How We Keep The Economy Stable

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Economic policy in Barbados is about keeping the economy stable, while providing incentives and support for activities that contribute to the growth of output, income and employment. Ours is an economy that depends on foreign exchange. We need about BDS$5.5 billion in foreign currency each year to buy from abroad the goods and services we need to maintain our quality of life. The economy remains stable so long as approximately that amount comes in, from tourism, the sale of other goods and services that are paid for in foreign exchange, and prudent foreign borrowing. To grow the economy, we must invest in activities that will increase the inflow of foreign exchange, because as soon as income is spent there is a need for additional foreign exchange.

That is because everything we buy has an element of imports: either the item itself is imported, or the seller uses electricity which is generated with imported fuel, or the purchaser has driven to the place of sale in an imported car, or there is some other call on foreign exchange.

The Central Bank’s main responsibility is to keep the economy stable, and we work very closely with the Ministries of Finance and Economic Affairs in doing so. The process begins with the setting of a target for foreign exchange reserves. If the foreign exchange accounts are in perfect balance, the CBB’s foreign reserves will remain unchanged, because the foreign reserves are used to make up any deficit in foreign currency inflows, compared with what we need to pay out. That is why, in times of plenty, we build up reserves, to dip into to help to carry us through the lean times. It follows that the considerations that go into setting the foreign reserve target are 1) what inflow of foreign exchange is expected, 2) what level of outflow is projected, and 3) how long are these lean times going to last?

Having set the foreign exchange target, how do we go about ensuring that it is achieved? This is the subject of the presentation. The Governor explains how the foreign reserves target is monitored, what are the economic levers available to keep us on track to achieve the target, and what is the process of corrective action that is taken in case of significant deviations from the target.

June 13, 2012

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