Fiat Money?

Once upon a time, hundreds of years ago, money had intrinsic value.  Coins were minted in gold or silver.  Money was then a physical item.  This money got its value from the worth of the bullion it represented.  If the coin said it was worth $1.00, then it had a dollar’s worth of gold in it.  This was straightforward.  But the weight of the coins was inconvenient for carrying around.

First the Knights Templar during the time of the Crusades, and then various governmental affiliates began to issue paper notes to the value of the gold or silver they kept in their vaults.  They promised they held gold or silver to the value of the notes they issued.  Those notes were said to be “backed” by gold or silver.  Not every country made sure their notes were backed by bullion.  Such currencies were very unstable and frequently collapsed.

In 1971 and 1972, the US and British governments moved away from backing their currencies with bullion.  Like other issuers of most modern paper currencies, they began to print money as needed.  The Eastern Caribbean dollar is a classic example of a currency that is not backed by gold or silver.  There is no requirement for the notes of the EC Central Bank to be backed by either bullion or foreign currency.

These unbacked currencies are said to be “fiat” currencies.  “Fiat” is a Latin word that can be translated as “let it be done”.  Our currency only has a value because the Eastern Caribbean Central Bank says it has that value.  The Central Bank simply said, “Let these bank notes we are issuing have the values we print on them.”  Unlike money backed by gold or silver, there is no real value to fiat money in itself.  Once everyone accepts the fiat of the Central Bank, all is in order.  Problems only arise when people begin to have doubts about the value of the currency.

One result of this fiat system is that currencies risk losing value due to inflation.  They even risk becoming worthless in the event of hyperinflation.  In some countries, when the people lose confidence in the value of their money, inflation can double in a single day.  There is then no acceptable medium of exchange.  People refuse to accept the currency, and all commerce collapses or turns back to barter.

Has the British colony of Anguilla found a way to issue fiat money?  I ask the question because over the past two years the Government of Anguilla (GoA) appears to have been printing money to meet the government’s every need to look good.  Its expenditure is not connected to how much money it can raise.  I am not sure that is legal or sensible.  Why have the Foreign and Commonwealth Development Office (the FCDO) and the Central Bank permitted this financially irresponsible state of affairs to develop unchecked?

Governments throughout the Caribbean region notoriously view their Social Security Fund as a cash cow to be raided at every emergency.  Anguilla is no different.  As part of the “banking resolution” back in 2016, our Fund took its first major hit.  Government borrowed over EC$200 million from our Social Security Fund to buy the two cash-strapped local banks.  I am not aware of any effort to repay any part of this borrowing.

In 2020, at the height of the recent pandemic, government raided the Fund again.  Contrary to the purpose of the Fund, government used it to pay unemployment benefits to every unemployed person in Anguilla who had not contributed to Social Security. or who had not contributed the required fifty weekly payments.  These monthly payments were at first EC$800.00 and then EC$1,000.00.  This freeness went on for over a year.  Social Security was encouraged to create a programme to pay the same unemployment assistance to persons who were social security contributors.  All these unlawful payments were, I understand, legalised after the event by having the House of Assembly approve them.

The Fund has now been sucked dry.  There are few alternative sources of ready money left for government to give away.

According to an article in The Anguillian Newspaper last week, a recently concluded Social Security conference saw the experts recommending that we increase contributions from 10% to 12% as the Social Security Fund has almost been depleted.  I am not surprised.

Starting in February 2022, the Russian/Ukrainian War resulted in sanctions and blockades.  The prices of goods skyrocketed.  The GST Act came into effect in mid-2022.  The result was further rising prices.  Inflation is sky rocketing in Anguilla.

To help with the rapidly rising cost of living during the past year, GoA is imitating the US and UK governments.  It has been issuing EC$500.00 food vouchers to every person over 70 years of age in Anguilla.  This money was not budgeted for.  Indeed, there was no public consultation on the need to give away money.  There was no discussion of the merits and demerits of giving the money to every 70-year-old in Anguilla.  There was no public discussion at all.  The news item on Radio Anguilla to the effect that GoA had taken the decision to grant this largesse caught us all by surprise.

