In an historic move, decades-old foreign exchange controls are to be dismantled in a bid to bring in billions of dollars in new foreign exchange, one of the government’s top economic advisors revealed today.
But the “long-term” relaxation of Barbados’ tight grip on the outflows of US dollars won’t be rushed, and depends on the imminent injection of funds from the multilateral lenders, topped up by a possible doubling of reserves from investors.
“We are not going to do it in any rushed and rash way. The country is going through a tough adjustment in order to protect our peg. We are not going to endanger the peg,” the Government’s Special Economic Advisor, Professor Avinash Persaud said.
The plan has received the thumbs up from the International Monetary Fund (IMF), said Persaud, during a 90-minute online panel discussion led by noted Caribbean economist Marla Dukharan on the topic: What does an IMF programme mean for Barbados?
But Persaud was quick to warn that the island’s competitiveness must first be right and its reserves sufficient to cushion any potential shocks that might confront a small economy such as Barbados’.
The relaxation of foreign exchange controls by the Central Bank of Barbados is a long-term process that is to be phased in, said the economist.
With close to one billion dollars in financial support from the International Monetary Fund (IMF), the Inter-American Development Bank (IDB) and the Caribbean Development Bank (CDB) for the Barbados Economic Recovery and Transformation (BERT) programme, the funding would lay the foundation toward removing the controls, he said.
He warned against Barbados returning to the days when foreign exchange was “leaking all over”, partly due to the printing of cash, thereby forcing the Central Bank and exchange control officers to tighten the screws on money outflows even though investors were to be allowed to repatriate the returns on their investment.
“One of the benefits of the IMF’s backing of BERT, of [IDB Barbados representative] Juan Carlos’ [De la Hoz Vinas] backing with the IDB and with the CDB, is that we are probably going to end up with $500 million of new foreign currency coming from the official sector.
“So Barbados dollars and reserves go from $400 [million] today to $1.4 billion. And if that helps to catalyze new investments and we are heading towards the $2 billion mark, we will feel more comfortable about further relations of our foreign exchange controls,” the top economist said.
Professor Persaud suggested the country might phase in the scrapping of exchange controls by returning first to the spirit of those regulations which say that “people who bring money in can take it out”.
But the Government’s Special Economic Advisor assured the country that the removal of the controls would not be rushed into.
“People who are bringing money and to put that money into an investment that is generating foreign exchange, when they take their money out, they don’t actually [drain] the system because they brought that money and they created new money. So we first need to get back to the spirit of our exchange controls,” he added.
Mission Chief of the IMF in Barbados Dr Bert van Selm, who was one of the three panellists along with the IDB country representative, backed Professor Persaud’s comments.
“I completely agree with everything Professor Persaud said. We believe the fixed exchange rate regime served Barbados very well. But, of course, it can only prosper if it is underpinned by the right fiscal and structural policies. It needs to be underpinned by structural policies to help boost growth and it needs to be supported by fiscal policies that are tight enough that they sew confidence and they don’t require monetary financing,” the IMF senior executive cautioned.
“And we also truly agreed with the intention of the Government to gradually liberalize capital controls to make it easier to move money in and out. That would need to be done in a very cautious and gradual way,” van Selm said. (EJ)