With commercial banks currently displaying a low appetite for such instruments, the Central Bank of Barbados today announced an increase in the amount of Government paper the banks are required to hold by law.
Saying the move was “appropriate”, Acting Governor Cleviston Haynes announced that “effective December 1, 2017, commercial banks will be required to hold 18 per cent of their domestic deposits in stipulated securities, and from January 1, 2018 the banks will be required to hold 20 per cent of their deposits in stipulated securities.
“This is the second increase for the year and complements the fiscal initiatives introduced by the Minister of Finance in his Financial Statement and Budgetary Proposals earlier in the year,” Haynes said, while pointing out that “the cash reserve requirement for commercial banks remains unchanged at five per cent and the reserve requirement for deposit-taking trust and finance companies and merchant banks also remains unchanged”.
In his May review the acting governor had announced that commercial banks would be required to hold 15 per cent of their domestic deposits in stipulated securities, up from ten per cent. That took effect from June 15, 2017.
Over the past year in particular a number of commercial banks have backed away from taking on Government debt out of fear that when it becomes due, Government may not be able to repay, given its dwindling reserves, which now stand at 8.6 weeks of imports or $549.7 million, and its soaring national debt of 144 per cent of gross domestic product.
However, in defence of the further tightening of the domestic monetary policy, Haynes pointed out that the securities reserve requirement had been as high as 20 per cent in the past, while suggesting that as the economic situation improves it would likely fall back down to the ten per cent level, which existed for the last seven years.
“We believe that as we work through our economic challenges that it is important for all of the players in the system to contribute towards helping to restore confidence and growth in the system. And therefore we believe that it is appropriate at this time to increase the securities reserve [requirement],” Haynes said.
“It is our belief that once we are able to address the economic challenges which we face at present, that we will be able in the future to bring those ratios back down to levels that we consider to be appropriate. But this is a measure that is necessary at this point to contribute towards the overall economic stabilization for which we aspire,” he said.
However, the acting governor said what was now critical was for Government to put the necessary fiscal policies in place to restore overall confidence in the economy.
For the first half of the 2017-2018 financial year, the deficit was again financed domestically, with commercial banks providing 76 per cent of the funding “principally because of the requirement for banks to increase their holdings of Government securities”, according to the latest Central Bank report.
“The banking sector continued to exhibit a trend of high excess liquidity, improved asset quality and high levels of capitalization. The excess cash reserve ratio declined to 15.1 per cent, well above the historical norm even after the impact of the monetary policy decision to raise the commercial bank’s requirement ratio in June 2017,” Haynes added.