GoA simply announced one day that every person in Anguilla over the age of 70 was entitled to go to the Inland Revenue Department (the IRD) and collect a voucher for EC$500.00.  The voucher could be presented in any grocery for food or liquor.  It was later announced that we could go back to the IRD and collect a second EC$500.00 voucher.  So, the total amount of the gift to each of the over-70s amounted to EC$1,000.00.

My guess is that there are about 1,000 persons over 70 years of age in Anguilla (local and ex-pat).  That means that these two unauthorized gifts must have cost about EC$1 million.  This money was not in the budget.  Perhaps this unauthorized expenditure from the Consolidated Fund was subsequently made lawful by an Act of the HoA.  That would be easy to do as the GoA controls the House (most of the members of the HoA are either cabinet ministers or junior ministers in the GoA.

Subsequent authorisation of an illegal government payment (if that is what it was) is not the point.  When the budget was prepared, no thought was given to raising the money to make these gifts.  It was not a budgeted item.  It appears GoA was permitted by the FCDO to spend unlimited amounts of money that was not budgeted.  I suppose because they had done the same thing in the UK, they could hardly object.  I am not sure I approve.

The next unauthorized government giveaway was a surprise gift of two amounts of EC$500.00 paid to each household account with the electricity company (ANGLEC).  This money was deposited directly to ANGLEC.  Note that this handout was not limited to Anguillians.  Nor were the recipients required to be certified as “needy” of financial assistance.  Nor was it limited to persons aged over 70 years.  It was paid indiscriminately to all residential accounts at ANGLEC, foreign or local, retired or working, millionaire or indigent.  I am not sure I approve.

The gift was ours whether we wanted it or needed it.  We had no say in the granting of this largesse.  If we objected to it as being illegal and unnecessary in our case, we could do nothing about it.

It was not a budgeted expenditure.  It was not authorised by any Act of the HoA.  Nor was it a negligible sum of money.  There must be some 5,000 households in Anguilla.  The cost of this gift, according to my calculation, should amount roughly to EC$5 million.  In my view, not being paid to needy residents, it was a blatant case of vote-buying for the next general elections.  Will it work?

All the evidence is that Western economies are presently in an economic recession.  By next year, consumer confidence is forecast to collapse.  The UK and other major economies will go into a depression.  Unemployment will increase substantially.  The real value of wages is expected to fall by about 50%.  Tourism will temporarily dry up in Anguilla.  Hotel companies will collapse.  Fewer workers will be employed.  Poverty will spread over the island.  But there will be no more gifts of free money to bail us out.

And now we learned last week that GoA will be issuing another unauthorised EC$500.00 food voucher to all seniors, millionaire or otherwise, on the island.  This generous gifting could not happen without the express approval of the FCDO.  They must by law sign off on all major expenditure by GoA.  It is as if the FCDO have given GoA permission to print our own fiat money.  Otherwise, GoA could never find the wherewithal.

But what will the consequences of all this munificence be?  We suspect one of them will be increased taxation.  At the end of the day, the money must come from somewhere.  The ministers are not giving away their own money.  It is more likely than not the workers of this country who will have to pay for all the handouts to the seniors.

Cowrie shells were currency in certain parts of the world many years ago.  With inflation high and about to increase, and given the rate at which the dollar’s value is sinking, should we be thinking about converting our savings into cowrie shells before the end of the year?

The AUF GST

 

I occasionally tune in to Klass FM for entertainment when I am driving my car from North Hill into town.  I don’t get to hear much during the short drive.  But it seems these days I mostly hear some agitator or the other spouting propaganda and drumming up anti-government sentiment, usually over the impending arrival of GST.

These radio commentators assure us that Hurricane GST will hit Anguilla on 1 July because Premier Dr Lorenzo Webster betrayed Anguillians and agreed to implement GST when during the election campaign he promised if elected to do away with the AUF’s proposed GST (the Anguilla United Front was Anguilla’s previous administration).

It was not high sea-surface temperature that caused Hurricane GST to develop.  It was the AUF administration’s signature back in 2018 to the agreement to impose GST that set off the disaster.  The present Anguilla Progressive Movement administration, appointed on 30 June 2020, is taking the blame for it.  Do they deserve the abuse they are getting on social media and the talk show programmes?

