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Is Barbados insolvent?
The apparent attempt by the Barbadian Minister of Finance, Christopher Sinckler to remove the Governor of the Central Bank of Barbados (CBB), Dr Delisle Worrell, has caught many people in T&T and throughout the region by surprise.
That’s because anyone who has seen the two men interact at the several investor forums that Barbados has held in Port-of-Spain, and elsewhere, over the past few years would have come away with the impression they had a close working relationship based on mutual respect, complete policy alignment and the need for them to work together to further their country’s national interest.
So why would Minister Sinckler, according to reports in the Barbados media, have given Governor Worrell an ultimatum to either resign or be fired, after the members of the board of the CBB complained to the minister about him?
What can be deduced is that the CBB directors may have felt that Governor Worrell was making statements about the Barbados economy that did not reflect the sentiments of the entire board.
The Barbados media has latched on to comments that the governor made during a live television discussion on state-run CBC at the start of the month, in which Dr Worrell publicly warned the Government that its practice of financing the Barbadian fiscal deficit by borrowing money from the central bank (printing money) was not sustainable.
“We cannot continue to have a deficit and we cannot continue to have a wage bill as high as we are, simply because the only way we are able to do that is by the Central Bank providing financing,” he said, according to a Barbados Today story on Monday.
What that report indicates is that the governor believes the only way that the Barbados government is able to pay the monthly salaries of the country’s public servants is by borrowing money from the country’s central bank, which it gets from commercial banks’ reserves.
What a thing?
If the Barbados government is only able to pay the salaries of public servants by borrowing from the central bank, does that mean there is no bank in Barbados—including the two T&T-owned banks that are located in the country, FCB and Republic—that is willing to lend the country money in order for it to finance its fiscal deficit?
If the Barbados government issued an eight-year, fixed rate bond through its Central Bank—as the T&T government did this week—would the institutional investors such as the pension plans, insurance companies and the commercial banks in Barbados not take up the bond, as T&T institutional investors did?
If the government in Barbados is unable or unwilling—because of the high interest rates it would be required to pay—to borrow money from the banks in Barbados, does that mean there are no banks outside of Barbados that are willing to underwrite or arrange a government bond issued by the island?
When a country reaches the stage where no commercial bank, either local or foreign, will lend it money—and where the main source of deficit financing, the central bank, is warning about the dangers of it continuing to provide financing—then that country’s back is against a wall and the only ladder, shovel or door is the International Monetary Fund (IMF).
In its 2016 Article IV report on Barbados, published on August 26, 2016, the IMF said: At end of March 2016, “central government debt including securities held by the National Insurance Scheme (NIS) reached the equivalent of 141.6 per cent of GDP, from 132.3 per cent in FY2014/15.
“The large funding requirements, totaling about 45 percent of GDP, have been mostly met by the Central Bank of Barbados (CBB), the NIS, and growing arrears.”
The IMF described the arrears as large and growing, estimating that “central government arrears rose from 4.3 per cent of GDP at end March 2015 to 5.9 per cent at end of March 2016, including arrears to the NIS.
“State-owned enterprise arrears are estimated to have risen to 5.5 per cent of GDP, of which the largest share is to the Barbados Revenue Authority (BRA) and NIS. Arrears are impeding private sector transactions, inhibiting investment, and may be contributing to erosion of tax compliance.”
RBC Caribbean economist, Marla Dukharan, writing in her bank’s economic report for December, stated: “CBB holdings of Government debt expanded 55.5 per cent y/y to BBD1.877 billion or 65 per cent of CBB’s total assets in October 2016.
The IMF estimates that Government debt accounts for 74 per cent of NIS assets, and that NIS expenditure began to exceed contributions in 2013, rather than in 2024 as estimated in the 14th Actuarial Review.”
The fact that the Barbados government and its state-owned enterprises are building up arrears, totaling 11.4 per cent last year, means the country is unable to pay off its debts, in particular the interest on its debt, on time—which is the definition of a state of insolvency.
We here in T&T have some experience of this as the country was forced into the arms of the IMF in 1987-88 after the administration led by ANR Robinson (as he was then known) realised that the imposition of the 10 per cent salary cut for public servants, along with the elimination of cost of living allowances (COLA) would not have been enough to balance the fiscal books.
Will Barbados seek an IMF stand-by arrangement?
Up to Monday, I would have said the country would not have gone the IMF route because one of the first conditionalities the fund would demand of the island is that it introduce a floating exchange rate regime. That would remove the long-held fixed exchange rate the governor and the minister have claimed is the way to preserve the population’s accrued savings.
But, it seems to me, that salaried middle-income households in Barbados (teachers and public servants) have not had a salary increase in eight years and, during that period, have faced a number of new taxes and the elimination of tax credits that have reduced their standard of living.
How is that reduction in their standard of living different to the immediate adjustment for the entire country that a devaluation would cause?
If a country is consistently earning less revenue, including revenue from foreign exchange, over a number of years, how do the people in that country not experience a decline in their standard of living?
The issue is this: do you adopt a measure that forces an immediate adjustment on the entire country OR do you continue to pick the pockets of salaried middle-income households by freezing their wages and imposing new taxes on them every budget?
The point being, of course, that if a government is earning less revenue over a number of year, it needs to embark on fiscal adjustment by spending less or earning more...or both.
Some countries in the Caribbean have adjusted their fiscal accounts by selling citizenship (St Kitts).
In T&T, the government here has been able to cushion the impact of reduced revenue because we have the ability to borrow, foreign exchange savings, a state enterprise that was generating cash (NGC) and TT-dollar assets, which can be sold quickly (FCB, Phoenix Park etc).
Barbados may not be as fortunate.
The irony of the Barbados situation is that it had a reasonable 2016 tourism season, in terms of visitor arrivals. Clearly, that money is not being reflected in government revenue there.
Because the Barbados government reduced VAT on the tourism sector, lowered property tax on the tourism sector and provided that sector with a number of other tax breaks as a means of incentivising the sector.
Could it be that the real breach between Dr Worrell and Mr Sinckler is over the issue of devaluation?
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