The recent announcement by the Central Bank to set the minimum savings deposit rate only and to influence the treasury bill rate is designed to push more money into the purchasing of long-term Government securities.
The bank has a major problem with the excess money in the banking system not being used to meet Government’s borrowing requirements. Treasury bill tenders used to finance Government spending are not being fully subscribed; similarly, long-term Government securities are not attractive.
As far back as September 2011, it was noted that commercial banks have expressed little appetite for further investment in Government long-term securities. This has forced the Central Bank and the NIS to hold much more Government securities that they wish to.
The fear that the Government has to rely more on these two institutions for financing in the coming months is real and dangerous. Government’s fiscal house is now much worse than in 2011, when this fear was first raised. At that time, the bank increased its capacity to hold treasury bills from to $120 million to $250 million. This increase was to be temporary but has not been.
In the face of Government’s more recent spending spree, the policy change is an attempt to accommodate the fiscal madness that will get worse this fiscal year with a $600 million stimulus. It contradicts the governor’s previously held view that “…monetary policy cannot make up for the lack of fiscal adjustment. It must be stressed as well that monetary policy cannot make up for insufficient fiscal adjustment. Fiscal adjustment must be appropriate and sufficient.” What a change in thinking!
The Government has not made the fiscal adjustment, so the bank is putting more pressure on the domestic financial market to support its excess spending. Barbadians are truly being taken for a ride, as years of hard-earned knowledge and wisdom are being conveniently ignored.
There are some other initiatives happening behind the scene to support the fiscal madness: (1) credit unions are being forced to put more money with the commercial banks; (2) the NIS is being asked to increase its financing of the Government’s spending and (3) the central bank does not plan to reduce the limit of primary issues (treasury bills) which it increased in 2011 and was to reduce in March, 2012.
When the credit unions put more money at the commercial banks and their deposits now exceed $1.2 billion, the banks by law are required to hold Government securities. This is therefore an additional source of financing for Government spending.
The removal of a minimum rate on deposits other than savings obviously makes the commercial bank less attractive to all institutional investors including the NIS. Therefore the Central Bank’s intention “to protect the savings of households of modest means” is not the real objective of the change in policy.
Institutional investors will now find Government paper even more attractive. This is the intention of the Central Bank’s change in policy. Furthermore, it has been stated that “a clearly articulated policy on the part of Central Bank will also help to secure a rational structure for the Government’s yield curve, with higher interest yields on longer maturities.” In essence, the bank is hoping to increase the commercial banks’ and other financial institutions’ appetite for further investment in Government long-term securities.
Since the bank is prepared to change policy to finance the Government’s spending, this makes access to foreign financing extremely critical in the coming months. Again recall that prior to the general election, additional spending in the economy was being discouraged by the central bank and others because of its implication for the country’s foreign reserves. The bank hosted a television series of programmes on foreign reserves. What a change in policy!
This writer cannot accept that monetary policy in Barbados, known by all to be ineffective, is being used to support fiscal madness. It goes contrary to my training under Governor Courtney Blackman and then mentor Dr Delisle Worrell. The former wrote: “Meaningful interest rate policy can only be formulated in the context of sound fiscal policy.”
If the Government’s fiscal policy was sound, there would have been no need for a Medium Term Fiscal Strategy. The fiscal strategy has failed because there has been no fiscal adjustment, yet the current governor believes that monetary policy is the key.
It is difficult to understand what matters most in Barbados these days.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.