Worrell warns government again about overspending
Former Governor of the Central Bank of Barbados (CBB), Dr. Delisle Worrell is yet again appealing to government to put measures in place to cut its spending.
This is a point Dr. Worrell has been reiterating for some time and he spoke on it again during his April monthly newsletter. Dr. Worrell pointed out the issue of deficit financing do not arise from the printing of money as currency notes are printed by the firm of De La Rue in the UK and stored in the vaults of the Central Bank until commercial banks request an additional supply to meet customer needs.
He said the real problem with Government finances arises whenever tax and other revenues are insufficient to cover monthly expenses, and Government is at its overdraft limit with the Central Bank. This overdraft limit is set by law, at 10 percent of the estimated revenue for the fiscal year.
"Over the past several years there have been many months when Government was already at its overdraft limit as civil servants' payday approached, and revenues accumulated at the Treasury were insufficient to cover the wages bill. In these circumstances the Central Bank buys Treasury Bills in order to provide the additional funds needed to ensure that all Government expenditures can be covered."
He explained the problem is worsened when the demand for imports is generated and puts strain on already declining foreign reserves.
"This does create a problem, because the Central Bank lends to Government for payments in Barbados dollars. However, when these dollars are spent, to buy groceries, to pay electricity bills, to pay for gasoline, and other necessities, they generate a demand for imports. Imports must be paid for in foreign exchange, so ultimately banks will return to Central Bank to obtain foreign exchange from the country's store of reserves, so they can meet the additional import demand."
In the last economic review by the CBB in January, it was reported the country's foreign reserves stood at $410 million at the end of December last year- equivalent to 6.6 weeks of import cover and well below the standard 12-week benchmark. The foreign reserve levels were predicted to dip again as a result of debt payment government was obligated to make.
Dr. Worrell said government overspending will eventually lead to the loss of foreign reserves. He said the only solution "is a reduction in Government spending, sufficient to bring Government's current account into balance".
Referencing an earlier paper 'The Barbados Economy: The Road to Prosperity', Dr. Worrell said expenditure cuts will need to be sustained to about three years to allow government to generate savings on the Government’s current account and rebuild an adequate store of foreign reserves.
He added "fiscal rectitude and a public service that gets the job done" is the first step to ensuring economic growth.