Notes From a Native Son: Are We Seeing the Beginning of a Chasm Between the Ministry of Finance and the Central Bank?

Hal Austin

Hal Austin

Introduction:
We must all offer our congratulations to finance minister Chris Sinckler for having the bravery to change his mind about the management of the economy. One can only imagine the amount of pressure that was on him, mainly from the DLP’s private economic advisers and the central bank governor, to continue down the policy cul de sac of a stubborn rush for growth at the end of which was national destitution and even more street crime. His decision to launch a Bds$600m economic stimulus is brave, and right, even if it has come a little too late. However, it is better to be late than never.

The challenge now for the minister and his senior advisers is how are they going to source this $600m that is now urgently needed and, once it has been found, how is it going to be spent. He must not resort to posturing or rhetoric and doing dodgy arithmetic to arrive at the numbers. Of course, as I am often reminded, the government is not in need of economic advice from me, nor am I offering it; but, instead of borrowing from external agencies, and incurring even more debt, the minister should dig in to the $1.2bn in foreign reserves which is money left idle, similar to old ladies putting their life savings under the mattress. This would be a much better and prudent strategy than robbing future generations of pensioners by taking it from the national insurance scheme.

The truth is, the Barbados economy is far worse than many people think, and than the government and central bank will admit. Part of this new thinking must be a rejection of the recent Financial Stability Report from the central bank, which is error prone and methodologically suspect.

Quantitative Easing:
A plausible economic strategy must accompany the QE, and this must include a new economic model, based around major infrastructure projects, and not just digging up the roads and willing them in. The driving principle must be job creation, targeting the 16-24 year cohort, the group that poses the greatest social threat to society. However, one of the major unintended consequences of a job creation programme is that, if focused on this important cohort, the group largely responsible for most anti-social behaviour and irritating crime, it will reduce the huge economic costs of criminal behaviour – police, courts, probation service, prisons, private security guards, etc.

If government decides to invest in infrastructure, there are two important points: do not spend Bds$50m of taxpayers’ money unnecessarily developing roads in Warrens, when that money could be better spent building new homes in some of the ancient slums in Bridgetown; second, and very, very important, any construction contracts that accompany the projects must have strict conditionality: that the employers must provide the vast majority of jobs for Barbadians, which is the purpose of the stimulus, and that government’s decision in allocating contracts must make provision for small sub-contractors and the decision will be final. In other words, the fat cat contractors who traditionally milk the public cow cannot rub their hands and expect to make millions from this development without putting much back in society. The strategic thinking is that once the economic crisis is over, and it will not last forever, improvements in the environment will lead to greater real prosperity and all round improvements in lifestyles.

Banking and Financialisation:
There is a view which is common in the central bank, that Barbados is better off without a locally domiciled retail bank, which is further implicit in the Financial Stability Report 2012. Here is not the place to give an extended analysis of this wrong-headed view, but allow me a few words to repudiate it. The report claims it is an analysis of a range of “financial stability indicators for banks and other financial institutions as well as the balance sheet and income and expenditure trends. “For the banking system, financial forecasts are used to project expectations for capital adequacy and the quality of credit. Progressive stress tests ar e also used to test for possible contagion among banks, and from banks’ exposures to financial institutions abroad.”

First, financial regulation is about risk perception and risk management, which is not as simple as the central bank appears to be making. In his evidence to the US Senate inquiry on the banking crisis, when asked why the US government allowed Bear Stearns and Lehman Brothers, which at the time had assets exceeding US$600bn, to go to the wall, Hank Paulson, then Treasury secretary and former head of Goldman Sachs, said basically they did not have a clue. Trying to predict future trends is not a science, but with good actuarial and analytical skills good policymakers could get it fairly right, with good scenario planning, or What-ifs? Central Bank analysts seem to ignore this basic fact.

What if an epidemic were to hit Barbados today? What if there was a cyber attack by hackers from China, or Russia, or even Trinidad? What if the banks’ technology broke down for a number of working days, how would the system work? What if a tsunami were to hit Barbados? These and many more hard questions must be asked when stress testing an organisation. It also involves the management of the enterprise, the policy for lending, who they lend to, rogue borrowers, underperforming loans, etc. None of these are made clear in the Financial Stability Report, nor is there even a proper recognition of the economic situation in Barbados, both households and corporates. Take for example, the obvious one: population growth, which always lags economic growth. Can Barbados cope with a population of over 400000 by 2050, or even 350000 by 2020? The FSR does not say. Yet, according to the Electoral Commission, over 247000 people are on the electoral register, those are people aged 18 and over ; and, according to the CIA Factbook, there are about 53979 aged under 15; excluding those aged under 18 in the 15-24 cohort, that gives a conservative population of over 300000.

Add to this the number of illegals, those who failed to register for whatever reason, those in prison, and the free movement of Caricom citizens, expatriates who have no interest in voting, then we are fast approach the 320000 mark. This, I suggest, is a central issue for any risk projections for financial stability.

Two other important issues: banks are the principal institutions for funding households and small enterprises, yet, with over 12 per cent unemployment, restaurants and hotels in deep trouble, the FSR claims that the problem with financialisation is not enough demand. Can someone within ear shot tell them that the problem in Barbados is on the supply side, banks are not lending to households and small businesses; since they are still in business, then they must be lending to a select group of customers. Clearly, if they are not funding the key drivers of the economy, then they are obstacles and alternative funding must be found for the good of the economy – shadow banks, hedge funds, credit unions, cooperatives, private equity etc. The great implicit risk from banking, however, is the consensus belief that savers, and a number of investors, are underwritten by government. There is also an implicit subsidy of foreign-owned banks, if only as far as customers are local people. So, in the real world of banking regulation, Barbadian taxpayers are underwriting foreign-owned banks, something, of course, which the central bank says it approves of.

In business terms, the tax benefits also allowed on business debt have the risk-bearing on taxpayers. What is also not clear is if the local subsidiaries and branches are ring-fenced as stand-alone Barbadian companies. This must be made clear. By saying it is keeping a close eye on rogue debtors, as it recently did, the central bank is in fact giving a vote of no-confidence in many Barbadian businesses and households.
This aside, a central part of stress testing banks is to examine their capacity to absorb losses, their overall resilience.

