Both Sides of The Coin: The Story of The Central Bank of Barbados 1972-2017

232 By September, substantial agreement had been reached on a six- month emergency programme (ending in March 1992) which would be followed by a longer, more comprehensive stabilisation effort. The Bank tightened monetary policy, in two stages, by raising the maximum rate on savings deposits by 1.5 percentage points and the commercial banks' cash reserve requirement by three percentage points. In the absence of a devaluation, the fiscal deficit, as measured by the IMF, was to be equivalent to one per cent of GDP for the 1991/92 financial year thus necessitating a fiscal surplus between October 1991 and March 1992. The fiscal adjustment was anchored by an eight per cent cut in wages and salaries of public servants and retrenchment of 3,000 public service jobs. After an earlier discussion about the constitutionality of a salary cut, the Bank’s Board approved the measure at its meeting of September 19. It was expected that the programme would be supported over the 1992-93 period by resources from the World Bank and the IDB, with additional funds coming from divestment of Government assets and renewed borrowing from commercial sources. Work commenced on the Letter of Intent early in September, with a view to having it finalised by month-end. This was the official correspondence from the prime minister and the governor of the Central Bank to the IMF outlining the economic problem and the proposed solutions. It also proposed targets for the quarterly performance criteria and requested financial support from the IMF. Apart from the purely economic elements it was agreed that certain structural issues would be addressed in this document as well. One was the need to review the budgetary process, particularly expenditure control. Another was reform of the indirect tax system, and, to this end, the IDB was willing to provide funds for a study. Even at this early stage a value-added tax (VAT) was seen as more transparent and easier to administer than the system then in use. The draft Letter of Intent was circulated in late September to all members of the JEG as well as to other technicians in the Bank and the Ministry of Finance and Economic Affairs for their comments. After some amendments the final version was signed by Governor King on