Barbados and other Caribbean economies are being cautioned about the monetary policies they employ, as regional economist Marla Dukharan suggests they follow the example set by the Bank of Jamaica.
In her July Caribbean Economic Report, Dukharan said choosing the right monetary policy framework was critical to improving socio-economic outcomes.
“Yet, when we look at monetary policy frameworks across the region, we largely find a mixed bag of questionable approaches,” she said, without singling out any country.
“There are cases where the authorities target jobs, so they create ‘make work programmes’ paid for by debt.
“Other countries target growth and tend to overspend, driving debt higher. Then there are those who engage in what I would call ‘nothing targeting’ – where no specific policy agenda is articulated, and it is not clear what they are trying to achieve.”
She also pointed out that there were many countries in the region “with what appeared to be de facto ‘votes’ targetting regimes, where the authorities conduct fiscal, monetary, and even exchange rate policy in a manner that reflects their ‘short-termism’ – designed to achieve victory in the next general election, at the expense of longer-term socio-economic wellbeing”.
But she praised the Jamaican central bank for doing things “very differently with a clearly defined and communicated inflation targeting policy regime”.
She said: “In fact, it is probably the most well-communicated monetary policy framework in the world! Inflation targeting is a powerful and effective policy framework because it involves, by extension, monitoring many other macroeconomic variables – the exchange rate, interest rates, unemployment, wage rates, trade, international developments, commodity prices, fiscal policy, and many others.”
Dukharan explained all of those factors affect prices and therefore would impact on inflation whether directly or indirectly, which would, in turn, affect purchasing power, real incomes, standards of living, poverty rates, and inequality.
“Ultimately therefore, inflation targeting is a monetary policy framework that can improve people’s lives and yield better overall social outcomes in a sustained manner,” she said in her monthly newsletter.
Adding that authorities in Jamaica should now focus more attention on human development outcomes, Dukharan said that island was making progress in terms of GDP per capita “unlike Trinidad and Tobago and Barbados, which have seen declines in recent years”.
Citing the most recent International Monetary Fund (IMF) review under the Barbados Economic Recovery and Transformation programme, Dukharan said Government had met all its BERT targets.
She added that while private sector confidence and tourism growth were expected to partially mitigate the impacts of the fiscal consolidation, both foreign direct investment and tourism could be affected by a slowdown in the US economy or a disorderly Brexit.
She said: “The fixed exchange rate exposes Barbados to the risk of US dollar appreciation with tighter US monetary, which would make Barbados less price competitive versus destinations with flexible currencies, such as Jamaica and the Dominican Republic.”