However, the fundamental moral hazard in the belief that foreign-owned banks are in themselves preferable to locally domiciled ones is that if there is any weakness in the bank’s capacity to absorb serious exposure to defaults, instead of the regulatory inspectors moving in and taking control, the banks can easily fob them off by claiming the parent company would cover any losses. This is highly dangerous since the parent company would not be under the jurisdiction of the local regulator, and its home regulator would not provide business-threatening information on capital adequacy to a foreign regulator. In any case, what little information we do have about the central bank’s regulation of local subsidiaries and branches does not give us any real confidence. For example, was there a business case for the Republic Bank taking full control of Barbados National Bank, or was the take-over a clever device to hide gathering storms on its balance sheets? I am not convinced. In any case what happened to the market, allowing BNB shares to reach a market price? Is banking regulation in Barbados protecting an oligopoly or do we really believe in fair competition? Did the stress testing carried out by the central bank include a stress analysis of the inter-bank loan and payment schemes? In short, how safe is our money? One advantage of a new locally domiciled bank, providing finance for households and small businesses is that it would not have any legacy problems, therefore it could have lower capital requirements.

This is one reason why Bds$50m of the $600m quantitative easing pot could be used to fund the launch of a post office bank with a national distribution network already in place, operating on the principle of deposit-funded balance sheet lending and barred by law from involvement in the wholesale markets, securitisation or credit default swaps and any such instruments.

Analysis and Conclusion:
In any case, the omens look good for an economic recovery unless Sinckler retreats to political juvenilia by making silly party political points. He must rise above that and remember the demographics of financial stimulation are just as important as the policy itself. If money is pumped in to the wrong organisation or demographics we will find that it will fail to oil the parts of the economy that the policy is intended to.

For example, in the late 1990s, when the Japan government introduced a stimulus in the form of cash to consumers, the national culture of savings was so powerful that households just put the money in the bank, defeating the very purpose for which it was intended. Similarly, the Bank of England pumped £375bn in to buying gilts from banks, insurance companies and other major financial institutions, but the banks used the money to reduce their balance sheet debt rather than pass it on to small businesses and mortgage borrowers as was intended.

The final act in this drama is to decouple the Barbadian dollar from the Greenback, stopping Ben Bernanke from running our monetary policy from a distance, fixing it with a basket of essential currencies and commodities, ie our major trading partners and the products that compromise the basket of goods for the measurement of the retail prices index, and allow the currency to float against all other major currencies. The Barbados dollar is over-priced. It would be economic suicide if Sinckler were to use the nation’s hard-earned $600m to recapitalise foreign-owned financial institutions; the Trinidadians and Canadians would be laughing all the way to the bank, pardon the pun. He must use this opportunity to put right what Arthur did wrong for 14 years and Thompson/Stuart for the last five, got rid of our only bank and major insurance company and failed to put in place a proper economic strategy.

This time, however, he must make sure that the management is sound and that it does not try to punch above its weight, by sticking to balance sheet lending and not engaging in any off balance sheet activities or dealing in credit default swaps or any other form of derivatives. The fact is that it took the US government 25 years, after the 1929 Wall Street collapse, to recover and the global economy is still resetting.
We do not have that time.

76 thoughts on “Notes From a Native Son: Are We Seeing the Beginning of a Chasm Between the Ministry of Finance and the Central Bank?


    • Here is another question: if the 600m is found and it is pumped into the economy how will it be allocated to ensure optimal response? Let us assume the economy gets the bounce expected what next before it reverts to a flatline or comatose state?


  1. In today’s Nation newspaper, Professor Michael Howard is reported as describing the government’s proposed Quantitative Easing proposal as ‘economic madness’. With respect, if anyone is showing signs of economic madness it is surely Professor Howard.
    He is taking the traditional Barbadian intellectual default position of saying what he is against, but not what he is for.
    How does he propose catapulting the economy out of the state it is in at present? What policies would he introduce?
    It is the easiest thing in the world to say someone else is wrong, but slightly more difficult to come up with alternative policies.
    Until we get the full details, the proposal is just rhetoric, but as I have said, it must be new money and not money taken from the NIS or just from public sector efficiencies.
    And it must be spent prudently: on establishing a deposit-based balance sheet retain bank, to providing the financialisation for households and small businesses, and the bulk of the money must go in infrastructure constructions, not repairing roads, but clearing the City slums and providing decent homes for those people in Suttle Street, Welling Street and the surround areas.
    The key must be job creation, in particular for the 16-24 cohort. If Professor Howard has better ideas then let him say.
    Although I am not hung up on the big economies, the Bank of Japan, the Fed, Bank of England, European Central Bank, and the majority of the Asian central banks are all unlikely to be this wrong.
    Our academics should contribute positively to the debate or take their pay packets and shut up.


  2. @ David | March 22, 2013 at 5:23 AM |
    “Don’t we have to find the local dollars first?”

    There is pool of idle savings of nearly $9 billion sitting in our local financial institutions.
    The government can issue bonds to entice cash holding savers to invest and take up the government paper. But this would require a large dose of business and investor confidence in this country and its political management.

    On the other hand the government can divest a significant interest in the air and sea ports to private investors both individual and corporate and use the proceeds to finance its capital works programme to stimulate the economy.

    Under both alternatives the government would still be caught between a rock and a hard place as far as the country’s foreign reserves are concerned. Tremendous pressures would be put on the foreign reserves and in a rather short period the country could be faced with a shortage of forex to pay for regular imports like food, fuel and medicines (and even luxury items like motor cars and overseas vacations). Currently we are running down our reserves because of underperformance of those forex earning sectors like tourism.

    The preferred option is to attract foreign financing bring foreign money to shore up the reserves to counter the concomitant foreign spend component of the Capex stimulus package.
    Our credit rating status and IMF assessment would be the traffic lights to any application for foreign loans or investments.


  3. Surely any QE will result in a demand for foreign exchange, which is not being adequately replaced by exports of goods and services. To then take the actual QE funds from the foreign exchange reserves would put the country in an even more difficult position when meeting the demand for imports. Hello IMF!


  4. …..it must be spent prudently: on establishing a deposit-based balance sheet retain bank, to providing the financialisation for households and small businesses, and the bulk of the money must go in infrastructure constructions, not repairing roads, but clearing the City slums and providing decent homes for those people in Suttle Street, Welling Street and the surround areas.
    The key must be job creation, in particular for the 16-24 cohort. If Professor Howard has better ideas then let him say.

