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2018 was challenging for the Central Bank of Barbados (the Bank) as it helped government in the design of the policies to reverse several years of economic decline in the country.
The newly elected administration quickly introduced the Barbados Economic Recovery and Transformation (BERT) programme to address low growth, a deterioration in public finances, a build-up of public sector indebtedness and falling international reserves.
The programme is centred on macroeconomic adjustment, debt restructuring and structural reforms to boost growth and already there are signs of renewed confidence in the economy. Multilateral funding agencies, including the International Monetary Fund (IMF), are providing financial support to the country and our economic performance has started to improve. In particular, the import reserve cover exceeded the 12-week benchmark at year-end and further strengthening is anticipated in 2019. The public finances have improved, enabling government to make current payments on a timely basis without relying on central bank funding.
Government has committed to strengthen the fiscal position further by pursuing a primary balance of 6 percent of GDP in the coming fiscal year. This together with the debt restructuring, inclusive of the reduction in domestic debt, lower interest rates and extended maturities, now offers prospects for a sustained improvement in the public finances.
These developments augur well for increased investments that can help to propel economic growth.
The implementation of the domestic debt restructuring allowed the dematerialisation of all government securities to become a reality. These initiatives should ultimately allow for increased activity on the secondary bond market, particularly in an environment in which Government is not expected to be tapping the domestic market for new funding. The changed economic environment has already enabled the Bank to lower the required securities ratio for banks and further reductions are envisaged as the economy stabilises. The scope for expansionary monetary policy has been reduced as Central Bank financing of Government’s operations is now limited following legislation instituted during 2018, and alterations to the Central Bank Act, aimed at modernising the Bank to bring it in line with emerging best practices, are anticipated in 2019.
The financial system, which has been a major source of government financing in recent years, remained stable during the past year. In the aftermath of implementation of the IFRS 9 Accounting Standard and the domestic debt restructuring, commercial banks suffered accounting losses, but their levels of capital remained above minimum statutory requirements. The Bank will continue to work with its licensees and will strengthen its relationship with its sister regulator, the Financial Services Commission, so as to promote ongoing stability in the financial system.
The economic adjustments impaired the Bank’s balance sheet during 2018. In recent years, declining foreign exchange balances and low international interest rates made the Bank dependent on income earned from lending to the Government.
The Bank’s income was more than sufficient to cover ordinary expenses in 2018, but Government’s one-time write-down of the Ways & Means balance in July and the subsequent reduction in the value of securities held by the Bank, reduced the size of the Bank’s balance sheet and led to an overall substantial loss that resulted in a deficiency of capital. Government has committed, as part of its programme with the IMF, to develop a recapitalisation plan for the Bank by mid-2020.
In the interim, the new securities held by the Bank, along with the anticipated income from investment of increased foreign reserves should help the Bank to cover its costs. The Bank’s ability to honour its obligations will not be impaired.
As might be expected, the Bank’s focus in 2018 was on dealing with the economic challenges. In this regard, the Bank collaborated with other public sector entities and the commitment and dedication shown by public sector staff, in the design and execution of the economic initiatives is worthy of commendation. At the same time, the staff in other areas of the organisation continued to provide high quality service as we sought to strengthen governance, improve customer service, enhance risk management, including as it relates to cyber security, and serve as a reliable source for economic information and analysis.
The future is promising and the Bank has an important role to play.
Firstly, the country must build on the progress of the economic recovery and transformation programme in order to create a vibrant, strong, resilient economy. We must implement planned new private sector investments to ignite economic activity and return the economy to sustainable growth. The Bank will continue to work with Government to implement other phases of BERT and we will jointly develop appropriate monitoring mechanisms for key macroeconomic indicators. As an institution, we will maintain a monetary policy regime that is consistent with preserving macroeconomic stability.
Secondly, we need to focus on innovations that will enhance efficiency in the financial system. In this regard, we will continue to focus on the possibilities created by the emerging technologies for payments systems. Already there is an initiative to phase out the use of cheques and the Bank will assist with this process by expanding access to the Automated Clearing House to include credit unions.
Thirdly, we must continue to pursue our vision for the Bank, i.e. “to create and maintain an institution of world-class excellence”. We have committed to being nimble, agile, efficient and more responsive to all our stakeholders. We have committed to implementing a digital transformation strategy that integrates technology in all areas of our business processes and builds a more customer-centric culture. We will complement this strategy with the requisite development of our staff, improved governance and increased attention to risk management.
We intend to be results-oriented and we will commit resources to facilitate the effective monitoring of our programmes.