#BTColumn – Govt used its money to purchase its bonds

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by Anthony Wood

The recent revelation by Government Senior Economic Adviser, Dr. Kevin Greenidge, and repeated by Prime Minister Mia Mottley, that Government used 120 million dollars of its money to purchase its own pandemic bonds was surprising to most Barbadians.

The explanation was that the money was taken from the Special Drawing Rights (SDR) funds provided by the International Monetary Fund last year and held by the Central Bank of Barbados.

According to Dr. Greenidge, the Central Bank Act mandates that “the only way to transfer those funds to the Government was through Government issuing a bond and the Central Bank using those inflows to purchase the bond”.

The explanation, which was used to suggest that the Central Bank did not “print money” was repeated by Prime Minister Mottley. As someone possessing a trained Economics and Finance

mind, the thought that a government would use its money to purchase its own bonds is puzzling. Entities including governments typically issue bonds when in search of new capital. Hence, to utilise its funds to purchase its own bonds, the Government is defeating the purpose of issuing the bond. Indeed, there must be a simpler way that the Government can gain access to such funds held by the Central Bank on its behalf.

For example, the funds can be treated as a source of funds like taxation and borrowed funds in the Estimates and appropriated in the normal way when required. Also, like inflows in the form of Foreign Direct Investment for specific projects, a simple arrangement can be effected through the Central Bank for the release of the funds for specific uses.

Barbadians will recall that when the Prime Minister mentioned the Government’s intention to issue the 250 million dollars pandemic bond and launched the marketing campaign for private individuals and financial institutions to invest in the bond, nothing was said about SDRs being used to purchase some of the issue.

The firm impression gained by Barbadians was that the 250 million dollars bond issue was available for purchase by private individuals and financial institutions.

However, and by strange coincidence, the interventions by Prime Minister Mottley and Dr. Greenidge were made only after persons began commenting on the revelation by the Governor of the Central Bank, Mr. Cleviston Haynes, that the Central Bank provided 120 million dollars to the Government by June 30th, 2022. The timing and nature  of the interventions by the Prime Minister and Dr. Greenidge raise a few questions in the minds of some Barbadians.

It is noteworthy that the Prime Minister and Dr. Greenidge were anxious to avoid using the term “printing money” which bothers many politicians. But new money has still been “created” or “printed” for public use by Government through the transfer of the SDRs through the country’s Central Bank.

Finally, whether the 120 million dollars is treated as “printing money” or “money creation”, the economic impact will be the same when the Government utilises the funds. The use of the funds will impact the balance of payments and foreign reserves negatively given the strong likelihood that they will be used for foreign-exchange using activities.

Anthony Wood is a senior economist, former lecturer in Economics, Banking and Finance at the University of the West Indies, Cave Hill Campus. He is also a former Cabinet minister in a Barbados Labour Party administration. This column was offered as a Letter
to the Editor.