The popular online newspaper Barbados Today reported (20.07.2010) the surprising loss incurred by the Central Bank of Barbados (CBB) in the amount of 9.4 million dollars. It is unusual for a Central Bank to report a financial loss in Barbados. Barbados Today quoted President of the Barbados Economic Society Dr. Winston Moore, “The Central Bank of Barbados reporting a loss is a rare occurrence in Barbados. The Central Bank is commonly referred to as the government’s banker, that is, it manages the assets of the central government. The loss reported by the bank implies that the institution was not able to earn enough interest revenue, fees and commissions etc to cover its operating expenses. There are a number of implications…” In response Governor Delisle Worrell referred to 2009 as an “especially challenging” year.
The Central Bank of Barbados has always enjoyed a good reputation at home and abroad. All governments and all politicians have unhesitatingly quoted Central Bank statistics to support arguments. At the start of the global recession the Barbados banking system received a high ranking from the global financial community. As the regulatory body for banks in Barbados the Central Bank would have shared in the praise. The continuing financial stability of Barbados will depend on the good work of our Central Bankers.
One bad financial performance by the CBB should not be reason to panic. Dr. Winston Moore points out in the Barbados Today that if the negative trend continues it could wipe out CBB’s net capital. It appears the CBB is expected to transfer its reserves to the government coffers and therefore is unable to build up adequate reserves to offset significant losses if they were to occur. The article dealt adequately with the financial implications of the CBB continuing to make losses. BU’s interest was piqued by the article for another reason.
Many have questioned the idea whether the Governor of the Central Bank is ‘independent’ in the role. The Governor is appointed by the Prime Minister and probably can be fired by Board of the Central Bank if pressured by the Prime Minister. It must be said that successive governments have treated the position publicly with respect.
BU would have liked Barbados Today to address the issue of independence. To what extent does CBB making financial losses place the Governor under pressure sufficient to compromise decision making.
I am afraid that that you are completely out of your depth with this one. Unfortunately you have confused many issues involving the role of cental banks, and you have asked all the wrong questions. But I’m not going to try to help you, this time!
All this blog has done is to restate the Barbados Today’s position and ask a question at the end.
@Dennis Jones blogmaster of Living in Barbados
We understand that you are leaving Barbados, we have had our disagreements but on behalf of the BU household we wish you and your family all the best for the future.
@Dennis Jones blogmaster of Living in Barbados
We understand that you are leaving Barbados, we have had our disagreements but on behalf of the BU household we wish you all the best for the future.
It is unusual for a central bank to make a loss. It is unusual for a Government to run a deficit on its current account. It is unusual in a period of economic difficulties not to have at least one and perhaps two budgets.All of these signs point in the same direction.
Joachim Fels of Morgan Stanley in a research note to clients warns:
“The longer the banking crisis and the sovereign crisis last (and both are by far not over yet), the more likely we will get a crisis of confidence in the central banks who act as lenders of last resort to banks and governments. Financial and fiscal stability concerns will make it difficult for central banks to aggressively fight inflation pressures once they emerge. Inflation in the U.S. and the euro area is still low, but the UK, where inflation is way above target, may be a leading indicator rather than an aberration. The ECB is just the latest victim – the sovereign and banking crises have forced it into actions that threaten to undermine its credibility over time. The gold price and exchange rates have already been signaling a loss of (overall and relative) confidence in the value of fiat money for some time. Yet, the famed bond vigilantes are fast asleep, lulled in by liquidity, carry and roll-down.”
“Yes, central banks can extend unlimited amounts of credit to banks and governments. But they do so by issuing ever more of their own liabilities – money. And just as the trust in banks’ and governments’ liabilities eroded when they issued ever more, we believe that the trust in money will erode if central banks issue ever more of it.”
“Central banks can go broke and have done so historically, albeit mainly in developing countries. Central bank insolvency may become an issue again, even in advanced industrial countries, if central banks were to assume too many foreign-currency denominated liabilities in an attempt to support or bail out private banks and other financial institutions deemed to be too large or too interconnected to fail.”
@ Dennis Jones
So comrade Dennis can we look forward to a Living in Bahamas next? Should I allert my famliy out there? You must make friendly with them, they put you in contact with different perspective on whole new life…
Slightly off topic, but if we are discussing banks and banking stability, here’s some thought provoking info for you, It appears that the banking crisis has lead to even big international banks laundering billions in illicit drug trade money in order to stay afloat or just pad the bottom line.
So in spite of all the tightened up anti-money-laundering regulations, it seems the only people they will catch or hinder with these regs are your friendly, neighborhood spliff supplier or maybe the man sailing a pot laden pirogue from St. Vincent to Bim (if that), the really big boys in the drug trade apparently still “laughing all the way to the bank.”
OK David, I have relented. Please find a document at http://cdi.mecon.gov.ar/bibl.ar/blio/docelec/fmi/wp/wp0572.pdf
which provides an understanding of the process/policy framewok of central bank operations. I shall wait to see what your bloggers make of it.