    **************************
    Now we talkin Hal Austin….providing so called stimulus moneys to the BIG FIVE contractors and the likes on ‘pinth modulus ‘ to attract the migratory Neptunes just is “so not in”…..Think more of ordinary Joe,.. from the just relaesed CDB document…the 48% unemployed youths ….their in need of cheaper drugs granparents …..their struggling (some unemployed) parents…that’s who the $ 600M stimulus should be directed to at this time….


  5. Good questions David
    Anyone who thinks that the problems that we face can be addressed by playing around with borrowed money is a non ceramic bowl.

    Why people always have to take SIMPLE issues and make them into complex gibberish nuh?

    We have been living above our means for decades now.
    We have reached the stage where our outstanding loans have grown to the point where we CANNOT afford them
    Our lenders tricked us by lending at low interest rates, but will now “downgrade” us and jack the rates up to unpayable levels
    We are in danger of being locked up for our debts.

    The solution is obvious.

    We now have to pay (sacrifice) for the sweet live we have enjoyed but DID NOT DESERVE based on our productivity.

    We can do this proactively
    ….or re-actively!

    Proactive:
    INCREASE PRODUCTIVITY by 200% (that was a joke 🙂 )
    Or…
    REDUCE SALARIES of all workers by 25%
    Or….devalue the dollar by 50%
    Or…reduce workforce by 30%

    REDUCE imports of commodities by 40%
    Ban imports of vehicles to be reviewed in 3 years

    Reintroduce stop and search operations by joint police/BDF to deter praedial larceny, illegal drugs, guns, and crime.

    ENCOURAGE / allow up to 300% increase in the price of locally produced foods.

    Institute a Public Education program to involve everyone in discussions about the challenges faced and the progress being made

    The REACTIVE approach (which we will no doubt take..) is well documented

    White people will do all of the above for us in their usual caring manner. See Haiti, Jamaica, most of Africa etc.


  6. @ Peltdownman

    You ahve made a good point, but it is not necessarily a macro-economic truth. Put simply: QE will create jobs for many of the 12per cent unemployed, who will go out and pay their bills and buy things, encouraging the shops and stores to re-stock and even take on more staff, who will pay taxes and national insurance, raising government revenue. Some of this money will lead to greater exports and a safer society, better and reasonably priced hotels, new leisure facilities, better manufactured products, will all lead to more foreign earnings.
    But what are the foreign reserves for? This is where proper risk perception and management come in. At present we are keeping foreign reserves because Economics 101 say an independent nation state should.
    The reality is that foreign reserves are there in case of external shocks ie plagues, 9/11, cyber terrorism, etc. Good currency management should sort out some of this, and fixing our currency to a basket of currencies and commodities.


  7. @peltdownman

    Do you realise Hal et al are not addressing the issue of what happens after the bounce created by the stimulus? What analysis has been done to proactively manage forex outflow as a result of the stimulus. The only way Barbados can autonomously defend the parity of the dollar is to guard the henhouse (forex).

    @Miller

    The chart in the Financial Stability Report suggests there is investment fatigue in government paper.


  8. Hal Austin | March 22, 2013 at 7:32 AM |
    “He is taking the traditional Barbadian intellectual default position of saying what he is against, but not what he is for.”

    This is the typical response of the typical small-minded local academic posing as an intellectual but still unable to think outside the narrow confines of academia that has no answers just questions.
    You should know from your boyhood days the old folks in the Ivy and surrounding districts like Carrington Village would tell you Cawmere and Harsun College boys that ‘edication ain’t commonsense’. You now see it for yourself in Bim today in live talk and no action.

    Let me express my appreciation of your submission and support to your proposals to help get us out of this damned mess that is leading to social unrest if the pending economic collapse is not arrested.
    Any economic stimulus must be geared primarily for the rehabilitation of housing in the urban corridor and other revitalization and socially upgrading projects especially in those areas you mention and which should be of major concern to those Bajans living in their make-believe insulated castles in the heights and terraces on this 2×3 rock with a population no bigger than 2 larger boroughs in London like Brent or Lambeth.

    Housing upgrades and development projects have greater economic spinoffs than road construction with a wider and longer lasting multiplier effect on the local economy.
    Road rehabilitation and upgrading should take precedence over building new roads. But there is little contract award kick backs in road upgrades so don’t expect the politicians to be to keen about road upgrading and improvement. This not the area for jada or preconco would feel comfortable. But perhaps we should seriously consider the use of more concrete roads in the St. Michael and Ch Ch corridor with the utilities place at both sides of the road. Then jada and preconco could have a role to play via Rayside Construction.


  9. @bushie
    Lol. Would you put those proposals in your manifesto?

    The problem with being pragmatic and proactive is that political prudence always gets in the way! Good luck!

    Observing


  10. I could not believe my ears, when Minister Sinkler starting boasting in Parliament for the first time GEMS (Hotels and Resorts Ltd) have gone into profit. Is this before or after the last $85 million of debt was written off?
    If they are now profitable, does this mean they are going to repay the hundreds of millions of taxpayers monies lost so far and compensate the private sector hotel industry that they have driven into near bankrupcy through a decade or more of predatory pricing.


  11. @ Loveridge

    Part of the new economic model is to sell off the portolio of hotels that this government is holding on to, including the Hilton. Governments are there to govern, not run hotels.


  12. @ David | March 22, 2013 at 8:07 AM |
    “The chart in the Financial Stability Report suggests there is investment fatigue in government paper.”

    So David how does our government intend to finance its fiscal deficit especially on the current account?
    The MoF can cancel or defer expenditure on the Capital component of the expenditure side of this fiscal equation.
    The only other option is to raise taxes, do you agree?
    What about cutting back further current expenditure like firing a few hundred of lazy bastards from the statutory corporations and Central Government?
    Political suicide or social unrest you call it, David?
    Who will bell the economic cat?
    We are really up a political creek without a financial paddle.


  13. @millertheanunnaki

    Miller you are right. Government should (must) order each department to implement cost savings – 3 per cent a year over the life of this parliament – freeze salaries, including MPs’ (do you notice not a single politician talks about freezinng their salaries), and strategically raise some taxes, car parlking fees is a good example; fix the Transport Board and sell it off, giving workers a major share.
    I also like the idea of a tourist visa, put at $30 each that could raise the funding for the Tourist Board and would not stop a single person from Europe or North America from visiting.
    Make insurance companies pay for the free-loading that they get; motor insurers in particular; every time they call out police for a traffic accident they should be compelled to pay, each person who has to go to hospital they should pay for.
    Barbadians say they are over taxed, yet they will gladly live in Canada, the US or Britain, paying local, state/county and national/federal taxation.
    Impose an environmental tax on households, make those expensive homes on the West Coast pay more taxation, set the tax inspectors on those professionals who cheat on their tax returns.
    Alcohol, smoking and sugar are the causes of our heavy health bill, make them pay.
    The list goes on.


