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WHAT MATTERS MOST: Households taking the brunt

Dr Clyde Mascoll

WHAT MATTERS MOST: Households taking the brunt

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In relinquishing control of the minimum rate on savings deposits, the policymakers are hoping to achieve some predetermined outcomes in the Barbados economy.

In the current economic environment, these outcomes would include protecting the international reserves, encouraging economic activity and reducing the cost of Government credit. Of these, the latter is the only real objective at this time.

As a consequence of the deregulation, the savings rate on deposits will fall as is the true intention of the policymakers. This will increase the profitability of the banking system. It will reduce the income/interest earned by depositors. Unfortunately, it will not reduce lending rates and if so, only prime borrowers will benefit.

If the Central Bank wanted to protect the international reserves, then an increase in the minimum deposit rate would have been the obvious policy in the short run. Since the deregulation would cause a reduction in the savings rate, protecting the reserves cannot be a predetermined outcome.  

Over the last seven years, fiscal policy was designed to improve the Government’s financial position. The taxation measures have been severe on Barbadian households and businesses without any significant change in the fiscal position, when the Government’s true liabilities are fully brought to book.

Apart from the onerous taxation, Barbadian workers have not enjoyed salary increases in the face of rising prices, resulting in a significant reduction in their spending power. Policies were also introduced to remove benefits associated with mutual funds and other investments. It is therefore surprising that depositors have become victims of the trend to discourage savings and investment.

Given that the announced policy will reduce the savings rate without a corresponding reduction in lending rates, the theoretically predetermined outcome of encouraging economic activity will not be achieved. This could not have been a practical outcome, since the Government has argued that its policy of increasing taxation was designed to reduce economic activity and in that it has been successful.

By increasing taxation, the Government has succeeded in reducing total spending in the economy. This is evident in the fact that the Barbados economy is now smaller than it was in 2008. It was suggested that this had to be done to protect the country’s international reserves and by extension its exchange rate.

If the above reasoning is accepted, then the recent interest rate policy cannot be designed to contradict the fiscal policy. The easiest way to prosecute an accused is to use his/her own evidence. Clearly, the policy is not intended neither to protect the international reserves nor to encourage economic activity that leads to growth.

However, the policy of allowing commercial banks to fix the minimum savings rate is designed to lower not only that rate, but the treasury bill rate, which is the rate on short-term Government securities of a 90-day maturity period. In lowering this rate, the cost of Government debt servicing is reduced.

The evidence of very strong correlation between the savings rate and the treasury bill rate is irrefutable in the Barbados economy. Therefore, once the savings rate falls, so too will the treasury bill rate. But there is more.

Since September 2011, it was noted that commercial banks have expressed little appetite for further investment in Government long-term instruments. As a consequence, they preferred to invest in short-term securities. The increased demand for treasury bills was not accompanied by an increase in the rate as the Central Bank became a major investor in the short-term paper. Furthermore, inflation (the rate of growth of consumer prices) reached almost ten per cent in 2011, which should have triggered some increase in interest rates.

Notwithstanding what was happening with interest rates in the United States, the local evidence pointed to an increase in domestic interest rates. Instead, the policymakers opted to use more taxation to dampen economic activity under the guise that they were protecting the international reserves. Yet the reserves were said repeatedly to be adequate over the period.

Now that the Government long-term securities are not as attractive to institutional investors, the recent policy is to reduce the interest rate on the short-term securities, thus forcing the investors to look in the direction of long-term securities/debentures.

The policymakers are concerned only with the fiscal numbers, while once again ignoring the consequences for human beings. At every turn in the last seven years, households have taken the brunt of the adjustment. The deregulation of the minimum deposit rate at this time is no different.          

• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected]