||Central Bank Of Barbados
Good day, I am happy to share with you my thoughts on The Changing Dynamics of Foreign Exchange Regulations: Balancing Stakeholder Expectations against Barbados' Economic Realities. It’s a topic that is engaging the attention of most of the people in this room, and I am delighted for the opportunity to chat with you and to answer your questions.
Exchange Controls in Barbados
Exchange Control is a set of procedures which the Government uses to monitor and regulate the flows of Foreign Exchange into and out of the country.
Exchange Control started in Barbados in 1967 when the Minister of Finance was designated “Exchange Control Authority” under The Exchange Control Act 1967. This Act enables the Exchange Control Authority to regulate the flows of foreign exchange between Barbados and other countries.
How is Exchange Control carried out in Barbados?
The Minister of Finance as Exchange Control Authority has delegated most his authority to the Central Bank of Barbados. The Central Bank in turn has delegated some of its authority to the Authorized Dealers and other foreign exchange dealers. The delegation of authority by the Central Bank is designed to facilitate the ease of doing foreign exchange business in Barbados.
The CBB administers exchange controls through a number of circulars which are documented procedures for the guidance of Authorized Dealers. These Circulars are amended periodically to reflect the existing economic conditions.
The list of authorised dealers in Barbados is as follows:
Bank of Nova Scotia
CIBC FirstCaribbean International Bank (Barbados) Limited
First Citizens Bank (Barbados) Limited
RBC Royal Bank (Barbados) Limited
Republic Bank (Barbados) Limited
Citicorp Merchant Bank Limited
Consolidated Finance Co. Limited
Globe Finance Inc.
Signia Financial Group Inc.
Other foreign exchange dealers are Cave Shepherd and New World Capital, which have been granted permission to conduct selected foreign exchange activities.
Why do Countries have Exchange Controls?
Exchange Controls or capital controls is not unique to Barbados. There are many countries in the world that maintain a system of capital controls. The extent and the types of control systems vary based on the determined objectives. There are also countries with no formal capital control mechanisms but in reality have procedures in place that effectively control some outflows of capital.
The IMF’s 2016 annual report on exchange arrangements and exchange restrictions provides data on 190 countries. In the report, Barbados is classified as one of the forty-four countries with a conventional peg. Regional countries included in this category are Aruba, Bahamas, Belize, Curaçao and St Marteen. Only 31 countries including USA, France, Germany, UK and other developed countries were deemed free and floating. China was in the same group as Haiti which was classified as other managed arrangements. Trinidad and Tobago was placed in the category of stabilized arrangements. The point must be made that the IMF report in essence suggests that Barbados like most other countries have some form of exchange arrangement or restriction.
Exchange controls are used in some developing countries to assist in maintaining the balance of payments equilibrium. These regulations essentially exist as a means for countries to maintain the stability of their own currency by enforcing restrictions on foreign exchange trading and international settlements.
For volatile economies, exchange controls can be necessary for the stability of the local market and to help prevent the flight of capital. A key argument for exchange controls is that by limiting the flow of capital out of the country and the ability to invest offshore, local investment is encouraged instead.
There is a view that a huge tie exists between exchange controls and the tax system because exchange controls very often protect the local tax base by limiting overseas investments which tend to retain their profits abroad. The resulting taxes from overseas investments are often retained offshore and do not the benefit the country of the original investment. Exchange controls in a way can be seen as an auxiliary tax measure as it assists in ensuring that income is retained in Barbados which will be taxable.
If one looks at the level of overseas investments over the years, it could be argued that the presence of exchange controls did not deter a large number of investors from coming to Barbados. Investors consider several factors including the economic performance, the quality of the infrastructure and the social and political environment. What is important is that the operation of the exchange control mechanisms should be efficient and effective. Its operations should reflect its understanding and appreciation of the local and international business landscape.
Exchange Control Liberalization Measures
Over the years, the Central Bank, with the approval of the Minister of Finance, has liberalized exchange controls with respect to a variety of transactions. This was done through the delegation of increased authority to authorized dealers and the Barbados Stock Exchange to execute selected foreign exchange transactions without prior approval by the Central Bank.
