HOUSEHOLD DEBT IN Barbados increased rapidly between 1990 and the end of 2010, moving from less than $500 million to $4.5 billion over the period, according to a recent study.
However, the research conducted by University of the West Indies economics lecturer Dr Winston Moore and the Central Bank of Barbados’ senior economist Mahalia Jackman and research officer Justin Carter did not find any indication that this had become a risk to financial and overall macroeconomic stability.”
The study included in the December 2012 edition of the bank’s online journal Economic Review found that household debt was positively associated with economic growth, inflation and wages but inversely related to interest and unemployment rates.
The researchers noted that despite the significant increase, net indebtedness continued to be largely negative and bad debts to the household sector seem to have stabilised.
“However, it is recommended that authorities closely monitor this indicator, as it has been a leading predictor of financial difficulties in other countries,” they cautioned.
The study pointed out that financial deregulation had resulted in the Central Bank having limited control over banks and the amount in which they lend.
However, if household debt became unsustainable or problematic, it could mean a reintroduction of credit controls, a raise in deposit requirements and increasing the regulations on the interest rate.
“These would surely have adverse effects on the availability and cost of credit, which the literature suggests are the drivers behind rapid increases of household debt,” the researchers said in the study entitled Is the Magnitude of Household Debt In Barbados A Concern?
The paper showed that during the period 2005 to 2008 credit boom household debt in Barbados rose by an average rate of 15 per cent per annum.
However, in the face of the global slowdown, growth in household debt dwindled to a mere 1.6 per cent and 3.7 per cent in 2009 and 2010, respectively.
The crisis also significantly affected the ability of households to manage outstanding debt obligations. Household non-performing loans expanded substantially following the onset of the crisis, moving from $69 million or 2.8 per cent of personal sector loans to reach a high of $161.1 million (the equivalent of 5.9 per cent of household loans) in September 2010.
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