I had a word with Mr Ivan Connor, the government’s press officer.  He explained to me that it was pure propaganda.

According to the draft AUF White Paper of May 2020, GST was going to be the best thing that ever happened to Anguilla.  It would help to restore growth and achieve fiscal sustainability and poverty alleviation.  It would enable our economy to respond to and recover from the global and economic recession, the pandemic, and natural disasters.  The AUF administration committed Anguilla to the full implementation of GST effective 1 January 2023.  (The White Paper was later revised by the APM administration and the FCDO and published in March 2021.)

The propaganda was that GST would not be an additional tax.  It would replace the tourist-paid Accommodation Tax, the miniscule Environmental Levy, and the almost non-existent Communication Levy.  The claim was that this would allow GST to be introduced at a relatively low rate.

The more outrageous claim was that GST would facilitate investment, provide incentives to exporters, and make Anguilla internationally competitive.  What spin-doctor dreamed this stuff up?  Mind you, a lot of this puffery is repeated in the subsequent APM revised White Paper.  Meanwhile, we know that the sole purpose of GST is to allow the Anguilla administration to get money to continue pampering the Anguillian unemployed and unemployable.

The AUF administration’s concession to the British Government in introducing GST arose from the devastation caused by Hurricane Irma in September 2017.  The AUF administration was in a dilemma.  It was faced with a choice.  Either enforce existing tax legislation (for example, the Chief Auditor’s Report consistently over the years shows that only 40% of Anguillians pay their property tax), or introduce a new tax, preferably GST.  The AUF administration chose the second option.  In agreeing to the Medium Term Economic and Fiscal Plan (MTEFP) in June 2018, the AUF promised the FCDO they would introduce GST in Anguilla.  They preferred to impose a new tax.  If we collected the outstanding unpaid taxes, we would probably have enough money to run the government for five years without GST.  We won’t enforce this one either.  Remember the rule:  we cannot turn “innocent” Anguillians into convicted criminals.  To this day, we still have not prosecuted, so far as I know, a single Property Tax evader.

Let us not forget how GST came upon us.  To recap, after Hurricane Irma in September 2017, we fell back on British taxpayers’ generosity to meet the over-indulgencies of our excessively expensive public service (I estimate we currently employ two to do the job of one).  When the hurricane passed, the British made a gift to the AUF administration of £60 million (EC$240 million at a four to one exchange rate) for rebuilding.

We had no reserves to pay for our structural repairs ourselves.  This grant was earmarked for capital infrastructure.  In return, the AUF administration promised that we would cease to rely on the British taxpayer.  In future we would raise our own revenue to pay our own costs.  We promised we would enact the GST Act.  As the months and years of the AUF administration passed, we did not do so.

In the middle of the 2020 pandemic, and the close down of Anguilla’s economy, the AUF administration begged for and got a further EC$100 million in grant in aid.  This was intended specifically to pay civil servants for the following ten months.  It was also, we realised, intended to throw money around to help win the coming general elections.  In exchange, the AUF administration promised again on 11 June 2020 that it would either enact the GST or cut the cost of the public service.  We took the money.  We did not cut the cost of the public service.  The AUF’s tactic did not work.  It lost the elections.  But not before it had negotiated yet another EC$100 million gift from the British taxpayers to pay civil servants.  This windfall was due to be paid within days after the general elections.

The day after coming to office on 30 June 2020, Dr Webster was faced with a dilemma.  There were no funds in the Treasury.  He must either default in paying civil servants’ salaries for June or accept the AUF-negotiated EC$100 million from the FCDO.  He chose to pay the civil servants.  You may think, as I do, that he missed the golden opportunity to send all of them home while he worked out how to permanently let half of them go as being an unproductive and unnecessary burden on Anguilla’s taxpayers.

Let us be clear.  We got the second EC$100 million by repeating the promise of the previous administration, that we would introduce GST.  Since we would not reduce our expenses of government, we would increase taxes to pay for it.  That was the promise.  On 29 July 2021, our House of Assembly passed the GST Act into force.