The Central Bank recognized that in respect of some transactions with the rest of the world it was necessary to give further consideration to the liberalization of exchange controls in order to enable the business community and individuals to derive the full benefits of globalization. However, certain factors must be considered when contemplating further liberalization.
The first major consideration is the maintenance of a fixed exchange rate regime, something to which Barbados is fully committed. While maintaining a fixed exchange rate, decisions on further liberalization will require that the country has a more than adequate level of foreign exchange reserves to support the initial outward flows of foreign exchange that usually follow the abandonment of exchange controls.
It has been recognized that the liberalization of foreign exchange transactions with CARICOM could result in the leakage of foreign exchange to the rest of the world as no exchange controls exist in the countries of the major CARICOM partners.
The growing desire by residents of Barbados to participate in global wealth management programs and to engage in e-commerce activities will place an added strain on the country’s stock of foreign exchange reserves.
The bulk of payments for trade transactions and a significant number of other current account transactions with the rest of the world have been fully liberalized.
Prior exchange control approval continues to be required for capital account transactions with the rest of the world.
The Current Situation
The following statements taken from the Central Bank’s report on the performance of the economy for the first six months in 2017 summarizes the current state of the Barbados economy:
“The Barbados economy registered an uneven performance during the first half of the year. Preliminary data suggest that the expansion in real economic output continued into the second quarter, primarily reflecting sustained growth in tourism activity. The fiscal deficit narrowed moderately in the first quarter of fiscal year (FY) 2017/18, partially the result of the fiscal consolidation measures implemented in the previous fiscal year. However, the stock of international reserves fell below 10 weeks of import cover, owing in part to expected external debt service obligations and the on-going delays in securing planned foreign investment inflows.
The twin policy challenges for the Government remain bringing the fiscal imbalance in line with financing, and restoring the foreign reserves to an internationally acceptable level.”
These statements should give you some perspective of the challenging environment within which exchange controls must currently be practiced.
Apart from the above, the economy is the victim of certain practices which have resulted in foreign currency outflows or reduced inflows. Some of these practices are as follows:
Many local companies are now owned by holding companies in CARICOM and further abroad. This type of ownership structure creates annual foreign exchange liabilities in the form of dividends and management fees even though the companies received little or no capital from abroad. What we are seeing are local businesses generating revenue in Barbados dollars and then converting some of it to foreign currency for remittance abroad.
A significant number of the large properties are owned by companies which are in turn owned by companies abroad. When these properties are sold, it is done via the sale of shares in the companies abroad. No property transfer tax, which would be in foreign exchange, is paid. It is also likely that rental revenues will be paid abroad and local taxes avoided.
Over the years, approval was granted to many companies to invest abroad with the understanding that the investment income would come back to Barbados. Unfortunately, neither the principal nor the yields have been coming back to Barbados. Instead, some of these companies come seeking permission for further investment abroad.
These practices impact negatively on the performance of the Net International Reserves (NIR) and government’s revenue. Government gets less revenue and we get less foreign exchange.
The Central Bank is very much aware that the practice of exchange controls in Barbados must constantly be critically reviewed to ensure that its operations and policies reflect the prevailing economic conditions while balancing that with needs of businesses and individuals. It will fully leverage the use of information and communication technologies to ensure that the delivery of its services meet the standards of a world class organization. The Bank will work closely with commercial banks and the business community to eliminate any unnecessary processes which tend to hinder prompt execution of foreign exchange transactions. In this regard, the Bank will continue dialogue with the banking and business sectors regarding the execution of e-banking and e-commerce transactions.
In terms of any further liberalizations, the performance of the economy and the NIR will essentially dictate how we proceed in that regard. Once the foreign reserves are restored to internationally acceptable levels, the Bank will be in a better position to meet the foreign exchange expectations of both businesses and individuals in Barbados. In the meantime, a heavy focus will be on the use technology to drive the efficient delivery of our services.
Finally, on behalf of the CBB, we wish to thank BIBA for inviting us to discuss the hot topic of exchange controls in this forum. We also wish to thank the very engaging audience for its participation in this discussion and offering candid views and feedback on Exchange Controls as practiced in Barbados. We will definitely consider their ideas and suggestions as we review our policies and procedures.