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WHAT MATTERS MOST: Confusing strategy

DR CLYDE MASCOLL, [email protected]

WHAT MATTERS MOST: Confusing strategy

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IT IS BECOMING increasingly more difficult to understand the rationale for removing the flooring on savings deposit rate to allow the commercial banks to make more profit.

Banks are now offering as little as 0.5 per cent on deposits, which means they would have less expenses. On the loan side, they would be able to lower lending rates to attract more quantity demanded of loans. It is a win-win situation for them.

The Central Bank did not reduce the floor, it was removed. As a consequence, several thousand depositors are receiving less interest/income on their savings. In theory, depositors should reduce their savings and invest in alternative financial instruments. This presumes that people hold deposits to earn interest.

Imagine the environment for many Barbadians who have had little or increase in wages and/or salaries and have been called upon to pay more income and indirect taxes. These same individuals have had their income tax allowances and deductions stripped from them, which include their ability to invest in registered savings plans and pensions, among others.

The profile of a depositor at a financial institution is wide and varied. Most people from the lowest to the highest income groups have a savings account. For several years, they have been guaranteed a minimum deposit rate of at least 2.5 per cent, which did not stop the commercial banks from being profitable. Now they will get 0.5 per cent on their savings deposits and the banks will be more profitable.

If the intention of the policy is to reduce interest rates on loans, then it is not intended that the full benefit to the banks of paying lower deposit rates will be passed on borrowers. The ultimate benefit to the economy will depend on who is doing the borrowing and for what purpose.

One of the reasons why it is increasingly difficult to understand the policy is based on the economic environment. For the last five years, it was being suggested that the Government was imposing additional taxes on Barbadians to reduce their ability to buy more goods and services in the economy. The aim was to protect the county’s foreign reserves as buying less would mean importing less.

In another breath, it was being suggested that the foreign reserves were adequate. This prompted the governor of the Central Bank to belatedly announce that 12 weeks of import reserve cover was more than adequate and that more reserves are not better.

The justification for the tax policy never made sense, since it was being stated that the tax policy would be accompanied by growth in the economy. But how do you grow the economy if the taxation was imposed to force Barbadians to buy less goods and services?

The interest rate policy is also hard to understand. Having implemented a policy of lower deposit rates, the Central Bank issued savings bonds to give deposit holders an opportunity to switch to an investment with a 5.5 per cent return. In the absence of data on the profile of who is investing in the bonds, one thing is certain: those who are able to buy the bonds are not in the low income groups and are hardly in the middle income groups.

There is no good reason why the information on the profile of those investing in the savings bonds should not be known. What is however known is that the other real motive for the change in interest rate policy was to reduce the cost of domestic debt servicing to the Government.

In the process of taking care of the commercial banks and the Government, the Central Bank incurred bigger losses. Commercial bank depositors and the staff of the Central Bank became the ultimate victims.

For sure, there are thousands more depositors than investors in savings bonds and therefore the switch has come with a wealth effect in favour of the few. What a policy as people are being asked to make an increasing contribution to access social services.

Over the last few years, it has become annoyingly difficult to understand the real purpose of Government policies especially when the stated reasons make little sense. The approach is now a strategy. Simply say what sounds most plausible at the time of introducing the policy. As the real effect of the policy on the public materialises, switch the reason to suit the political environment.

The strategy has gone beyond taxation to things like the Cahill mess. The next game in town is to stage an economic recovery.

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