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WHAT MATTERS MOST: The more things change

DR CLYDE MASCOLL, [email protected]

WHAT MATTERS MOST: The more things change

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ONLY TWO of the major sectors in the Barbados economy have grown in the last eight years – financial services and Government. The former comprises mainly commercial banks. The growth as measured by real value added has come from different sources; the Government increased spending while the banks cut costs.

The contrasting behaviour in the two sectors offers some interesting insights, not only to historical relations in the country but present-day thinking as it relates to the vision of the political leadership. The behaviour brings to mind Bob Marley’s song Rat Race and more so the verse: “In the abundance of water, the fool is thirsty”.

The financial system ought to be the provider of sustenance to fuel enterprise and consequently growth in the economy, by making finance available for investment. It has not played its role effectively over the years.

The system’s focus has been more on efficiency, which is about making as much profits as possible. In pursuing this objective, the sector has not concerned itself with distributing the sustenance more effectively to help the less traditional entrepreneurs.

Notwithstanding its historical failure to better accommodate the objectives of previous political leadership in this country, the current leadership saw it fit to reward the sector over the last year. This reward has come in the policy that allows commercial banks to fix the minimum deposit rate.

The irony is that over the course of the last seven years, commercial banks have been flooded with excess liquidity, that is, excess money. This resulted predominantly from the lack of demand for loans especially from the traditional entrepreneurs. In the circumstances, the banks could have offered the smaller entrepreneurs greater access to finance at more affordable rates. But no, the focus was on how to make more profits in a declining economy.

In the circumstances, the banks reported less profit because of falling revenue. Therefore, policy initiatives to cut costs became the new strategy. As a result, labour costs were targeted. Unfortunately, job losses accompanied the strategy. On the other hand, more emphasis was placed on utilising technology. Of course, this is business.

What is not business is when the Government facilitates the appetite of the financial sector to make more profits at the expense of the people. This is where one questions the vision of the political leadership. The question is: why should a specific sector be immune from the economic circumstances confronting the most vulnerable?

Here is the context for understanding this strange behaviour by the political leaders. As far back as 2011, commercial banks expressed little appetite for further investment in Government long-term instruments. This prompted the Central Bank of Barbados to turn to the printing of money as a way of financing government spending. This figure has now reached in excess of a billion dollars.

Once there was excess money deposited at the commercial banks, they were committed to paying a minimum deposit rate of 2.5 per cent. This is the major cost to the banks. In an environment of reduced demand for loans, the banks needed this cost addressed, having dealt with the issue of labour costs. This could only be addressed by a change in policy and it was done.

Having agreed to allow the banks to offer much lower deposit rates, depositors were the ones hurt by the policy. The Government therefore supported the policy of offering savings bonds to the depositors. This resulted in more able depositors switching to savings bonds at a rate of 5.5 per cent. The less able depositors could not make the switch and have therefore suffered some significant loss. In the meantime, the commercial banks have benefited substantially by offering depositors rates as low as 0.5 per cent. What substantial savings for them!

As a result of putting the savings bonds on the market at a respectable rate, the Government too has benefited. Now that the banks are able to pay much less on deposits, the treasury bills, which they were finding very unattractive in recent times, will now become doable once again. This means that they will buy them. What a remarkable collaboration by two unlikely accomplices.

In the circumstances, a very unnatural relationship between the Government and commercial banks emerges that ought to be of major concern to the people. Unfortunately, this kind of information does not come in the form of gossip and to some is less appealing, even though far more critical to their day-to-day existence. The more things change, the more they remain the same.

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