  14. @ Observing

    The alternative to being pragmatic and proactive is that you will suffer and die….. But that is a common approach to be found in brass bowls from the things the eat (and end up with diabetes and high blood pressure) to the way we spend money on education (and end up with hundreds of parasite lawyers).

    The PROBLEM is that we have been living a stimulus for the past 20 years – a near 20 billion dollar stimulus, …and have enjoyed the resulting “bounce” as David calls it.
    OBVIOUSLY that must come to an end when reality hits – as it now has.

    To suggest that the “solution” to the effects of such a stimulus is another short term stimulus is idiotic at best….Professor Howard is exactly right.


  15. The other point worth mentioning is to question the integrity of the Central Bank’s data collection system. A view of their website shows an uncomfortable lag in reporting. How nimble is their data collection to allow for quick proactive decision making?


  16. @ Bush Tea | March 22, 2013 at 8:00 AM |

    I must admit to the intellectually impressive quality of the contributions this BU blog tends to attract especially on this thread so far.
    But BT man you take the biscuit with your proposals for Bim’s economic salvation.
    You need to change your moniker from BT to “Star Trek” to boldly go where no man has gone before.
    It would be interesting to see if your new admirer D J on the radio takes you up on your, should we say, “out-of-this world” solutions for Bajan survival and luxury-style way of life.
    But remember BT those who the gods seek to destroy, they first “big up”.
    Hubris is the Karma of thinkers like you who seek to sit around the ethereal table of divine knowledge of good and evil.
    Watch your step, BT now ST, or you might find yourself running afoul of your beloved PM and MoF. Your suggestions are in total contradiction to their promises of an easier and brighter tomorrow for Bajans. LOL!!


  17. @ David

    Central data, and therefore projections, is fiction. Tell them to do what all developed central banks do, put their methodologies and data on the website.
    I can track the Bank of England because I know what they do, they are transparent. The same for the Fed, Bank of Australia, etc.
    Not the Barbados central bank. All we get is what the governor does not believe in, not what he is for. How about the board: do they interrogate him does he have to explain himself to the board?
    How about the central bank and FSC carrying out the Financial Stability Report – banks and insurance companies have different business models, they are in effect rival bodies, and should be stressed tested differently.
    But then again the central bank is convinced that financialising in Barbados has a demand problem, not supply; then two days later it issues a statement saying it is keeping an eye on rogue loans.
    Get them to explain that.
    But here is the key: our central bank, our great regulators, has admitted to getting information on banks and insurance companies by reading their annual reports.
    Can you believe that. Read the Clico annual reports in the years before the brown stuff hit the wheel.
    The central bank is not fit for purpose.

    .


  18. Now that Prof. Howard has broken ranks with the MoF about “stimulating” the economy it would be very interesting to openly hear from the other Prof. Emeritus, frankly speaking of course.

    Is he going to side with his professional and academic colleague or let him the poor outspoken professor go it alone in his protestations?
    But we all know what that disloyal old professor did with the late Wendell McClean and the NDP.
    A real snake in the grass. But this one will not be the talking one in the garden.
    Don’t expect him to come out and state his position. If he does we would most surprised and grateful for his confessional responses.
    Is he still against any economic stimulus as he argued during the elections or is he for stimulus now?
    But we have a slither of light emanating as truth based on his recent pronouncements on privatization extolling its benefits to the economy and country.
    Hypocrisy is the hallmark of this deceitful government and the academic frauds acting as its economic advisors.


  19. Bush Tea………….wonderful proactive and very creative ideas from you and others, however, how will any of this be implemented if there is no payoff, bribe or kickback involved…………as I see it these politicians don’t realize yet that an ounce of prevention is better than a pound of cure……they are in denial that when the US economy crashes out, that the Bajan dollar will disintegrate and if they do not know what to do now the ship is sinking, they will all have to run away when that happens cause no amount of lies or sweet talk will cut it then.


  20. millertheanunnaki | March 22, 2013 at 8:24 AM |
    We are really up a political creek without a financial paddle.
    —————————-
    miller could Jesus H Christ you reciting the same effluent since DT put a cut ass on the Bees in ’08. Stuart join the fun with a repeat cut ass in you all tail still you crying wolf.

    If BIM didn’t collapse as you insist it would in the last five years its not going to happen now.

    You, onions and the scratch grain pickers must stop listen, learn. The DLP knows what its doing reason why we return them to the little room with a Carlisle Bay view. OTOH we the people relegate you all to the Bush Hill in some instances to Pinfold St.

    Look we nauseous from miller and BT feeding us empty chants of cawmere cawmere. Those are days of yore like donkey carts and chiggers. The rest of schools carry the sway now they just don’t annoy the country like the big hard back ‘children’ from close to Glendairy.

    Take a cue from Lodge, , CP, HC, Foundation, St. Michaels, QC just chill. Take a break lime among the sargossa at the Bay by the River carry along obnoxious loud mouth Mike Williams with you. Even tired COW tired of he.

    The $600 stimulus is targeted perfectly a surgical incision to accelerate employment and commrce simultaneously building out infrastructure and growing the economy.

    Dont be swayed Fruendel be fearless MOF, eyes to the skies Team Dees go ahead the real populi are behind you.


  21. @ Hal Austin
    “But what are the foreign reserves for?”

    Believe it or not Hal, they are in a large part for purchasing inputs to the manufacturing sector which, according to your plan, will be burgeoning. They are also for purchasing the outrageous amount of imported food that Barbados consumes. Any stimulous would have to partly address the rehabilitation of the agricultural sector, unless, of course, we are prepared to remove the rural population altogether. If we reduce our food import bill by 50%, then I can see your plan to use foreign reserves having some merit. That’s a big “if”, because I see us going down the same old road, with the commercial sector importing all kinds of consumer goods, to soak up the extra loot in the economy.


