The following articles posted by fellow blogger over at caribbeansignal.com, separating signal from noise – Barbados Underground
Barbados Fuel Price Change December 2018
From mid-night December 2 consumers paid less for gasoline and diesel. The retail price of gasoline fell from $3.91 BDS per litre to $3.71, 20 cents / 5.1% less. The retail price of diesel fell from $3.20 BDS per litre to $3.17, 3 cents / 0.9% less (Source: Barbados Government Information Service).
DeLisle Worrell: The Threat of Barbados Dollar Devaluation Remains – The Threat of Barbados Dollar Devaluation Remains
Prime Minister Mottley’s unprecedented achievement in securing financial support from the IMF, the Interamerican Development Bank and the Caribbean Development Bank, has averted an imminent threat of devaluation. However, even though the risk of immediate devaluation has lifted, it has not gone away. Loans from the international financial institutions have bought the Barbados Government some time; Government must use this breathing space to negotiate a mutually satisfactory agreement with holders of US dollar-denominated bonds. In the absence of debt restructuring which is agreeable to the holders of those bonds, the threat of devaluation reemerges in three years’ time.
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?
Grenville Phillips II, leader of Solutions Barbados
Since the DLP have not corrected the fatal flaws in their economic development plans, and the BLP are unwilling to offer any workable solutions, then if we continue on the current path, devaluation of the Barbados dollar is certainly foreseen. Based on their past governing experience, Barbadians are unprepared for the level of misery that they will experience if they elect either of these two parties to form the next government. If you are currently employed, then you need to start preparing for the nightmare scenario – which is the focus of this column.
If your employer has to convert foreign currency revenues in order to pay all or part of your salary, then your employer is an exporter. Persons in this ‘export’ category include: maids and gardeners in foreign owned villas, all employees in the tourism industry, all employees in the international business industry, and all employees of those who directly export goods or services. These employees need to politely request a meeting with their employer, either individually or collectively, in order to renegotiate the terms of their salaries.
Currently, the basis of most Barbadian employees’ salaries is the Barbados dollar. Employees in the ‘export’ category should request that the basis of their current salaries be in US dollars, but paid in the equivalent Barbados dollars. If the company claims that it only exports say, 50% of its products, then the employees should not expect to have more than 50% of their salaries based on the US dollar, but paid in the equivalent Barbados dollars. This should protect at least part of their salaries from a devaluation of the Barbados dollar, which the IMF has repeatedly warned is a likely inevitability if we remain on the current path.
In order for employees to protect a larger part of their salaries, the company needs to export more. This will require that the employees innovate by working better (not necessarily harder or for longer hours), and that the company is effectively managed. Employees need to keep asking themselves this question: “How can I do this task better, faster, more accurately, and using less resources.” If the consequences of failure are low then just try it. However, if the consequences of failure are high, then get prior approval from your supervisor.
Employees in management posts need to manage the company using the most effective parts of the ISO 9001 Quality Management System immediately. The entire ISO 9001 System does not need to be implemented at this stage, managers just need to start using the most relevant parts.
You need to start negotiations now. You are more likely to succeed if you do not discuss any type of salary increases in these negotiations. The singular aim of this meeting is to protect your future salary. If you wait until after the expected devaluation, then your employer may be tempted to greedily add the devalued portion of your salary to the company’s profits.
If you are employed by a statutory corporation, then you will likely be the first on the proverbial chopping block if the statutory corporation is badly managed and unprofitable. A properly managed business is normally profitable. Therefore, it is in your family’s interest that you work in an ISO 9001 quality management environment. The ISO 9001 system encourages innovative thinking among all employees and addressed complaints permanently.
If statutory corporations in Barbados have not implement the ISO 9001 quality management system yet, especially given the obvious foreseen dangers, then that is an intolerable level of irresponsible mismanagement. Employees should request a meeting with the CEO and insist on being managed in accordance with ISO 9001. If the CEO says no, then they need to appeal to the Chair of the Board. If the Board also says no, then both Board and CEO are behaving like children carelessly playing with toys.
Unfortunately for you, those toys are your family’s financial future. Therefore, those employees need to contact their unions and shut down all irresponsible statutory corporations until both the Boards and CEOs are replaced with more responsible people.
The most vulnerable persons will be the unemployed and under-employed. These people should be trained to start home-based business, where most of their sales are on the Internet and most of their revenues are in foreign currency. Given the business and Internet components, the Barbados Investment and Development Corporation and the National Council for Science and Technology should facilitate workshops to teach Barbadians how to set-up profitable businesses with little-to-no start-up money – with dispatch. I am available to help.
Grenville Phillips II is the founder of Solutions Barbados and can be reached at NextParty246@gmail.com
Former Governor of the Central Bank of Ireland, Dr. Patrick Honohan
The following Barbados Advocate editorial is reproduced to facilitate discussion on the highly publicised visit to Barbados by Dr. Honohan, former Governor of the central bank of Ireland – Barbados Underground
EDITORIAL – WHY DEVALUATION IS NOT THE ANSWER
Mon, 04/03/2017 – 12:00am Barbados
IN the presentation he made last Thursday evening at the Grande Salle of the Tom Adams Financial Centre, economist Dr. Patrick Honohan added his voice to the debate as to whether devaluation does work for countries which have entered relationships with the International Monetary Fund (IMF).
While not indicating what countries should or should not when it comes to this policy, and speaking broadly, the Distinguished Fellow indicated that very often subsequent devaluations follow after the first devaluation, and results in countries being right back where they started.
