Aye…a Foreign Currency Problem

Submitted by Wily Coyote

Barbados has been experiencing a significant reduction in their Foreign Currency Reserves over the last several years. The reserves are presently at about 4 weeks, this should be noticeable with shortages of goods within the island, however this is not the case. One would have to ask why this is; a shortage of foreign currency should limit the purchase of imported goods and result in shortages. There are likely several reasons for this to be happening in Barbados with respect to imported goods.

  1. Concessions to large Foreign owned business, Sandals, Cost U Less, Sandy Lane etc. result in no Foreign Currency inflows from these businesses which allow these companies to operate outside currency controls, and
  2. Large retailers domiciled outside of Barbados i.e. Massy, Cave Sheppard, Sagicor etc. have the capacity to purchase their goods outside the controls of Barbados currency regulations and then import their goods into Barbados with foreign exchange immunity, and
  3. World tourism commerce is no longer transacted in the visited country, i.e. Foreign tourist buys a vacation package to Barbados in France, pays a travel agency, airline etc. in France with Euros. This French agency now pays another off Shore Company in USA which represents the accommodation provider in Barbados to their off shore account. So far none of this Foreign Currency has reached Barbados. This off shore provider who represents the Barbarian supplier will now transfer to Barbados ONLY the COST portion of the Barbadian supplier. In years past all of these transactions would have taken place in Barbados with foreign currency.

These Foreign Currency transactions do not significantly impact these Barbadian businesses; it does however directly impact all Barbados government offshore transactions as they need Foreign Currency to pay for all their goods and services. Lots of foreign currency outflows with limited inflows results in Foreign Currency Reserves being depleted and not replaced.

Pegging the Barbados currency to an individual Foreign Currency is no longer practical in this new age of world commerce. Pegging to a basket of foreign currencies maybe a solution, however this scenario is also fraught with significant risks. Barbados best solution is

  • reduce government expenditures,
  • increase productivity,
  • reduce the payroll significantly (50%), all civil service promotions done on merit,
  • eliminate 70% of the state owned enterprises,
  • privatize potentially profitable SOE’s to NOT FOR PROFIT companies/corporations,
  • drastically improve efficiencies within government,
  • have all SOE’s maintain financials and be audited annually,
  • remove life pensions for government ministers,
  • implement a MEANS TEST for all government social payouts,
  • run a balanced budget,
  • country must learn to feed themselves without relying on food imports, and
  • FLOAT the currency.

In order for the above to be implemented Barbados will need the IMF’s financial assistance and more importantly IMF DIRECTION, MONITORING, MEETING SET OUT GOALS, TIMETABLES and BIG STICK SUPERVISION. Barbados dire financial situation requires drastic adjustments to Bajan lifestyles and government operations. Barbadians must start to live within their mean.

The Featured image is a Marla Duckaran chart.

90 comments

  • Fortyacress demonstrates precisely, how T&T’s managed float (aka dirty float) differs slightly from $GUY mechanism. And both are substantially different from the $JCA regime. And why comparisons are difficult.

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  • @fortyacresandamule

    Good to see you about and your interventions is where the blogmaster was going.

    Like

  • I am hearing that the Crop can’t start because the GOB has used the money earmarked to pay off a court action against it.

    Don’t have all the details but don’t be surprised if you don’t see a crop this year.

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  • David BU & Fortyacresandamule

    I hope you both realize that there are fundamental differences between devaluation of currency and depreciation of currency.

    “Rather than let market forces determine rate, the central bank intervenes regularly in the market to prop up the rate” is as a result of a devaluation of the TT$.

    Under a floating exchange rate system market forces determines any fluctuations in the exchange rate.

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  • fortyacresandamule

    @Artax. Only a few countries in the world operate an absolute free floating currency exchange system. Most operate a hybrid system. Trinidad system is not a fully floating exchange system. If Trinidad had allowed the market to fully priced its currency, given the chronic shortage of US$ in the commercial banking system, the exchange rate would have been at least U$1/ $10TT instead of the current rate of US$1/$6.78TT .

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  • fortyacresandamule

    The central bank in Trinidad, during the oil boom, amassed a war chest of US reserve, equivalent to 11 months of import. It is this build up of reserve that it has used to intervene in the market time and time again to prevent a larger slide in the exchange rate….given the chronic shortage of US$ currency in the banking system since 2014.

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  • @ fortyacresandamule

    Okay, I understand….and you are correct……Trinidad is using a “managed” floating exchange rate regime, (which is basically a “middle ground” between fixed and floating exchange rates), whereby the monetary authorities (Central Bank or government) could intervene in the market from time to time to manipulate the value of the currency to achieve certain macroeconomic objectives (e.g. countercyclical monetary policies used by countries such as Singapore).