  22. @ Peltdownman

    They are not. It was a rhetorical question. Foreign reserves are simply a hedge against ext ternal shocks, nothing more nothing less, based on risk perceptions. Good currency management, decoupling from the Gr eenback and fixing to a basket of currencies (our main trading partners) and commodities, basic foods, should lead to a reduction in foreign reserves build upp.
    In fact, since the beginning of globalisation, developing nations have built their foreign reserves when logic says they shoulkd be freer to use that money wisely.
    In Barbados, the mantra of foreign r eserves is even talked about by school kids. I have a friend who teaches at Cave Hill, he is always telling me about building foreing reserves, when I ask for a sound macro-economic case for building foreign reserves, he becomes dismissive.
    Most people talk about foreign reserves because that is what the governor of the central bank says is goo, and his supporters at Cave Hill.
    What is the intellectual case? In reality there is none for such huge piles.
    Spend half the money on QE. Be brave and innovataive.


    • @Hal

      Let us summarize your last comment in simple terms. We spend a significant chunk of our foreign reserves in a climate where consumption behaviour is endemic? What will those who factor behavioural economics think?


  23. @ Watchin | March 22, 2013 at 9:35 AM |

    Poor miller, cussing the DLP since 2008.Where was I now?

    But we shall see. As your pit bull Dr. David now reduced to a poodle called Stuartie often repeats time longer than a gallows rope.
    Rome was not built in a day neither would Bim fall in one. But all the cracks are there unless fixed very, very soon.
    You go ahead and ignore all the warning signs. You realize that the UK foreign Office has Bim under watch? Never before has this happened?

    But you continue to play the lying numbers games. The UK Foreign office confirmed that 180,000 British citizens visited Bim last year. But this government is claiming 250,000 made the trip. A massive difference of 70,000. Now whom should we believe? Even if we take the government’s figure, don’t you think that such a market needs proper protection and inducements to perform better?

    You continue with your arrogant backside high in the sky and your empty head buried in the soon-to-be absent visitor beach sands of Barbados.

    Yes go ahead and continue to fcuk with the Brits. Once the Brits go everything is over for this growing tourism wasteland.


  24. $600M Stimulus is Labour Demand focused as opposed to Consumption Demand, the LD generates sustainable growth .There will be a foreign reserves cost of approx $420m, yet recoverable.


  25. @ David

    You say spend, I say invest for the medium and long term. Consumption is one of the three main drivers of any economy: the other two are corporates and the public sector. In good times, consumers and corporates drive the economy and government takes in added revenue; in tough times, like these, when consumers and corporates are not spending, it sis the public sector’s duty to spend.
    But there is also need for deep structural reform. We need an inheritance tax. When I was last in Barbados I told a former minister this and he laughed his head off. No, no man, we do not want that here.
    But, it is the simplest and most just way of spreading wealth; further, most inheritance wealth comes through property, which has an inbuilt bias towards the property owner. Thus the small guy is subsidising those on the West Coast with their mansions, which they pass on from generation to generation without a death/inheritance tax.
    They laugh all the way to the bank.
    There should be no free meals in Barbados, especially for those who could afford to pay their way.


  26. Inheritance tax to achieve structural change is a backward step. Economic structural change reguire equitable and sustainable growth measures andthe avoidance of jobless growth


  27. @ New Blood

    Inheritance tax is about the distribution of wealth, the most important policy aim in a liberal democracy. Most household wealth is built up through property, which has a tax bias, which is then passed on from generation to generation, giving the children of the wealthy an unearned advantage in life.
    Structural changes come through prudent management – cutting out the deadwood, introducing more efficiency processes, such as the use of technology across government.


  28. @ NEW BLOOD | March 22, 2013 at 10:59 AM |
    “There will be a foreign reserves cost of approx $420m, yet recoverable.”

    Glad to you have managed to identify and even quantify the forex component of the stimulus.
    But doesn’t labour demand (LD) eventually translate into consumption demand (CD) within a matter of months if not weeks.

    So tell us New Blood where would this $420 million equivalent in forex come from? The existing reserves which this administration said can’t happen and will not be touched to jeopardize the country’s currency peg aka trigger fears of devaluation?
    Certainly not the NIS whose “surpluses” are denominated in Bds $?

    It must come from overseas investors or lending institutions.

    Now let us pose a question to you.
    If you were an overseas lender would you risk such a large investment in a country with a debt profile like Bim with junk rating status attached to it?

    If we approach the IDB then we would have to immediately execute and complete the terms and conditions that have been already attached to the US $33 million loan for balance of payment support of which Barbados has not yet qualified for draw down since mid last year.

    The lender of last resort is the IMF; would you approach them?

    But then again we can always resort to the illicit loan sharks called the drug barons as wisely advised by one of our leaders of integrity.


  29. @ miller

    Miller you are right. I think the mantra of foreign reserves is confusing the issue. Barbadians overdose on this mantra like a religious tract.
    I would pay anything to sit in on undergraduate economic lectures at Cave Hill to hear these lectures.
    Job creation leads to greater consumption etc etc as I have said. Workers will go out and spend and shops/stores will have a greater intake and will expand by hiring, restocking.
    Foreign reserves are a hedge against external shock. It is part of scenario planning in risk management.
    By investing in infrastructural developments, once this awful cycle moves on, society will benefit from the capital projects – clearing slums, creating a theme park, leisure centres, the right educational courses and skills (not more lawyers, journalists and PhDs in cultural studies) – something that future generations would benefit from.


  30. During the election campaign the BLP put forward a stimulus proposal of $90M – this was pooh poohed by the the Minister of Finance, The Gov of the Central Bank, a number of Economists including Frank Alleyne who said that such an attempt could mean that Bajans would develope an appetite for imported goods and that would be a further drain on the foreign reserves of the Country and rather than help the situation cause further problems.
    Now 4 weeks later the Minister of Finance announces a stimulus package worth $600M – what have I missed here? what has changed so significantly that Barbados can now afford to do this? For my benefit can someone explain it to me? And why is it that the only voice of dissent to be heard has been Pro. Howard, have all the others gone dumb? obviously the Gov of the CB is now in agreement and so are we to take his silence as agreement?

    This Govt is not prepared to take the hard necessary steps to deal with the Country’s problems of reducing Govt expenditure etc and will continue to borrow from NIS every month to pay salaries. With our recent downgrade to Junk bond status its long before we will be forced to go to the IMF who are waiting to deal with us.
    Like it or not Pro. Howard is right, Economic madness.


