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

71 shocks, the 1977 case was less severe, shorter in duration and easier to solve than the 1981-82 episode. The 1977 liquidity shortage The problem in 1977 was a shortage of foreign exchange, but the situation was handled decisively and was therefore short-lived. Cleviston Haynes (1997, p.87) described the action in 1977 as “a precautionary response to a decline in the import reserve cover…which fell from almost 11 weeks in 1975 to just under seven weeks in 1976.” Despite a good winter tourism season, there was no growth in foreign reserves during the first three months of 1977. In addition, falling prices for raw sugar depressed foreign exchange earnings in spite of the higher volume of sugar exports. These developments were compounded by a sharp increase in imports of intermediate goods, (reflecting the high import content of tourism and construction), and of fuels in particular, indicative of rising electricity consumption. Moreover, public sector outlays on infrastructure boosted imports of machinery and equipment and Government purchased and refinanced two private sector entities. In these circumstances, between 1976 and 1977, the fiscal deficit rose from 7.1 per cent to eight per cent of Gross Domestic Product (GDP) and much of it was financed by the Bank. As a defensive measure, the Bank drew down $10 million from a line of credit with the Central Bank of Trinidad and Tobago plus $8.1 million under the IMF’s Compensatory Financing Facility. It also used a plethora of measures in an effort to contain the slide in foreign reserves, including calls by Governor Blackman for moderate wage settlements, and the imposition of tighter credit controls and higher reserve requirements. This was all to no avail and during the year the foreign exchange holdings fell steadily, from $68 million in March to $62.6 million in June and $59.5 million in September. Accordingly, during the last quarter of the year the Bank resorted to the remaining $10 million from the credit line with the Central Bank of Trinidad and Tobago and an additional $8 million from Chapter 3: Consolidation: 1976 to 1986