You must have noticed how from time to time, a thread of thought, slightly dangerous thought, gets sabotaged by someone placing an interesting, but completely irrelevant and quite long story. It is a sign of power that people try to derail you.
Good question David. There definitely would be implications for central bank independence if these losses persist. It is hard to conceptualise the bank having the same (managerial) independence when it has to depend on government for capital injections, like most other quasi-government agencies. Regarding the independence of advice emanating from the institution, I do not foresee and significant changes. Just restating what the Governor said, however, there is not any need to panic regarding the stability of the central bank of Barbados.
I can’t find the Barbados Today article – which page is it on?
Yesterday’s edition p.7
correct me if i have misunderstood.. but this loss arose only because of a loss on the finanacial markets alone and does not represent other areas of the central bank business…. i could be wrong,pls correct me if i am
It matters not why the losses occurred. What is the focal point is if the losses persist. Given the turbulence or unsettled global financial markets this is a possibility. Then the issue of the CBB’s dependence on the treasury brings into question its independence.
The issue is an interesting one. As noted above earnings of the Central Bank are transferred to Government each year so the Bank is not able to build up retained earnings in the profitable years to absorb losses in the unprofitable years (the financial statements do show a general reserve of $16M, part of which has been eroded by the 2009 loss).
I am not sure it it is fair to look at the Central Bank as a separate entity and read much into the fact that it made a loss. Do they have control over what assets (and liabilities) they hold or is this determined by the Ministry of Finance? For example, the balance sheet shows advances of $274M to government and an investment of $102M in government treasury bills and debentures. There is no clear indication if any interest was earned on the advances.
Also, remember the matter reported in the press where the Bank announced promotions but then had to rescind them. Maybe this was a consequence of the poor financial performance.
My reading of the financial statements (on the Bank’s website) is that they also control a number of funds whose results are not included in the bank’s financial statements – Export Credit Insurance Fund, Small Business Guarantee Fund, Industrial Credit Fund, Housing Credit Fund. It would be interesting to see how these funds performed.
The financials also showed that the bank has lost $3.3M on foreign debt securities – I wonder what it is they had invested in.
Have the statements been prepared in accordance with IFRS.
Is Ben Bernanke (US FED RESERVE CENTRAL BANKER) words today on the so-called “RECOVERY” troubling – where the use of terms like “unusually uncertain prospects” be cause for real concern?
ARE DEFLATIONARY PRESSURES BEGINNING TO SQUEEZE?
This link trumps yours in our opinion.
This george Reid reminds me of Jack Bowman!
Professor Buiter’s article is quite comprehensive – thanks for the link. It is focused in large part however on central banks that issue their own currency and do not have a fixed-exchange rate. The recourse that these central banks have, when faced with a problem, is to print more notes, but ours cannot do that without setting off a run on the Barbados dollar and threatening devaluation.
Recently the Governor has switched focus on gross international reserves and not on the net international position. In other words, if the Bank/Government borrows foreign currency it will appear to have increased its gross reserves, but its net position has not altered. In the long-run it is the net position that matters for solvency. Our gross position has been stable as a result of borrowing which means our net position has worsened. The cost of our borrowing today is 5%, but the interest that our reserves earn (largely US dollars) is close to 1%. So, the more we borrow at 5% to put on a deposit at 1% the more the Bank is going to get into a problem.
The Government can step in to rescue the bank by borrowing itself and using its borrowing to recapitalise the bank, but none of this will be reassuring to anyone and at the end of the day the future of an economy – investing and savings – rests on confidence and confidence in its payments and currency.
We are quite some way from an insolvent central bank, it would be wrong to be alarmist. The central bank is not on the verge of going bust. But as someone else mentioned, this development, alongside the deficit on the government current account, sends the signal that the govenrment is finding it hard and more complex to manage its financial position. If anything was a wake up call that we need to stop the rot and rein in the deficit (either through taxes or expenditure cuts) it is this.
The loss is minuscule, but seriously patrons, Central Banks/Feds are NOT in business. No profits no loss. Unfortunately for those like me from the East we get information only when there is something wrong. Not a good thing no…?
@ Winston Moore // July 21, 2010 at 11:14 AM
Good question David. There definitely would be implications for central bank independence if these losses persist. It is hard to conceptualise the bank having the same (managerial) independence when it has to depend on government for capital injections, like most other quasi-government agencies. Regarding the independence of advice emanating from the institution, I do not foresee and significant changes. Just restating what the Governor said, however, there is not any need to panic regarding the stability of the central bank of Barbados
Prof. Moore, by agreeing with David of BU do you think that this will stimulate a serious and informed discussion on the meaning of central bank independence in economies like those of, say, Barbados?
I have a question for you, and it is intended to highlight the cultural and institutional framework within which central banks in the Caribbean operate. No, it’s not why was Winston Cox fired. It is whether “independence” is a realistic objective when Governor #1 acknowledges that he was “a creature of the Prime Minister”?
