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The Belize Times
sunday, march 7, 2010
GOB’s BANKING CHANGES: A DOUBLE EDGE SWORD
On the heels of national clamor for a decrease in interest rates, at the February 19, 2010 sitting of the House of Representatives, Prime Minster Barrow introduced and read several Bills with serious implications on the banking sector. He prefaced his introduction by indicating that it is Government’s first step at attempting to address the current impasse on how lending rates are being determined by the banking sector under the current recession. He indicated that if these sets of measures do not produce the impetus for the banks to reduce interest rates then his government is prepared to take other measures to ascertain this necessary decrease in interest rate. This writer will provide a cursory review of the proposed legislative changes and the implications of such changes. Four bills were introduced to amend the following Acts: • The International Banking Act, Chapter 267. • The Treasury Bill Act, Chapter 83. • The Central Bank Act, Chapter 262. • The Banking and Financial Institutions Act, Chapter 263. The proposed changes that were introduced by way of the four Bills include, inter alia, some of the following: i. The definition of resident would be so amended to allow developers and companies with Commercial Free Zone (CFZ) and Export Processing Zone (EPZ) status to be able to access off-shore banks in Belize. Therefore, this would allow these businesses to be able to source US dollars from off-shore banks. ii. Government would be able to increase its issues of Treasury Bills from the current limit of $100M to $200M. Treasury Bills are short-term debt instruments issued by the government and repayable within a year or less. They are sold at a discount whereby interest is due at maturity. Current interest rate is fixed at 3.25% iii. Government would be able to increase its issues of Treasury Notes from the current limit of $75M to $225M. Treasury Notes are debt instruments with a fixed interest rate payable every 6 months. Currently maturity period can be between 1 year and 5 years. The proposed changes would extend TNotes for a maximum term of 10 years. Current T-Notes with 2 year maturity pays an interest rate of 7%. 1 year TNotes currently issued pays an interest rate of 6%. iv. Central Bank would be restricted in how much advances could be made to GOB, that level would reduce from 20% or $50M to 8.5% of GOB revenues. v. Central Bank would be allowed to hold up to 10 times its paid-up capital and general reserves in GOB issued TBills or T-Notes. This level was previously limited to 7%. vi. Central Bank would have the authority to prescribe the minimum amount of GOB securities that banks must hold as part of their liquid asset requirements. vii. Central Bank would determine the minimum aggregate holdings of approved liquid assets that banks must hold; and banks having any shortfall in liquid asset holdings would be liable in paying the equivalent of 10% of the shortfall. Liquid assets are assets that
could be easily converted to cash/money, such as government T-Bills and short term T-Notes. The implications of the aforementioned changes are that they speak directly to GOB setting the framework for the financing of their 2010/11 budget and a very tardy attempt to spur the economy out of the recession. It can be anticipated that government would attempt to embark on some expansionary fiscal policy that would reflect an increase in government spending. Government dilemma however, is that such increase spending can only be financed by GOB assuming substantially more debt. Total debt to GDP ratio can be projected to increase to well above 75% for this financial year. Having the capacity to raise capital by way of assuming short to medium term loans (T-Bills and T-Notes) would allow for deficit spending to take place. As in 2009/10 budget, the $60M financing gap that existed was never realized, as it was premised substantially upon the receipt of windfall taxes from oil revenues, increased taxes and bridge financing form Taiwan. The folly of relying on such a
windfall tax so exposed the weakness in Government advisors ability to make the right call for Belize that it lays suspect their every action as we move forward. So it is not unreasonable to query and probe GOB to indicate precisely what are the projects it will be financing from its increase deficit spending. The move touted can only be seen as beneficial, if GOB will engage in meaningful expenditures that would spur the economy on to a path of recovery. With Central Bank having the ability to increase its holdings of government securities alongside being able to prescribe those limits for commercial banks, it can be anticipated that such a move would result in an increase in the money supply. As could be noted, any increase in money supply would result in a contingent increase in total demand within the economy and these policy changes are so required when the economy is experiencing a recession. The net result of these actions should result in an increase in reserves. This ought to translate in more monies being made available for lending, with the objective of driving down inter-
est rates. The success of such results being positive will be to the extent that the Central Bank uses these policy options and the Government undertakes prudent financial management whilst further burdening the people of Belize with increase levels of public debt. From the preliminary analysis of the implications of the proposed changes, it would be mindful to take keen note of what can be expected when the budget presentation is made. The Central Bank is task to execute Governments’ monetary policy and this first step is commendable in moving in the right direction, nevertheless, the desired results ought to be such that investment confidence is increased and businesses are able to undertake the required level of investment within their respective enterprises. The double edge sword that GOB is wielding is the possibility of realizing some ebbing of the recession at the expense of tax payers having to finance GOB’s debt burden, through possible increased taxes. Gwyneth Sydney Nah comments welcome at GwynethNah@gmail.com