In other words, there are no benefits to having their exchange rate adjusted. It is one of the things that we in Barbados have seen happened to some of our neighbours who go the devaluation route, while trying to correct problems in their economy.
In Barbados and over the last two years or so, devaluation has been discussed repeatedly as a tool the present government ought to use to help the country out of the economic misfortune that it finds itself. The response by both the Government and the Central Bank of Barbados is that changing the exchange rate – which has been in place since the 1970s – will not be done since the existing rate has worked well for the country and there is no need to tamper with it.
However, the debate has intensified since the country continues to see a decline in its net international reserves. Those reserves fell from over one billion dollars to just under $700 million by the end of last year. A country, it is said, requires a comfortable stock of reserves to defend the existing exchange rate, finance foreign debt repayments, pay for imports and to meet the requirements of Barbadians travelling abroad.
It must also be added that over the years countries entering Standby Arrangements with the Fund have been influenced into using the devaluation or currency adjustment tool to make their economies more competitive. In adjusting the exchange rate, therefore, they do so with the understanding that their exports will be cheaper than the rest of the world while their imports will be more expensive.
However, the problem with this line of thinking is that domestic producers require imported inputs for their business operations. Therefore, if inputs are going to cost more since they are imported inputs, then that means the final goods will cost more to produce and therefore, defeat the decision to have the devaluation. Another point worth arguing on the subject is that small countries do not produce a wide range of goods and services which can be substituted for the higher priced imports.
Dr. Honohan said that once the policy has not worked, overspending by a government tends to resurface. To date it is known that fiscal policy has been used to curtail spending, especially on imports. To date it has worked and Barbados will have to pursue this policy in addition to others, such as stimulating the export sectors, so as to both earn and safeguard foreign exchange.
The 2017 first quarter review period for the economy has just ended and soon the country will be hearing from the Central Bank on what transpired during the period January to March. The country is anxious to hear what has happened since December last year.
The following was posted to FB Senate Page by Economist Charles Skeete
Central Bank of Barbados
The monetary authorities can fix the nominal/official rate of exchange, but not the real rate (reer).
When the nominal rate is fixed, over time there is a tendency for it to become over-valued. This is so especially in small open economies. There is evidence that the official rate of exchange is over-valued (is higher than the reer).
A persistent bop current account deficit suggests we have a competitiveness problem and that national consumption exceeds national production.
A persistent bop current account deficit can be sustained only as long as capital inflows (e.g., FDI and foreign borrowing) are at least equal to the current account deficit.
High debt eventually limits the ability to borrow foreign exchange – except from the IMF.
What can we do?
Option 1: Draw on FX reserves. Unless replenished by a current account surplus, FDI, or foreign borrowing, reserves will be exhausted in short order. Sharply declining reserves will eventually make devaluation and borrowing unavoidable.
Option 2: Reduce the fiscal deficit. Alas recent experience suggests that our heart is not in it. We try to raise taxes we cannot collect and we resist cuts in spending with all our might. Reducing the fiscal deficit is necessary to restore a balance between national consumption and national production. Without credible steps to restore this balance, we will continue to be rated a poor credit risk.
Option 3: We have never been fond of high interest rates, except as a reward for saving. The fact that high interest rates are an alternative/supplement to devaluation as a way to lower consumption is conveniently overlooked.
Option 4: Adopt policies that make the relative price of imports and exports more favorable to earners of export revenues and less favorable to consumers (e.g., devaluation, tax holidays, or other subsidies). We have been willing to use tax holidays and other subsidies to encourage investment in our leading export sector (tourism). This is necessary because we are not price competitive without such subsidies and we have rejected devaluation or a cut in the nominal wage (the standard remedies). As noted above, rejection of these remedies is viable only as long as reserves last.
Concluding Remarks: Restructuring of the agriculture and manufacturing sectors sufficient to restore current account balance are necessary, but are achievable only in the medium and long term. Fiscal and bop imbalance require remedies that will show immediate results. The ability to borrow foreign exchange would give us breathing room. On the whole, I must conclude that an IMF Program is very much in the cards.
That the IMF would dare suggest devaluation of the dollar as reported is to put it mildly unwise, misleading and embarrassing. Economics assume rationality. Countries are not rational entities; they differ in terms of resources etc. Dollar devaluation might have been something to consider if we were a large scale producer and exporter with large guaranteed markets to supply but that is definitely not the case. Sugar is about the only significant thing we export. Devaluation will make it easier to sell the exported products but more costly to produce. If we can’t get people to work on the land today it is unlikely they would do so for lower wages.
Devaluation will increase to cost of imports and with it the cost to consumers. Salaries and wages will be devalued in the sense that everything will cost more. Businesses and government will be expected to increase salaries. Hotels too will be expected to increase wages and will likely increase the price to visitors. In short the cost of everything will rise and so too job loss and unemployment. It is unlikely that salaries and wages will rise sufficiently to compensate the increase cost of living. Government will have to increase taxes etc. in order to have money to pay its bills and the national debt which will increase. Given our reluctance to revise our lifestyle the dollar devaluation will likely lead to social unrest.
Exactly what does privatization and private sector participation mean and how will it improve the economy? Privatization is generally understood to mean the sale of commercial assets. Why would government sell/privatize its profitable assets? If government sells its commercial assets to foreigners or the local private sector profitability and efficiency could lead to staff reduction and higher costs to consumers, more so with devaluation.
