EDITORIAL: Concern over decline in net international reserves

RECENTLY there were some concerns raised in the private sector about the continuing decline in this country’s net international reserves and what would most likely be the response to put a halt to the falloff.

 

It is very normal for the concerns to be raised when it is taken into consideration that the reserves have been on a downward trend since April to May 2013. For the whole of the year the reserves actually fell by over $300 million to reach $1.1 billion based on what the Central Bank of Barbados had indicated in its news release for that year (2013). At the end of 2012 reserves were $1.4 billion.

 

The most recent release which assessed the performance of the economy for the period January to June 2016, said that the reserves had fallen by $43 million, which was half the amount by which they had declined in 2015. The reasons cited for the dip in the reserves were the delays in the major tourism investment projects, fewer arrivals when compared to the same period last year, and external debt service requirements.

 

In the release the Governor of the Bank, Dr. Delisle Worrell said that foreign exchange outflows will be tightened by measures to be announced in the forthcoming Budget. Together these factors should result in foreign reserves recovering form the $884 million at the end of June to $938 “over the course  of 2016”.

 

Many, including private sector officials, believed that some controls might be implemented to stem the flow, a point the Minister of Finance and Economic Affairs, Christopher Sinckler, did not agree with. His argument was that controls which were used in the 1980s and early 1990s were not successful and he sees no reason to revisit that situation. He was also quoted as saying that there would be no rationing of foreign exchange either.

 

 From what has been said, fiscal policy could be the tool which the authorities will most likely be using again in order to correct the situation. This happened in 2013 when the fall in reserves took place. On that occasion government cut its high expenditure and raised taxes and that has been the policy pursued.

 

But in an environment where the economy is starting to see some growth, evidenced by the expansion last year and so far in 2016, one is forced to query how significant will the fiscal correction will be. It is known that measures still have to be introduced to deal with the still high deficit, which at the end of March 2016 was 5.4 per cent of GDP. With the additional measures it is being projected the deficit could be lowered to at least two per cent by the end of March next year.

 

From our limited knowledge of economics, we know that austerity can set back an economy and bear in mind the country has been having a lot of this for the past five to six years while limited growth is taking place. 

 

The country has not been concluding external loans and perhaps this is so because of our current high debt to GDP ratio. Mr. Sinckler has said that financing for projects is still to come into the country as is an injection of funds from the Latin American Bank of which Barbados is a member. Hopefully these inflows should steady the reserves.