  31. @Miller
    The MoF knew that capital projects were required, the forex will come from current reserves. FT govt must by all means attack unemployment urgently.
    Added forex will come from the sale of 33% of the ports to T&T. FT and MoF were aware of this approach during the election but said nothing, the Blpwas blindsided.


  32. Ignoring the fact that Barbadians have a cultural disposition to live beyond their means – or punch beyond their weight – put it how you like, the reality is that our leading economists do not have anything of substance to contribute to this discussion.
    Just a minute ago I received an invitation from the London Business School for a discussion by some of the UK leading academic economist and policy analysts.
    It is a debate that has been taking place, in public, for the past four years. Not only in the UK, but over the developed world.
    Policymakers have tried and introduced QE, Credit Easing and other forms of helicopter money in order to stabilise economies and help them to grow.
    Some of these policies have worked better than others. But the point is that people are talking about monetary and fiscal policy in a serious way.
    I still have the impression that the ordinary Barbadian does not realise the seriousness of the situation. They still think it is a party political discussion.
    No, it is not. This is the real deal, not a dress rehearsal.


  33. @ Hal Austin | March 22, 2013 at 11:24 AM |
    “Most household wealth is built up through property, which has a tax bias, which is then passed on from generation to generation, giving the children of the wealthy an unearned advantage in life.”

    A society like Barbados with its built-in bias against the poor and its ordinary black population because of stark historical exploitation should see inheritance tax as a way of helping to level the playing field if we are to move towards a meritocratic society.

    Why should a child with “ordinary” educational potential and simple intellectual capacity have a distinct financial advantage over a poor bright child from “tenantry” village in rural Barbados just because of the wealth “hand-me-downs”?
    Why not let the rich kid’s family estate make a greater contribution to the pool of educational resources freely available to both children. To whom much is given much is expected.

    An Inheritance Tax can be easily administered in Bim with an exemption threshold being equivalent to say $300, 000 or something in line with land tax thresholds. Financial wealth like life insurance and other investment type paper might be subject to different rules. The rate of tax must also be kept low so as to minimize tax avoidance schemes and outright evasion by the inheritors. This is not new ground revenue collection we are breaking. There was once an inheritance tax in Bim but was abolished a few decades ago to satisfy political demands made by those with money.

    A low rate inheritance tax is not a tax on new investment or production but on a transfer of wealth from the dead to the living who see it as a gift and not something earned by dint of hard work.


  34. Inheritance tax was abolished by which admin BLP or DlP? In Bdos, where the a person major asset is house and land valued over $300,000 the average Bdian will be subjected to such a tax . The wealthy will create trusts to avoid the tax. If you want to tax wealth introduce a capital gains .


  35. @ Hal Austin | March 22, 2013 at 12:11 PM |
    “I still have the impression that the ordinary Barbadian does not realise the seriousness of the situation. They still think it is a party political discussion.
    No, it is not. This is the real deal, not a dress rehearsal.”

    That is so true it, is awfully frightening to understand.
    The quality of the debates currently taking place in our Parliament is indicative of this malaise of ignorance informing our policy and decision makers. These guys are still blaming a pre-2008 economic model for our current situation and just shooting in the intellectual dark to identify a way forward.

    But what is most alarming is the number of lies, bullshit and statistical gerrymandering passing off as facts and reliable projections that few are brave enough to question and exposed as the statistically mad machinations of an idiot posing as an erudite MoF.
    Only in Bim can a buffoon of a financial monkey handling an economic gun be the star attraction in this circus of confusion.

    They continue to wait for QE from the bigger boys up North while shooting and robbing visitors to the Island.


  36. Hal, what is an “external shock” if different from what we have experienced in the last 5 years? The Keynsian model that you postulate is all well and good in a large open economy. I am not so sure about a small open economy, especially one whose population is addicted to foreign consumer imports. Don’t get me wrong, I believe that we need a stimulous package based on improving infrastructure, but not in raiding the FX reserves.


  37. @ NEW BLOOD | March 22, 2013 at 12:30 PM |
    “The wealthy will create trusts to avoid the tax. If you want to tax wealth introduce a capital gains”

    Fair enough!
    But if the tax authorities here can’t even effectively manage a simple VAT system do you know what they would be up against with a Capital gains tax?
    You would now see tax avoidance and evasion at its most sophisticated.
    The incestuous relationships in this myopic society are too ingrained for such tax efficiency and fairness to prevail.
    Case in point: Leroy Grenverbs received gratuity payments albeit by illegal circuitous means. But because he has friends in high places has failed to declare and pay the appropriate Personal Income Tax on this source of taxable income.
    Can you imagine if he had to pay CGT on his many properties if they were to be sold or transferred?

    The man is a veritable leper indeed! Untouchable to the max in all aspect of law enforcement in this country.
    So let us stick to a “fairer” tax method of making the better-off dead pay a bigger share for the easy living.


  38. @ peltdownman | March 22, 2013 at 12:43 PM |
    “I believe that we need a stimulous package based on improving infrastructure, but not in raiding the FX reserves.”

    You need to explain further your contention above.

    Most of that infrastructure type stimulus would also involve foreign inputs.
    Where would the forex to acquire the foreign components of the infrastructure projects come from?
    What about the labour component both local and imported? Wouldn’t labour costs lead to forex leakage either by way of remittances or for demand by local worker for imports too?
    In which ever scenario you paint, significant forex leakages are involved.

    What should be aimed for is to earn enough forex to return to the tank to keep it at levels to keep some for a rainy day and to reduce the threats or risks to a currency readjustment.

    Explain you position regarding the option of borrowing from overseas to finance the forex component of the infrastructure or capital works stimulus bearing in mind Prof. Howard serious concerns and reservations.


  39. @Miller
    Leroy Greenverbs fronts for a Tdian, LG is not wealthy he is the carpetbagger .
    Our tax authorities have competent staff .How was it LG bambozzled so many educated Bdians . But let the blog stay on the main topic


  40. We need to start by questioning to what extent this is a real economic stimulus package at all. For a start the Minister said that it includes $300 million of capital expenditure that was already proposed, so that halves it immediately.
    How much new money is proposed? I don’t see mention of any projects we didn’t already know about.
    It’s smoke and mirrors.


  41. @ NEW BLOOD | March 22, 2013 at 1:21 PM |

    What happened, man? Cut to close to the bone and exposed a raw nerve to spill fresh blood?