The new APM Administration was immediately in political trouble.  They promised the people during the 2021 election campaign that they would not agree to accept the British EC$100 million gift if it meant passing the GST Act.  But, once in office, they faltered.  They reconsidered.  They took the seemingly easy option of taking the money and agreeing in exchange to pass the GST Act into law.

The CDB had also agreed with the previous administration to make a $30 million loan conditional on passage of the GST Act.  The new administration needed this additional money to pay more salaries.  It could not turn it down. On taking the loan, it was now obligated also to the CDB to pass the GST Act into law

The FCDO did not force us to pass the GST Act.  We took their money, and the money of the CDB, on a solemn undertaking to start paying for our expensive government ourselves by imposing GST.  If we do not live up to our promises made in exchange for hard cash, then would we be anything but a bandit state?

We have no one to blame for our dire circumstances but ourselves.  The British don’t owe us anything.  We don’t pay a penny in British taxes.  Blaming the “British” for our present problems is pure xenophobia if not an appeal to racism.  Let us face it, we Anguillians always delight in blaming others for our misfortunes.  We are never to blame.  It has always been so.

What really gets to me is the pure hypocrisy of the government critics who blame Dr Webster’s administration for agreeing to the GST Act after he came to office.  Are they willing to step forward and say that he should have chosen the alternative?  Would they have supported him sending the civil servants home without pay in June 2020?  Of course not.  What he did instead was masterful.  He negotiated down the most onerous terms and conditions of the GST as agreed by the AUF administration.  He got them to agree to making the GST terms as light as he possibly could.

I hope to look at these in a later article.  I also hope to expose the mistaken, if not malicious, motives of some of his most vociferous critics.

GST Imposed?

 

On 29 July 2021 the Anguilla House of Assembly passed the GST Act into law.  Controversially, two Ministers of Government voted against the adoption of the Bill, while the two ex-officio members of the House, the Attorney-General (A-G), and the Deputy Governor (DG), voted in favour of the adoption of the law, thus ensuring that a slim majority of one was attained, and the GST Act was passed into law.

An uproar arose in the community when the significance of these events sunk in.  Members of the public protested on social media that the actions of the A-G and the DG contravened the convention that the ex-officio members do not vote.  The A-G and the DG never previously voted on any motion before the House.

Few appeared astonished that the two Ministers who voted against passage of the Act continued to function in government.  Every Anguillian schoolchild knows that ExCo is collectively responsible to the House of Assembly for the conduct of government.  Once ExCo has taken a decision, no member may express public dissent to it without resigning.  This is known as the principle of collective responsibility.  When the two Ministers did not resign their portfolios, they should have been dismissed by the Premier and gone to the back benches.  Instead, they continued to serve as Ministers as if nothing had happened. 

The main objection that was aired on the radio and other social media was that the Foreign and Commonwealth Development Office (FCDO) put unfair pressure on the local administration to enact the law.  This is a conspiracy theory.  It also misses the main point of the assault on the principle of collective responsibility.

The reason government insisted on passing the Act was that we were bound by our promise made in exchange for large sums of money to do so.  The lack of public consultation before the law was passed is a systemic problem in Anguilla.  It is standard operating procedure in Anguilla.  Until the present Speaker started insisting on it, it was almost unheard of for the public to be consulted on any proposed new law.  But whether there was adequate consultation or not, the Act had to be passed.

The FCDO say with justification that Anguilla’s government is too expensive.  In some cases, we employ five persons to do the job of one.  The FCDO point out to us that if we cannot raise the local revenue to pay public service salaries, we must either cut the cost of government or we must raise the taxes to pay for it.  They insist that there is no reason their British taxpayers should pay for Anguilla’s expensive government.

However, no Anguilla Government appears prepared to either cut back the numbers of the public service or reduce their remuneration.  It is said that it would be political suicide for government to do what is needed and make half the public service redundant.  The banks warned that letting go large numbers of public servants or reducing their salaries means that hundreds of loans will go into default, and social distress will explode.  The only alternative left is for us to raise our own resources to meet our public costs.

