With global oil prices on the rise again, economist Jeremy Stephen is raising fresh alarm that the country’s dwindling foreign reserves are about to take a “nasty hit”, putting the stability of the Barbados dollar in further jeopardy.
“The reserves [are] about to take a huge hit, and we have to acknowledge that this hit is coming,” Stephen said in a video on his Facebook page.
He explained that while low oil prices had been Barbados’ “saving grace” in recent years, the global market was changing and “the knock on effect would mean a stronger case for devaluation.
“You can do all the monetary policies you want, but as long as the price of oil [was] below US$100, that gave Barbados a fighting chance . . . but [with oil prices again on the rise], I figure we need to have this serious conversation now about what we are going to do,” he said, while describing the situation as “freaky”.
Over the past five years there has been some fluctuation in oil prices, from a high of US$125 per barrel in early 2012 to as low as US$30 per barrel in 2015/2016.
Government spent about $300 million on the importation of oil, gasoline and diesel last year, compared to $452.4 million in fuel costs in 2015, according to official estimates.
So far this year, oil prices have fluctuated between US$55.50 at the beginning of this year and over $60 per barrel at the beginning of this month.
Officials are now predicting a “fair price” of between US$70 and US$80 per barrel, and Stephen warned that if the price goes up above the current rate of between US$50 – US$60 per barrel, this is “literally going to drag reserves down”.
He explained that there was a “deep link” between the price of energy and the country’s foreign exchange reserves, which plummeted to a low of 8.6 weeks of import cover or $549.7 million at the end of September.
“We need to seriously have this conversation. Things are definitely about to get interesting. For the better part they have been bad for some time . . . [but] the reserves are about to take a nasty hit,” he cautioned.
“This makes the NSRL [National Social Responsibility Levy] even worse . . . the cost of driving our cars even more expensive
. . . the cost of energy even more expensive for us . . . the cost of imports way more expensive for us . . . the cost of travel worldwide way more expensive . . . the cost of tourists coming in the country, although most of these people bought tickets already, more expensive for us,” he further cautioned, adding that if the reserves were to dip to as low as six weeks of imports this would essentially mean devaluation of the Barbados dollar, currently pegged at two to one against the United States currency.
“I know it does not inspire confidence when the reserves is at six weeks, [but] this has to be top of mind,” Stephen said, while acknowledging that the price of oil has a major impact on domestic reserves, so too Government’s debt payment and the national food import bill.
Just last week Minister of Finance Chris Sinckler sought to reassure the nation that the Barbados dollar was not in danger of devaluation.
However, addressing the annual conference of the Institute of Chartered Accountants of Barbados, Sinckler said Government was looking forward to the “expeditious conclusion” of the sale of the Hilton Barbados Resort and the Barbados National Terminal Company Ltd, valued at US$100 million each, “to give the country the breathing space it needed to address the medium and longer-term challenges with foreign exchange earnings and retention for the island as a whole”.
“It is true that a healthy reserves position is the bedrock of maintaining the desired peg against the US dollar and, as I highlighted before, our reserves have declined to a less than comfortable level. However, reserves of just above eight weeks of imports are yet enough to defend the local currency,” Sinckler stated at the time.
He also explained that Barbados still had access to second-tier reserves held by other financial and commercial institutions, that could be tapped into if necessary.
“We do not anticipate that such a move would be necessary and to ensure that this will not be the case, we, the Government that is, are working with the Central Bank on a number of fronts to boost the reserves in the short term as we move forward,” he added.