History will first remember Dr. Clyde Mascoll as an aspiring politician who misread the tea leaves when he failed to accept the return of the late David Thompson to lead the party. Then only will his study of economics and other academic achievements be referenced. BU however will always define Mascoll as the quintessential economist. Few if any of his profession understand the numbers behind the Barbados economy the way he does. His many years spent at the Central Bank has prepared him for the role as chief spokesman on the economy.
BU recommends Mascoll’s recent column reproduced from the Nation newspaper.
WHAT MATTERS MOST: Double worry over debt
The doubling of Barbados’ national debt over the last seven years has not been in response to the kind of financial crises that characterised several European countries in the recent past.
In fact, the Barbados debt crisis was about consumption, not investment, and is now revealing that it is a threat to the non-private financial sector that is predominantly made up of the Central Bank of Barbados and the National Insurance Scheme (NIS) to a lesser extent.
The threat is very much related to their holding of debt to accommodate excessive Government spending and further its need for compulsive purchasers of Government paper.
As far back as September 29, 2011, the Central Bank admitted that “. . . banks have expressed little appetite for further investment in Government long-term securities”.
The thinking behind such a sentiment is that the banks are uncertain about the long-term viability of the economy and so they prefer to invest over the short term.
Since this period, the Central Bank has been forced to increase its stock of Government debt from $223.7 million to $610 million as at December 2014. Yet the governor of the Central Bank, while admitting that the bank has made losses, continues to deny that it is printing money.
Where would the bank have found almost $400 million to invest in Government paper in the last three years when the bank is making losses?
The money printed to purchase the Government securities has nothing to do with the overdraft facility of the Government at the bank which is determined by an act of Parliament.
There is an established limit of ten per cent of estimated annual revenue for the overdraft facility, which is also known as temporary advances, that go through the Central Bank’s ways and means accounts. It must be easy to see the three different ways in which the printing of money can be addressed in the previous sentence – overdraft facility, temporary advances, and ways and means accounts.
Fiscal crisis
In essence, the language can be used to mask the printing of money. But a rose by any other name is still a rose.
At the same time in 2011, the board was invited “to approve a temporary increase in the limit of primary issues [Government treasury bills] held by the bank from $120 million to $250.0 million until March 31, 2012”.
The invitation was for a temporary increase. However the holding of treasury bills was $418.5 million at the end of last year, while the holding of debentures was $191.6 million for the same period. The latter was kept at $75 million for the period 2009 to 2013.
Time has shown that the Central Bank has become a casualty of the Government’s fiscal crisis. When the NATION reporter published that several workers would be set home from the bank in the near future as part of a restructuring, the response of the governor was to stop the representatives from the NATION from attending the Press conferences. Soon after, a decision was taken to abandon the Press conference altogether. But time is longer than twine.
In recent weeks, the same governor has admitted that several workers will in fact be going home in 2015. What is remarkable about the bank’s current circumstances is that in all previous economic recessions in Barbados, the bank made healthy profits. Between 1981 and 1982, the profit was $20.6 million. Between 1990 and 1992, it was $45.6 million. In contrast, since 2009 inclusive of 2014, the bank has made one small profit in 2010.
In the previous recessions, interest rate policy was used to help dampen consumption, as opposed to excessive taxation that has been the policy variable of choice since 2008.
While there is an argument that could have been made for holding local interest rates low in the face of what transpired in the international environment since 2008, the incidence of the excessive taxation and its implications for economic growth would have merited some alternative consideration. For sure, the decision to suppress domestic rates was taken purely to protect the cost of borrowing to the Government.
In the circumstances, the NIS income was also impacted as it was forced to hold Government debt.
In 2011, the bank also noted “the NIS’ inability to sustain financing at the 2010-11 levels because of off-budget pressures”. It is also known that the NIS has historically provided the most funding in the first quarter, primarily in relation to Government’s need to cover supplementaries. The tangled web continues.
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