How the Central Bank of Barbados is Run - Part 2

The Central Bank of Barbados has been at the centre of Barbados’ economic and financial development for almost 50 years, but the full scope of its operations and certainly the inner workings of the organisation are not widely known. In a previous article, we looked at how the new Central Bank of Barbados Act, which was passed in December 2020, has in some instances confirmed and in others altered the way the Bank is run. Now, here are two more things that are important to know about the Bank.

The Bank’s Finances Were Heavily Impacted by the 2018 Debt Restructuring

Prior to 2018, the Central Bank was one of, if not the largest, holders of Government Securities, and as such incurred a significant loss when Barbados’ debt was restructured.

“We sort of took one for Team Barbados,” says Elson Gaskin, the organisation’s Bank Secretary. “At the time, we were holding over $1.6 billion in Government debt, and that was exchanged for restructured securities of a lower value.”

The reduced value was enough for the Bank to continue to operate without disruption, but it will need to be recapitalised to return its finances to where they were pre-debt-restructuring.

That recapitalisation has already begun. Typically, when the Central Bank makes a profit, those funds are transferred to the Consolidated Fund, but Gaskin explains that as part of the process, the Bank was allowed to keep the profits it made from its investments in 2020 to offset some of the losses from 2018.

“We have been able to work out a recapitalisation plan with Government. For the next seven years, we will reduce that capital impairment by way of the profits. So, all of the profits we make, instead of putting them in the Consolidated Fund, we will keep those and incrementally repair that deficit. And the hope is that after seven years, the country would be in a position where then we can look at the recapitalisation in a more fulsome way.”

Gaskin says that while the Bank will work with Government to repair its balance sheet, this will not compromise the organisation’s independence because “we can still pay our bills despite the capital impairment… We don’t have to go to Government for budgetary or financial support… We can take our time over the next several years and repair our capital out of our profits.”

Autonomy is critical to the Bank’s ability to do its work, and to maintaining the public’s confidence and trust. In fact, this was a key aspect of the new Act.

The New Act Offers Protection for the Governor

As mentioned in our previous article, the new Central Bank Act extends a Governor’s term from five years to six years so that it does not coincide with Barbados’ political cycle. Gaskin reveals that it also offers him or her more job security.

“Before the new Act, we were sort of in a strange position where the Governor was at once the strongest person in the organisation and the weakest when it came to tenure. What it meant was that the Minister of Finance could get up one morning and decide for whatever reason that the services of the Governor were no longer required.”

The Governor can now only be fired for cause, such as misconduct, breaching the Act, or mental or physical incapacity. “Much like in the wider employment arena… under the Act, now you must have good grounds for dismissing a Governor.”

So, what do the inner workings of the Central Bank have to do with the average Barbadian? Gaskin offers two reasons.

First, the Bank’s activities are noticed well beyond our shores and therefore can affect the country’s reputation:

“Events in central banks are scrutinised around the world. So, as small as Barbados is, if something happens in the Central Bank of Barbados – a major event, such as something happening with the Governor – it will make ripples and be reported in central banking circles.”

And second, and closer to home, given the Bank’s role, the public needs to be confident that the organisation is being well-run.

“What happens in a person’s pocket is very real and meaningful to them, so the public must have the confidence that what is happening in the Central Bank is proper and that the Bank can be relied upon to deliver on its mandate, that its statistics and pronouncements are sound. If you don’t have the structures in place to maintain that trust and that confidence, you then put yourself in a very difficult position. That’s why it matters.”