Meanwhile, employees in the private sector are not as pampered as the public service.  While hotels let their staff go for over a year on at most half pay, public servants continue to receive their pre-pandemic salaries in full.  There must be hundreds of private sector employees who are unable to pay their rent or their mortgage instalments.  Salt is rubbed into their wounds as the hotels curry favour by part-time employment of public servants.  These come cheap since there is no need to pay holiday pay, social security, medical insurance, or interim stabilisation levy on “temporary” gig workers.

The last Administration hired consultants to advise on the most appropriate way to raise additional revenue.  The recommendation was that a GST would do the job.  The Eastern Caribbean Central Bank (ECCB) and the Caribbean Development Bank (CDB) concurred.

Instead, we fell back on British taxpayers’ generosity to meet our over-indulgencies.  After Hurricane Irma in 2017, the last Administration got 60 million pounds sterling (EC$240 million at a four to one exchange rate) in grant aid from the FCDO.  This grant was labelled “humanitarian aid”.   In fact, it was earmarked for capital infrastructure, namely, the building of new facilities or the repair of damaged ones.  We had no reserves to pay for our structural upgrades ourselves.  In return, we promised that we would cease to rely on the British taxpayer and raise our own revenue in the future.  We would enact the GST Act.  We did not do so.

Early in the 2020 pandemic, and the closure of Anguilla’s economy, the previous Administration got a further EC$100 million in grant in aid.  This was intended specifically to pay civil servants for the following ten months.  In exchange, we promised again that we would either enact the GST or cut the cost of the public service.  We took the money.  We did not do as promised.  The previous Administration then lost the election.

The present Administration came into office a year after the first aid grant, accepting yet another EC$100 million from the FCDO.  We were given this aid on the repeated undertaking that we would do what the previous administration had promised:  either increase taxes to cover our expenses by enacting the GST or reduce our expenses.

The new Administration missed the perfect opportunity to bite the proverbial bullet and cut our public service expenses.  They had promised during the election campaign that they would not agree to accept the EC$100 million if it meant passing the GST.  But, once in office, they faltered and grabbed at the seemingly easy option of taking the money and agreeing in exchange to pass the tax into law.

The British taxpayers’ money did not last long.  It has run out.  Now, the CDB has agreed to make us a loan of EC$30 million on the same promise that we would pass the GST Act.  The CDB was more astute than the FCDO.  This loan was conditional.  If we didn’t pass the Act by a certain date, we wouldn’t get the loan.  We passed the Act just in time with the vote of the A-G and the DG.  Now public servants will get paid for the next three months.

The FCDO did not force us to pass the GST Act, as some are saying.  We took their money, and the money of others, on a solemn undertaking to begin to pay for our expensive government ourselves.  If we do not live up to our promises made in exchange for hard cash, then we are nothing but a bandit state.

We have no one to blame for our dire circumstances but ourselves.  Blaming the “white British” for our present problems is pure xenophobia if not downright racism.  Let us face it, Anguillians always delight in blaming others for our misfortunes.  We are never to blame.  It has always been so.

Poverty in Anguilla is being held out by the protesters against the GST as a reason why the GST Act should not be passed at this time.  There are some poor people in Anguilla.  The Annual Reports of the Department of Social Development do not provide any figures for the number of families in need.  A close examination of their most recent report for 2016 on the government website suggests the number is between 100 and 300 households.  We do have an obligation to prepare a social safety net to take care of those who through no fault of their own are unable to do so.  But even a blind person cannot be oblivious to the proliferation since Hurricane Irma in 2017 of SUVs and CRVs on the roads of Anguilla.  Even now, at the height of the Covid-19 pandemic, there are new villas going up on nearly every street corner in Anguilla.  There is no shortage of money in circulation in Anguilla.

One must conclude that Anguillians are generally a wealthy people.  There is no shortage of resources.  It is not as if we cannot afford to pay for our public services, which are presently subsidised.  Our culture of expecting all public services to be subsidised while we pay few or no taxes must change.  Our tradition of objecting to every increase in government fees and taxes cannot continue.

How we are going to pay for our public administration once the loan from the CDB runs out is going to be the question.

It will be interesting to see if the present Administration can continue to mamaguy the FCDO as the last administration did so masterfully.