Here are my thoughts in regards to the budget debate contributions of the Rt Hon Owen Seymour Arthur on the occasion of his response to the Barbados Budget 2017. Mr Arthur is the immediate past Prime Minister of Barbados and Minister of Finance. My thoughts are focused on Barbados’ fixed currency peg and the need for strategic thinking to chart the way forward for Barbados.
I thank Mr Arthur for his clarity of thought, especially in respect to the currency peg of the Barbados dollar which is now fixed against the US dollar at 2:1. He was brilliant overall. His currency recommendations are quite optimistic in respect to how he thinks the rest of the world might respond to a devaluation of the Barbados dollar to 2.43:1 together with an annual reviewed of the peg. His recommendation follows the example set by Singapore, who have ended their fix peg against the US dollar in favour of a peg to a basket of currencies that reflect the relative weigh of their trading partners. In the case of Barbados, the basket would be 40% to the US dollar, 40% to the British pound, 10% to the Euro, and 10% to the Canadian dollar.
I do not share the optimism of Mr Arthur. For example:
1. Mr. Arthur seems to forget that foreign investors and banks prefer relative certainly in their long term investments. At present, relative certainly is provided for in part by the fixed exchange rate of the Barbados dollar. The annual review of the exchange rate suggested by Mr Arthur will introduced a level of uncertainty that is likely to deter investment, increase the expected returns of investors and increase the interest rates of lenders. The likely consequence would be to make Barbados even less competitive.
2. Mr Arthur presumes that returning UK nationals and investors would rush to invest in Barbados, especially in the area of real estate. IMHO our problems in real estate relate to the lack of expeditious planning approval processes and the lack of perfect honesty in local contractors and lawyers. These speak to productivity and governance issues in Barbados, rather than a lack of willing returning retirees and investors. Yes, they are exchange issues with the British Pound due to Brexit, but these pale in comparison with our local issues. Further, the British know full well that theirs is a self inflicted wound and thus cannot past blame to others. In any event, it should be understood that there will be a fall off in tourist arrivals and investors from the UK. Barbados should simply wait until the dust is settled before making any drastic knee jerk moves on its currency exchange rate. Similarly so for Trump’s America.
3. There is a presumption by Mr Arthur that the US dollar will appreciate in the future, hence dragging Barbados into the ground as we become more uncompetitive (particularly exports). What if the rest of the world abandon the US given the escapades of Mr Trump? In such a case, I suspect that the US dollar will likely fall (and gold and oil will most likely rise). We would need a strong Barbados dollar to help pay for the price inflation caused by the oil markets.
4. Barbados does not have a problem with tourist arrivals, but rather with their “spend”. A weaker exchange rate is not likely be the only factor that would cause tourists to spend. We need to develop clever marketing programmes that would lead tourists to the point of spending within the local economy e.g. cash back vouchers redeemable only in Barbados. Alternatively we could try to insert ourselves earlier in the supply chain, and capture foreign currency well before the tourists get to Barbados e.g. taxes on hotel rooms and all inclusive tour packages at the point of sale.
I agree with everything else Mr Arthur said in his speech, e.g. Barbados should go to the International Monetary Fund (IMF) as the lender of last resort, and should seek policy based loans from the Caribbean Development Bank (CDB) and the Inter-American Development Bank (IDB). We are at that stage.
My sole concern with Mr Athur’s contributions is with the currency peg (and the growing chorus that seem to think that Barbadians should be punished for having such a policy).
Moreover, I do think that Barbados should also think about the next big strategic initiative for growth. I suspect that this could lie in the areas of computer software, science and technology, renewable energy, energy efficiency, off-shore oil and gas (especially gas), cultural industries, and the diversification of the tourism product to include business meetings, sports, culture, heritage, etc.
Indeed, student’s education in the above strategic areas would he paid for through the introduction of the parental education saving plan suggested by Mr Arthur (as a strategy to selectively move away from free education for all). I simply think that he should go the extra step and suggest the areas in which this money might be spent.
In other words, Mr Arthur and others should have a strategic growth plan for Barbados. Such strategic plans are sorely lacking from ALL of the political parties in Barbados at this time crucial time. I want to know where our leaders intend to take us. What is the next big thing for Barbados?