Effect of no-control deposit rate

keeping acctThe Central Bank of Barbados, the appointed regulator of commercial banks and the intended advisor of Government on monetary, fiscal and other economic policy to ensure that the economy remains buoyant and can deal with any challenges arising, recently made a decision to deregulate the process of setting the minimum savings rate for deposits held in commercial banks by the public. This responsibility has now been assigned to the commercial banks, which, I remind you, have a profit orientation and shareholders’ return to satisfy.

It is likely that many only gave this a passing glance as, firstly, in the past ten years the savings rate at the banks had fallen from four or five per cent down to an average of two or 2.5 per cent; and, secondly, many people have been unable to save, as they have been struggling to make ends meet with static income and rising costs/prices of their daily requirements and transactions.

When you take a more in-depth look at the situation, however, and consider the current financial position of Government and its profile of expenditure, you will realize that the recent decision by the Central Bank is ultimately part of a wider financing strategy for the Government to address its financing needs and inability to secure funding internationally on competitive terms, and also build resistance to local lenders to continue the recent pattern of short-term borrowing which the Government had been forced to utilize, and any deepening dip into the resources of the NIS Fund.

So where are we? The effect of the regulator’s decision to remove the minimum savings/deposit rate can be summarized as follows:

Commercial banks have now systematically dropped the savings rate to sub 2.0 per cent levels to an average of 1.25 per cent, and there is the possibility this could fall to one per cent or lower.

Profitability of commercial banks will increase as the spread has become wider due to lack of movement on the interest rates on short-term borrowings; maybe this is intended reprieve for the recent implementation of the tax on assets.

Customers seeking savings instruments on what I refer to as a short-term demand basis will no longer have this option at a fair rate and will be forced to increase their wealth through Government securities or instruments provided by private investment companies, if they are able ––
which automatically eliminates lower income brackets.

Government securities have become attractive overnight, resulting in two fully subscribed bond issues; and a third under way that is likely to realize similar success, which now places $50 million plus into Government’s coffers.

Overall Government debt has just increased with the bond issue, with a new commitment
to interest over the next five years.

Many may ask: why are we here? But, for me, what is curious is the fact that just some six months ago, Government bonds were not being seen as attractive to local or other investors, for that matter, despite the fact that repayment by Government is certain and carries little to no risk except as it relates to deferred gratification in the return and time value of money due to rising inflationary pressures.

Some commentators even suggested it was an issue of confidence in the Government. Others suggested the international credit rating and economic outlook was affecting subscription
to Government bonds and securities.

This seriously affected the financing plans of Government to support its expenditure, primarily on interest cost/debt servicing and on other current expenditure. The Government was starved for cash flow as evidenced by delays in income tax refunds and VAT refunds, and other payments due
by Government; and a solution had to be found.

Essentially, the attractiveness of the bonds was created artificially by facilitating the ability of the banks to make themselves more profitable at the expense of the public, but to the benefit of the Government coffers. You may say to me that this is the least contribution that we as citizens could make to help address our economic and financial woes and assist in the ongoing structural adjustment exercise. But my response is simply: how much more must and will be extracted from the pockets of already struggling Barbadians, trying to make ends meet for their families?

What will the cash flows from the bond issues that barely saw the light of day before being consumed
be utilized for? In another section of the media, a Government official alluded to there being no wasteful spending if we find oil reserves in our waters, I trust this was not an admission of any wasteful spending in our recent past.

Today being Budget Day for our country, we would expect the Minister of Finance to provide us with an analysis of the revenues and expenditures and further analysis of our debt situation and most importantly his intent for the expenditures both capital and revenue for the remainder of 2015/2016 and until the next Budget, inclusive of proposed application of the proceeds
of the near three successful bond issues in recent weeks.

I continue to be concerned by the role of the Central Bank as regulator of the commercial banks and other financial activity and as economic advisor to the Government, where it appears that policy advocated is intended to support continued overspending, especially
in areas that are not creating capacity or generating activity/revenue that will spur economic growth.

I am concerned with policies that continue to disadvantage the average Barbadian, yet, as in this case, facilitate further extraction of profit by the minority with Government as the conduit, whether directly or indirectly. For an action now taken by a regulator that once charged itself with being the buffer between commercial banks and the public and also being a buffer and objective voice and advisor on behalf of the country. Has the position of the Central bank been compromised? Only time will tell.

Of further concern is the frustration of not always receiving the level of transparent information (often promised by Government officials) from the Government about its financial abilities and leaving the country to determine our real position based on the actions or inactions of the Government. The Barbadian public deserves the full extent of our financial situation and the future intent of Government, and I look forward to the same being provided this evening and during the rest of this week.

How low will the savings rate go? How many more bond issues will there be? Is it possible for Government to over-leverage itself with so much debt financing to even meet current expenditure and obligations like the tax refunds that are now starting to trickle out by daily quota?

The slippery slope must be arrested, and these actions must lead to real economic growth that translates to a growth in Government revenue through trading rather than borrowing.

(David Simpson is managing director of Prestige Accounting Inc.)

One Response to Effect of no-control deposit rate

  1. Patrick Blackman June 16, 2015 at 1:03 pm

    If you have excess cash piled up in savings that cash is useless. Lower interest rates forces that cash out into productive investments that benefits all. Look at the credit unions, a pile of cash sitting there and not being put into use to stimulate the economy.

    It is better to transfer that cash to government bonds which would have the immediate effect on government expenditure.


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