    How can we talk about improving our fiscal position through efficient tax collection efforts while turning a blind eye to blatant bold-faced tax dodgers?

    Would you consider a man earning nearly $75,000 p/m with guaranteed bonus and gratuity payments a poor man posing as a carpetbagger or gopher for a Trini con man?
    Where did these monies end up in Trinidad or Florida?

    The acid test of any efficient and effective tax system is enforcement of the tax laws and regulations right across the board without fear or favour.

    So are you still prepared to push your CGT in little unsophisticated Bim or would you settle for an inheritance tax on legacies over a certain valuation?


  42. We have lawmakers. Stop companies from owning domestic homes, trust law will have its parameters. The government has got lots of land from which I can extract value. The the Eye Hospital/ welfare department, one of the most desired pieces of land in the City; or the Old Hospital, which has been disused since 1963, before most of our parliamentarians were born.
    All we have used it for have been a few offices and to accommodate medical students.
    Why do we always look for the negative, why we cannot do things. Grantley Adams filled in the sea to create the port and we have not had any major capital project since then.
    The ABC, a design nightmare – someone standing by the airport and thinking how can we get tourists to the West Coast, I know what, build the ABC – and the airport has only been tweaking.
    Let us do something big: a theme part at Ragged point/Culpepper island, a monorails from the airport to Codrington College, inthe first instance; a series of leisure centres in St Philip, St Andrew and St Thomas, get the drydock working again; what about a new shrimp fleet?
    What we lack is the guts to do things,
    Our big problem is one of imagination. What is a Chinese cigarette factory going to contribute to the long-term health of Barbados? What is a cheap Cost-U-Less going to contribute to the long term development of Barbados?
    This is problem of both parties.
    This generation of politicians, academics and policymakers have betrayed our nation.
    By the way, I am not a Keynesian, nor Neo-Keynesian. The labels do not fit.


  43. @ NEW BLOOD | March 22, 2013 at 1:21 PM |
    “Our tax authorities have competent staff”

    It is people like you who are doing this country a serious disservice by hiding your head in the sand leaving your bare ass exposed.
    Did you read the Auditor General’s reports about tax collection, recording and reporting?
    How can we have competent staff in a 2×3 island in which every body knows who is not paying their fair share of taxes but hundred of millions in VAT, land tax and income tax arrears still remain outstanding? What about hundreds of thousands of motor vehicles that remain untaxed and uninsured?

    Barbados does not have any great natural resources and relied heavily in the past on efficient tax administration to finance it social development.
    What we are experiencing today is pure disrespect for our revenue laws and a consequential constipation of our fiscal system and attendant deterioration of our social services.

    If our tax authorities indeed have competent staff why is there a pressing need for a Central Revenue Authority that should be in place by April 01, 2013 as agreed with the IDB as part of the conditions for a loan of US $33 million fiscal support?


  44. If they continue to refuse to use imagination, creativity and innovative skills to initiate all of the above suggestions, nothing will continue to happen. They are collecting salaries every month thanks to the taxpayers and not one of them over the last few decades have done anything but enable wastage, how do you get them to see that it is possible to successfully do some if not all of the above and move the island out of the present corrupt and useless mode that has been allowed to flourish by the current batch of leaders?


  45. Do civil servants have annual performance reviews? If so, if they are continually under-performing what happens? I know the bully boys running the trade unions must be dealt with, which involves scrapping the corporatist nonsense of the Social Partnership. Government is there to govern.
    Start sacking the under-performing workers, from permanent secretaries to cleaners.
    This must be part of the new model.


  46. Sacking non performing civil servants and government employees can have rippling effects, remember over the last four decades or so the practice of cronyism, nepotism and all sorts of incestuous relationships have been prevalent in allocating jobs to individuals across the board, this will now be a haunting cause everyone knows something nasty, disgusting and criminal about everyone else. One you can get past that viperous mess, then maybe some change can be affected.


  47. Should read…………once you can get past that viperous mess of stealing land from the elderly and stealing this, that and the next among other shameful scandals, then maybe some change can be affected.


  48. Let’s get ethics in politics. I remember as few years ago the hospital pay roll was packed with ghost workers – people getting paid every month, but not known to the full time staff.
    I am sure the hospital was not the only public body to have that.


  49. This as been going on ad nauseam and indefinitely, as long as the leaders refuse to put transparency laws, integrity laws or any ethical laws oin place this will just continue to be a vicious circle. Trinidad’s integrity laws has seen a minister up for sanctions or arrest or dismissal nearly every week. The leaders in Bim continue to play a game and don’t realize that it is about to come apart at the seems, their take is as long as the taxpayers have money to pay them a salary they are good to go. Just sit back and watch the next eight months. I don’t believe people who have degrees don’t understand that for every action there is an equal reaction. I am beginning to question how some of them obtained degrees but somehow were not present when common sense was being shared


  50. @Miller
    You have precisely listed my concerns. Any stimulus package will create all these demands on foreign exchange, but only after the forex reserves have been raided for the stimulus itself. You stated the following:
    “What should be aimed for is to earn enough forex to return to the tank to keep it at levels to keep some for a rainy day and to reduce the threats or risks to a currency readjustment.” I couldn’t agree more, but if the stimulus creates growth, as it should, then the sense of “wellbeing” it will create will see little or no effort in encouraging the creation of new foreign exchange earning projects. How long have you lived here? You know that the concensus in government even now is that we don’t need to do anything – it’s everybody else’s fault. If we take $600 millions from the reserves now, and the Cyprus situation spills over to other European banks, (and it will) what is left to protect us? The IMF!


  51. Either way, spending more than you earn will cause money (it’s only paper) to disappear. IMF just has to sit tight and wait it out.


  52. @ peltdownman | March 22, 2013 at 3:09 PM |

    We don’t think that either you or the goodly Professor need be overly worried about any large stimulus package coming from this administration in the very near future.
    The money to finance any capital account stimulus cannot come from current tax revenues which must be first allocated to meet government’s current statutory obligations.
    Didn’t you hear the Minister of Education say that the UWI funding problems would be resolved from April coming?

    You really feel local private sector players like jada or preconco would enter into any PPP capital works stimulus that would require them taking their own resources or borrowed money from the banks without guarantees from the MoF and which must appear on the books as contingent liabilities?

    You really feel that jada and preconco would get burn again so quickly after involving themselves in projects such as Coverly where there are still many unsold units a situation replicated right across the housing stock of Barbados?