I gone fuh now!
It seems you are unwilling to uproot your thinking from the past. Do you accept that we live in a dynamic marketplace today as it relates to Central Bank’s role? The globalization of the world has increased the complexity of governance issues. Part of the problem exposed above is the pressure brought to bear on central banks and from where we sit it will only get stronger. It is important for those who want to protect the stability of their financial markets that they feel open to tweaking governance systems,
David // July 22, 2010 at 6:56 AM
“It seems you are unwilling to uproot your thinking from the past.”
Maybe! But perhaps my cynical view about what very small countries with miniscule resources can achieve in the real world of predatory economics is based on a better understanding of so-called development than yours. Tacitus was probably right! BTW, googling to find a “better” article that you think explains a set of facts is not it!
Why don’t you go back and read Samir Amin’s seminal work. Then you can tell me whether the Barbados “model” of development on the cusp of peripheral capitalism is viable, or is not the source of the recurrent crises that ordinary Bajans are enduring.
I gone, again!
Dr. Winston Moore,
It is a pleasure to see you participation on this BU blog.
However, there are a few little bones we would like to pick with you – so to speak – in regard of two things:
First, with regard to your point as stated in that contribution in the Monday, May 31, 2010 edition of the Barbados Business Authority, that “Given the recovery projected for the US and world economy in 2010, some recovery in economic activity is therefore likely for Barbados by the fourth quarter of 2010 and/or early 2011,” based on the assumption ( based on his research) that “for every one per cent rise in US economic output, real GDP in Barbados rises by around 0.5 of a percentage point”, and on the assumption that “it can take up to about two quarters to see the full effect.”
Now, Dr. Moore aside from US Fed Chairman Ben Bernanke’s recent comments that the outlook for growth in the US economy remains “unusually uncertain” because financial conditions have become less supportive of growth in recent months, there are at present a few divergent indicators that clearly do NOT wholeheartedly support your arguments.
a) The US economy grew an annualized rate of 2.7% ( revised downwards from 3.0%) in the first quarter, according the Bureau of Economic Analysis, whereas the Barbados economy contracted by a further 0.1 % in the first quarter, according to the Central Bank of Barbados.
b) The US economy grew at an annualized rate of 2.6 % in the second quarter, according to Bloomberg.com, whereas the Barbados economy contracted by a further 1.0 percent in the second quarter, according to the Central Bank of Barbados.
c) The US economy came out of recession in the third quarter of 2009, according to Guardian.co.uk. But here is it that, almost a year (way past six months ) since the US came out of recession, the Barbados economy is still mired in depression.
How are you really going to explain such divergences??
And, secondly, on the Barbados Economy Society blog – which we have not been able to access very recently, because we are having some difficulties posting on it – something about the security certificate presented by this website has errors – there is mention being made – under the thread – Commentary on the Central Bank of Barbados’ Press Release by the Barbados Economic Society (BES) – words to the effect that “after a decline of almost 8 percent for the first six months of last year, and having been in recession since 2008, the economy seems to be making a slow but steady exist from the recession.”
Thus, Dr. Moore – as head of the BES – it would be most welcome if you take into consideration that at this stage there are still some serious disequilibria taking place in the so-called economy of Barbados, even while, at this same time, there has been as yet no public explanation coming from any economists in Barbados as to why – having made such a drastic slowdown – there is no evidence physically on any scale to show that the Barbados economy has, in fact, overcome that savage 2009 – 5.5 % statistical performance of the Barbados economy ( we see too that that percentage figure has again been revised by the Central Bank, this time upwards – Table 1 – main economic indicators as contained in the written data of the 2010 Central Bank review of the first half performance of the Barbados economy ).
And, finally, while it is true that you did also in this said piece in the Barbados Business Authority make mention of “fiscal imbalances in the US and Europe playing a significant role in the recovery of the local economy”, it is still clear, according to your analysis, when put in reverse, that there are some fundamental, deep rooted, local factors/variables, which in their dismal awful performances, can be used by any serious thinkers/researchers to help explain why the so-called Barbados economy will continue performing so disastrously unsatisfactorily for a very long time to come.
With all due respect, I find that your contributions on this blog to date have been spectacularly unhelpful – at least the recent ones I have read.
You no doubt have useful information to share so could you consider explaining your views in clear terms so that bloggers can understand?
I find your comment particularly unsurprising. If I give you my analysis free, “will you still love me tomorrow“É Or better yet, buy my book when it is eventually available.
Thanks for your response. I would suggest that if you give me SOME analysis for free I might be interested in what else you have to say and even consider buying your book. If I am to make the decision based on what you have written on this blog so far, then while I wish you all the best, I would have to respectfully decline the purchase of your book.
“If I am to make the decision based on what you have written on this blog so far, then while I wish you all the best, I would have to respectfully decline the purchase of your book.”
Fair enough! I like people who speak their mind ..if they have one. I hope that you are in a distinct minority. Otherwise my attempt to publish would be a collosal waste.