Although insisting that the Central Bank has not surpassed its legal limits of financing the Government through “printing money”, regional economist Marla Dukharan has advised the Mia Mottley administration to put “urgent emphasis” on reigning in its deficit.
Amid public discourse about whether the Central Bank was printing money, Dukharan stressed that was one of the roles of that institution, and all indicators pointed to it being done within the parameters of the Central Bank Act.
“The problem arises when the Central Bank prints money in excess to finance the Government and/or where such printing isn’t sufficiently backed by foreign exchange reserves . . . .
“There are limits to the extent to which the Central Bank can finance the Government and at this point, we are nowhere near those limits,” she wrote in her Caribbean Economic Monthly Report for August, adding that the Barbados dollar (BBD) is increasingly backed by US dollars (USD) held in reserves.
Dukharan explained that the Central Bank was financing part of the Government’s fiscal deficit as evidenced by the Central Bank’s balance sheet and its quarterly report, where its holdings of Government obligations grew from BDS$703.8 million at the end of 2018 to BDS$941 million at the end of June – an increase of BDS$237 million, or 34 per cent.
“Remember, however, that the Gov’t received the equivalent of BDS$261.6 million from the IMF’s Special Drawing Rights (SDRs) disbursement to nations across the world to support [COVID-19] pandemic-related spending. This IMF SDR injection is not a loan. This is a grant given to the Government, which was then given to the Central Bank in USD to purchase Government securities in BBD, basically returning the funds to the Government but in local currency.
“The Central Bank exchanged one asset for another, in essence, and any ‘printing’ of BBD was backed by USD in this case. If the Gov’t took the SDRs for example, sold the USD to the market in exchange for local currency, and took the BBD and paid salaries, it would amount to roughly the same thing,” she added.
Dukharan also noted that according to the Central Bank Act, the Bank’s exposure to the Government is capped at three per cent of Gross Domestic Product (GDP), Government securities held by the Central Bank cannot exceed five years to maturity, and must be repaid upon maturity, or, if rolled, must be purchased by someone else – not the Central Bank.
Those restrictions, she said, are currently being observed.
However, while noting that the Government has “managed commendably” the challenges it has faced over the last few years, Dukharan said the current administration has incurred expenditure that it otherwise would not, resulting in wider fiscal deficits and, therefore, more borrowing than planned.
“I think it is imperative that the Government place urgent emphasis on reigning in its deficit, which is their intention,” the economic advisor said.
She added that the ease and cost of doing business in Barbados and the cost of living were affecting the island’s external competitiveness, its attractiveness as an investment destination, and its longer-term growth prospects.
“The demographic challenges/aging population amplify the strain being placed on the National Insurance, in particular, which could end up putting pressure on central government finances in the longer term if not addressed urgently. Already Barbados is one of the highest taxed and highest cost jurisdictions in the region, so the question of how to sustainably reduce the deficit is not a simple one,” Dukharan.
However, she expressed the confidence that Prime Minister Mottley could find a fix.