    This MoF has made many pronouncements in the past about large capital expenditure projects and funding arrangements that have not yet seen the light of day.
    Treat that stimulus pronouncement like the announcement for the construction of a new hospital.
    These Estimates have prepared as a stop gap measure and to impress the simple minded that the government is in a financial position to make a difference to Barbados’ economic situation.


  53. On another subject,President Barack Obama has put the Zionist Benyamin Netanyahu in his place in a most refined manner,the style of which many in our Parliament can emulate.Recall this Zionist hawk went overboard in giving the world the impression that the racist Mitt Romney was the President in Waiting of the USA and equally that Barack Obama was toast in ignomony of the other one term President as was GH Walker Bush.Besides receiving standing ovations by sensible youthful Israelis yesterday, one of the last events Obama oversaw at the airport today in Israel was Netanyahu having to call the PM of Turkey and apologize for killing 9 Turks on a ship bound for the West Bank a few years ago and further Netanyahu has had to agree to compensate the families of the 9 Turks.The Zionist has been chastened again.You would think that Palestinians are not human.Obama the Man!


  54. Clear the urban slums as part of capital projects/stimulus package by all means. But also take the opportunity to encourage residential enclaves along highways 2 and 7 with a view to reducing the unhealthy balance of electoral representation from St. Michael and Christ Church, which will only promote further unbalanced decision making re. development projects. Money for agriculture and fisheries is a low priority because of the imbalance.


  55. Shouldn’t a stimulus try to involve more than the interest of the construction cabal. Serious effort needs to be put into agriculture (including praedial larceny) and manufacturing. Government should take a serious look at its payroll and try to rationalize without terminating too many of its staff. A freeze on hiring would be a good start as employees retire transfer staff to facilitate, and the unions need to get with the program, it is do or die time.
    The tax regime needs also to be looked at. I work for a large company and our revenues have decreased by 25-30% since VAT increased, as you can imagine, we are struggling mightily and it will end with a great many layoffs if something is not done. As a consequence VAT collection has reduced so has our imports which will reduce revenue collection of duties. Even the freight agencies are saying the quantity of containers coming in has greatly reduced.
    The energy policy should be adjusted to make hybrid vehicles more affordable to reduce fuel imports. The government has made no effort in this area and the only reason I can see is that it doesn’t actually want to reduce fuel consumption so they can continue to reap the duties from the sale of petrol.
    Clyde Mascoll calculated during the last Administration that 40 cent of every dollar in Barbados went to the government. Government makes more money off most imports than the wholesalers and retailers. We are now paying more taxes than ever. Businesses and citizens of Barbados are in a chokehold caused by years economic incompetence.


  56. By the way i saw a economic statement from Owen Arthur in the newspaper. Welcome back to doing what you are paid for by the taxpayers of Barbados as crooked as you are I look forward to frequent contributions from you and to your insight.


  57. The government needs only to reduce VAT, social services functioned just fine prior to the increase in VAT and other giveaways that seem to be the norm of electioneering. I dont know if you live here or how involved you are with commerce but business has almost come to a complete halt in this island. In my job i work with senior people in the distribution and retail sectors along with the major covering the supermarket and food business along with major international freight movers. If they don’t release the chokehold VAT intake will be lower than ever and even the most stubborn tax monger will have to admit that is counter productive. Revenue’s in essential services (food & healthcare) has dropped 25-40%, non essentials (boutiques, hair salons etc) have dropped in excess of 60% in many cases. Boutique owners are closing stores and selling from their cars in alleys in Bridgetown. They are many un-rented properties in Bridgetown.


  58. For the last three years people were warning the government that businesses will come to complete standstill if they did not do what taxpayers were paying them to do, now we know that they did not know what to do. If you think business is at a standstill now, wait until next year if they still remain clueless.


  59. First you have to get the leaders to face reality, they are still living in denial, again, they are being paid to affect the turn around. Unfortunately, most of them continue to let arrogance and their own delusional sense of self-importance get in the way of them listening to the average man on the street, who might not have a degree but has many degrees more common sense than the average politician.


  60. It is part of the psychological damage the British have done to us. By telling us we were special, almost from the dawn of slavery, we actually thought we were. In fact, we are so badly psychologically damaged I wonder if in our lifetime we will change. We need to open up and admit our shortcomings.
    I will give an example, a few years ago Trinidad and Barbados gave a joint presentation in the City of London, the financial centre. Some Trinidadian permanent secretary, a Dr …whoever, gave a speech, which was frankly rubbish.
    At the time Billie Miller was foreign minister and she was there. I moved to sit next to her, gave her a business card, and asked her to call me or get someone at the high commission to. Peter Simmonds was high commissioner at the time.
    I had arranged for a number of senior financial people to talk to her.
    To this day I have not heard from her.
    I am sure if it had been a white Englishman asking her to call she would have.
    That, I suggest, is our deep psychological problem.


  61. I am glad you brought up the Billie Miller episode, some years ago I was in Bim, she was in London at some conference or whatever, she saw it fit to boast that Bajans made the best slaves in the Caribbean, each time I saw her after that, my constant thought was, what a fool, instead of educating her people that Barbados was in truth and in fact the clearing house for slaves to be distributed throughout the Caribbean and the Americas, her only functioning thought was to boast what good slaves Bajans were, so much better than their Caribbean counterparts; now tell me how would that in anyway help the feeling Bajans carry about being better than their fellow West Indians??? Miller was representative for the city for many decades, the state of decay in her former constituency is proof positive that she was just useless, political families and their ineptness.

    The standard of education in Bim is still relatively high, but as long as certain thoughts of superiority persists in the minds of the people, nothing will change. Politicians continue to do more harm than good to the mental state of their own people, we have a very confused generation of young people who are filled with anger, we cannot blame them.


  62. I remember Freddie and Tommy Miller from my youth and my grand parents’ shop in Nelson Street, and used to visit their rather small paddock in Brighton.
    But we get the quality of politicians we deserve. just take this as an example: for the last four years what have our academics at Cave Hill, contributed to our general knowledge about the problems facing the economy.
    We need to look inward at our own culture.


  63. Most of these leaders prefer to identify themselves with the DNA and culture passed down from the slave master rather than the DNA and culture passed down from their enslaved ancestors, it is a source of pride for these clowns. As long as they cannot identify the taproot, there will be no workable solution to change the mindset.

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