FINANCIAL REFORM AND LIBERALISATION
A sound financial sector
is integral for the achievement of sustained economic and social development,
since financial activity provides the fulcrum for real economic growth by channelling
scarce resources into those areas that are most productive. We need also to liberalise
our financial system. In order to be effective, financial liberalisation has to
be a part of a broader set of macroeconomic reforms, and must be well managed
and implemented on a phased basis.
The financial system in Barbados
has been characterised in recent times by a significant level of under-utilised
funds in the form of excess liquidity. The management of these under-utilised
resources presents both a challenge and an opportunity. The challenge is to find
efficient ways to channel these financial resources as quickly as possible away
from speculative activities and into such productive activities necessary to spur
economic growth. On the other hand, when as expected, the pick-up in real economic
activity gains momentum in the second half of next year, the ready availability
of these resources means that both the private sector and public sector activities
can proceed apace without fear of Government activity crowding out the private
sector.
During the nine-month period ending September 2002, commercial
banks' excess liquidity rose by 8.1 percentage points or $383 million. This growth
in liquidity, which has been a source of concern for both the Government and the
private sector, was deemed to have been caused by the implementation of an indicative
weighted average lending rate on commercial banks. However, the reasons for this
rise in liquidity may be more accurately traced to three main sources.
First, in an attempt to stimulate the real economy the Government of Barbados
undertook counter-cyclical policies, which resulted in approximately $228.4 million
entering the financial system. This took the form of a $133.9 million draw-down
in Government's Special Deposits at the Central Bank and a $94.5 million rise
in the Ways and Means Account. Second, the funds paid to persons who sold their
shares in Life of Barbados Ltd. to the Barbados Mutual Life Assurance Society
infused the banking with an additional $151 million. These two one-off factors
injected $379 million into an already-liquid system. Thus, more than 90% of the
rise in liquidity can be attributed to these two reasons. Thirdly, the Central
Bank of Barbados lowered the total reserve requirement by 1 percentage point,
which resulted in liquidity rising by approximately $30 million. Therefore, the
current level of liquidity is mainly due to one-off factors and will most likely
be reduced as the economy recovers.
In the recent past, the main objective
of monetary policy has been to provide a low interest rate regime, which is conducive
to economic growth, particularly in the foreign exchange earning sectors. Such
an environment is extremely important for economic recovery. The Central Bank's
decision on August 1, 2001 to introduce an indicative weighted average lending
rate has resulted in a reduction in that rate from 11.06%, as at end-June 2001,
to 8.32% at the end of August 2002, representing a reduction of 2.74 percentage
points. At the same time, the minimum deposit rate was reduced by 1.0 percentage
point. Since that time, with the exception of the 4th quarter of 2001, the credit
response has been positive. It is estimated that businesses in Barbados have saved
over $50 million in operating costs, which would not have been possible or as
pervasive with other support mechanisms such as subsidies.
The Government
stands committed to maintaining the minimum deposit rate in the foreseeable future.
Targeting the weighted average lending rate was always intended to be a temporary
measure, and the Central Bank will remove the limit by March 2003.
The
analysis of the economic impact of Central Bank's policies suggests that there
is scope for more competition in the sector. Furthermore, the surplus of funds
in the system provides the commercial banks with an opportunity to increase their
level of financial intermediation and aid in the country's
development. Over
the past years, Government has been meeting the challenge of providing funds to
many of the island's development schemes, including the Housing Credit Fund, the
General Workers' Fund, and Fund Access. Government has decided that this financial
intermediation role is best provided by the existing financial institutions, with
Government providing guarantees for bond issues by these corporations. This would
help to reduce the rising negative impact of discretionary expenditure on the
fiscal deficit. As such, the Housing Credit Fund will be made a legal entity and
will be administered by the Central Bank.