prime Minister Owen Arthur also made a case in Parliament in March for an end to the peg, calling for a “debate on what should be an appropriate exchange rate policy that coincides with our contemporary goods, services and foreign capital flows in the context of what is likely to happen to the currencies against which we are pegged taking into account all the other currencies of countries we do business”.
Both Sinckler and Prime Minister Freundel Stuart have already ruled out devaluation of the currency.
Sinckler is due to present the Budget on May 30 amid mounting speculation that the fiscal package could well represent the ruling Democratic Labour Party (DLP) efforts at swaying voters as the island prepares for a general election due next year.
Lederman told CMC that that on the fiscal policy side “once you enter into this painful dynamic of rising debt which means that overtime it begins to eat away at your ability to deliver public service to your people…it is a very tough situation”.
He said there was need to “provide a signalling to our people and to our creditors . . . that we see a long term solution.
“If we are able to fix people’s expectations for the long term in the direction that we can create confidence that will be able to come out as we lay out a transparent fiscal path . . . and a long term vision for the fiscal account for society in general, I think it helps,” he said.
Lederman said the Barbados economic situation was not one the Washington-based financial institution was studying as a blueprint for other Caribbean countries.
“Everybody is paying attention to what is happening in Barbados. The World Bank is a global institution and trust me when I say there are many delicate situations around the world for a variety of reasons.
“So therefore I cannot tell you that we are looking at Barbados with any and more emphasis or care than the care we [are] paying to the situation of indigenous people in Panama or the situation in Myanmar or the situation that Mexico is facing nowadays.
“But Barbados is certainly an economy that we have looked at historically as an economy that has managed to prosper while being small by making tough policy decisions historically. And we have confidence that Barbados will find a way to overcome the current juncture and we are looking at the issues we have been discussing here today, the tensions between fiscal policy and monetary anchor, how drastic it is going to be.
“Belt tightening versus how much new financing can be mobilized and unfortunately we cannot provide a magic bullet recipe for overcoming such challenges. What we can provide is optimism because we have observed in history that small economies overcome challenges and would come out on the other side stronger than before,” Lederman told CMC.