Former Governor of the Central Bank of Barbados, Dr. DeLisle Worrell, continues to inject economic perspectives in the Barbados space. Worrell’s legacy for many is that he was Governor during the so called lost decade.
His latest Economic Letter, titled Foreign Earnings Benefit the Economy Through Imports, is his latest contribution for public consumption. He makes the case that hoarding foreign exchange – whether by individuals, businesses, or governments – delivers no economic benefit to the local economy. And that money only becomes useful the moment it is spent on imports. Until it is spent, it is economically of little benefit to the economy.
It is a reasonable theoretical argument to a layman. However, for many Barbadians who recently lived through the foreign exchange challenge of 2013 to 2018, it will land on deaf ears. An example of theory not connecting to Barbadians living the day to day reality.
Unpacking Worrell’s argument in simple language, foreign currency earned or borrowed in Barbados must eventually leave the country to purchase commodities and services- and It is no secret Barbados is a net importer of goods and services. Therefore, the local domestic economy will only benefit when there is circulation of foreign exchange, NOT from hoarding.
Hoarding of foreign currency brings no benefit to the local economy; any attempt to put these funds to use, will trigger a demand for imports, directly or indirectly. Whatever purpose for which the hoarded funds are used, the providers of the products or services purchased, will eventually have to use the foreign exchange to purchase the imports they need to continue their operations.
– Former Central Bank Governor, Dr, DeLisle Worrell
Worrell also added to his argument that to achieve GDP growth, requires more imports, which requires more foreign exchange inflows and NOT the hoarding of foreign exchange:
Also, in order to increase GDP, we need to earn more foreign exchange because a rising level of GDP will increase the demand for imports. Note that virtually all the foreign currency that is earned or borrowed each year goes back out of the country. If anything remains of foreign currency supply after import needs are fully satisfied, the surplus is either placed in accounts with banks abroad or surrendered to the Central Bank, to be placed on the foreign reserve account held with the Federal Reserve Bank of New York.
-Former Central Bank Governor, Dr, DeLisle Worrell
Worrell is recognised as being a bit of an economics expert on small open economies like Barbados. The challenge is that his economics theory when compared to the lived reality of Barbadians on the rock, are not in harmony.
Between 2013 and 2018, Barbados leaked or did not earn adequate foreign exchange for several reasons. Our foreign reserves fell to a dangerously low level of import cover. Businesses struggled to source US dollars. Importers could not pay overseas suppliers o time. There was a list of individuals and businesses waiting for applications for foreign exchange to be approved by the Central Bank. The government imposed a foreign exchange fee to dampen demand for foreign exchange. There was the expected fear of devaluation, With that fear the cultural practice of hoarding foreign exchange became cemented.
The Mottley government went to the IMF on winning office in 2018 and the Barbados Economic Recovery and Transformation (BERT) programme was born. BERT has helped to stabilise the country BUT the hoarding of US dollars continues. Footnote, the government now boasts of over a billion dollars in mainly borrowed international reserves.
The issue that Worrell and members of officialdom shy away from discussing is – while it is true ordinary Bajans hoard US dollars, it is an open secret that many well off and prominent Barbadians maintain accounts in New York, London, Toronto, and Miami. A deliberate effort to stash wealth offshore and away from the Barbados financial system. Many businesses also engage in creative invoicing to divert funds to offshore accounts.
By Worrell’s own analysis, offshore accounts represent the ‘worst’ form of foreign exchange hoarding. At least the person who keeps US cash locally might eventually spend it on something. Money sitting in a Chase Bank account in New York has effectively left the Barbados financial system. Isn’t this where government maintain much of our international reserves?
So Worrell can lecture Barbadians all he wants, nothing will change unless we find a way to rebuild confidence in the economy, and trust in government that makes people and businesses willing to surrender foreign currency. Similarly, the offshore account culture among wealthier Barbadians is not simply greed, it is also a lack of trust in the system and the flexibility it provides to do ‘deals’. The inability of successive government to grow a diversified foreign exchange earning economy is fodder for another post.
Although Dr. Worrell has correctly identified a symptom. The solution cannot be directed at individuals acting rationally in a system that breeds fear and uncertainty. The solution has to be directed at the system first and foremost.
Are we there yet?
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