    I read that China adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. Since 1981 Singapore has been using the “managed float system,” the primary objective of which is to promote price stability as a basis for economic growth.

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  • No foreign currency problem for ROCK HARD cement. a stockpile to last about 2-3 years

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  • Here is what former finance minister Browne had to say about the defacto T&T floating rate.

     

    Mariano: Adjust exchange rate

    • Published on Sep 28, 2017, 10:00 pm AST
    • Updated on Sep 28, 2017, 10:04 pm AST
    • By Leah Sorias

    FORMER minister in the Ministry of Finance Mariano Browne

    Prioritise: Indera Sagewan-Alli

    FORMER minister in the Ministry of Finance Mariano Browne says he is perplexed by the Prime Minister’s statements that if the demand for foreign exchange is not curtailed the country will be forced to live with a rate determined by the forex market.

    “Essentially what he was admitting to is that the (exchange rate) is no longer floating. We are trying to control the rate. And as (economist) Dr Terrence Farrell said very clearly that’s why we have a shortage of foreign exchange,” he told the Express yesterday.

    “There are market-determined mechanisms to manage the rate environment. That was why in 1993 we took a lot of flak but the whole idea was that we put the floating exchange rate in position so that we moved away from the whole concept of devaluation at all. The talk about devaluation shouldn’t exist,” he said in a phone interview.

    On Wednesday during the “Spotlight on Trinidad and Tobago’s Financial Challenges” forum at the Hyatt Regency (Trinidad) hotel in Port of Spain, Prime Minister Dr Keith Rowley called on the country to support the “national effort as we seek to prioritise the use of our limited inflows of foreign exchange”.

    “We will not be going back to the exchange controls we had in place before 1993, but we will certainly not be using up our foreign reserves to keep the exchange rate at levels which will maximise our imports,” he said.

    Responding yesterday, Browne said as long as the demand for foreign exchange continues a shortage of currency will exist.

    “So the only thing that can change when there is a demand and supply out of balance situation, is the price.”

    He said given that the manufacturing sector exports to islands who are also facing foreign exchange shortage issues, the sector must look are creating new export markets.

    “That’s a long-term process and part of the balancing act to create new markets is to allow your goods to be more competitive,” he said.

    Browne went on: “One of the surest ways of managing demand is to adjust the prices. It might be difficult. It may cause an immediate changes in people’s circumstances but that is what is required if we have to deal with difficult circumstances.”

    Govt priorities and banking sector

    Economist Indera Sagewan-Alli questioned the Prime Minister’s suggestion that first priority be given to firms or industries that generate certain amounts of foreign exchange.

    “The challenge with what the Prime Minister is saying is that neither the Central Bank and Government is involved in the selling of forex to consumers whether it be to firms, exporters or individuals. It is the commercial banks and other commercial entities.

    “So it really begs the question as to what extent Government priorities can be translated into the priority of the commercial banking sector in how they sell the forex.”

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  • fortyacresandamule

    Gulf oil countries, especially the GCC, generate huge profit in oil export because cost of production per barrel in that region is relatively cheap. As such, they have established large souvreign wealth fund from oil export. Norway is another example too. They need not worry about their currency losing value.

    However, not all oil producing countries are so fortunate. Countries like Ghana, Nigeria, Angola, Venezuela, Suriname etc have all witnessed a huge slide in their currency since the fall of the price crude . Trinidad was able to fight off a drastic slide- despite a chronic shortage in the banking system, recession, and budget deficit – by using its reserve in the central bank to prop-up its currency and drawing down from its heritage fund to help finance the budget. Trinidad has done relatively well for itself this time around to avoid the hardship of similar oil-dependent economy experiencing oil price shocks.

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  • fortyacresandamule

    It is no secret that Barbados received a tiny spill-over from government levy, registration fees, and wages to workers relative to the massive inflow and outflow of the offshore financial sector. Billions in cross-border flow moves in and out of Barbados every single month.

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  • Forty,

    The exchange rate on the very active second market is 2.1 – 2.2 BBD for 1 USD. Minimum exchange amount 10,000 USD. In Barbados. People in Jamaica and Guyana do not want to exchange BBD anymore.

    The BBD has no purchase power. You get for 100 BBD just 14 bottles of milk, in other CARICOM member states 40.

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  • Milk is NOT sold in bottles in Barbados.

    And in any event what is a bottle? 1/2 liter? one litre? 2 litres?

    What?

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  • Tetra pack of 1 liter milk is 2 to 3 BBD in other CARICOM states.

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