A local economist is raising an alarm that the Barbados dollar could be heading for devaluation within two years if urgent measures are not taken to pull the country back from “a foreign exchange slide”.
Kemar Stuart, Director of Business Development, Finance and Investment at Stuart and Perkins Caribbean, said Barbados was facing a shortage of foreign exchange earnings since earlier this year, coupled with a number of ongoing economic challenges and the situation warranted urgent corrective measures.
“Government should move early to avoid the Barbados economy sliding further to the point of devaluation of the Barbados dollar, which at current economic underperformance, can occur in under two years,” warned Stuart.
“The challenge facing Barbados is a shortage of foreign exchange earnings, a widening current account deficit, increases in foreign debt levels and the expensive production cost to export goods and services to outside countries as compared to other competitors,” he said.
“It is estimated that by June 2023 government may have to consider making exports more competitive by changing its currency peg from 2:1 (BDS$2 to US$1), which would make export cost cheaper and investment cheaper. However this move will astronomically increase the cost of using foreign exchange to import goods and will result in serious shortages and price increases,” he explained.
Stuart, who says he has been assessing this situation since June 2021, noted that while Government has been boasting of significant reserves, which is now over $2.4 billion, this was not necessarily a good thing since it was borrowed money.
In fact, he explained that the high levels of reserves being touted should not be a total comfort in a small open economy where a foreign exchange constraint continues to be a chronic pain in the public finances of Barbados.
“Having high reserves is important. However, borrowing reserves in an attempt to pay down foreign exchange bills doesn’t cure Barbados’ problem but makes it worse if not supported by policy to cut the deficit between foreign exchange leaving the island and foreign exchange entering,” he explained.
“The main cause of foreign exchange depletion is the widening gap between foreign exchange earnings and foreign spending. Between January and June 2021 Barbados earned $1.4 billion, while spending was $2.04 billion, with fuel imports and imports from merchants using $1.3 billion of this earnings,” Stuart pointed out.
Authorities, including Central Bank Governor Cleviston Haynes, have been emphasising the need for a rebound in tourism to help drive local economic activity and foreign exchange earnings.
With the current account deficit reaching a record high of just over $632.5 million in June of this year, and widening even further to a new record of just over $958 million (or 14.4 per cent of GDP) at the end of September, Stuart said the highest current account balance recorded was in 2014 at $894.1 million for a full year.
“The rate at which the deficit grew is of alarm, and it shows the dependency of the country’s survival on travel receipts. The loss in travel earnings resulted in the massive drop in earnings, therefore, causing the gap to widen,” he pointed out.
Travel earnings dropped from around 23.8 per cent of GDP up to the end of September 2019, to a mere 9.4 per cent of GDP at the end of September this year.
“An economic policy to direct the funds from foreign direct investment available for local sector and industrial development is needed. However, there is no incentive to do so in the current climate with lockdowns, curfews, vaccine uncertainty, low access to funding, rising operation costs and low revenue streams. Therefore the excessive borrowing will continue to drive up inflationary pressure in Barbados as government will seek to extract revenue from an already existing and shrunken tax base,” said Stuart.
In his analysis, Stuart said Government faced the dangerous option of continuing to borrow in order to plug a widening deficit should current economic conditions continue.
“The options available will be to use the reserves to plug a US$310 million estimated deficit or borrow additional funds from international financial institutions. The strategy used currently by government has been a joint approach to using reserves as financed by the International Monetary Fund and borrowing from development banks to finance the deficit.
“It is clear to predict that if travel to Barbados does not increase in coming months another round of international debt financing will be required. Currently, the total amount borrowed from these international banks between June 2020 and June 2021 is $852 million,” Stuart pointed out.
Governor Haynes, in his review late last month said “The forecast for growth this year and next remains sensitive to the overall outturn for tourism.
“The reduced earnings from tourism services weakened the current account performance over the first nine months of the year. In addition, exports of goods fell and imports of goods, which contracted the year before, strengthened between April and September, said Haynes.
Stuart also warned that with Barbados signing on to the global minimum tax rate of 15 per cent to be implemented by 2023, that would place “strain” on the global business sector
“If businesses migrate in droves similarly to when Canada extended its exempt surplus arrangement to other countries, foreign exchange revenues will further plummet, causing a deeper shortage of foreign exchange available. These factors have the potential to bring severe and irreparable damage to the Barbados economy,” he warned marlonmadden@barbadostoday.bb
