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SUNDAY BUSINESS GUARDIAN www.guardian.co.tt AUGUST 16 • 2015
One could imagine the public outrage
if Trinidad Cement raised its prices
because it anticipated an increase
in the worldwide market price of
its products. Yet, by using the same
argument about the future trend
in US dollar interest rates, the Central Bank has
pushed up the interbank (repo) rate, and the local
banks followed suit by raising the prime rate. And
the Minister of Finance, worrying about their prof-
itability, has defended the decision of the banks to
leave deposit rates at their historically low levels.
The Central Bank s further argument on stemming
the migration of funds is nonsense, because it controls
the outflow by limiting the supply of hard curren-
cy.Another reason advanced by the Central Bank is
that it has tightened liquidity, nevertheless the banks
as at April 30 still had $3 billion in excess reserves
available to lend or invest. Economics dictates that
a large supply keeps a price down. Interestingly when
the excess liquidity dropped from $7.6 billion to $4.7
billion a year ago, interest rates swayed not a basis
In the 1960 s before the localisation of foreign-
owned banks, the prime rate was seven per cent,
savings accounts paid four per cent, and fixed deposits
earned up to six per cent. The banks were still prof-
itable, operating costs were moderate in the pre-
computerisation era, the local head office costs were
not yet incurred, and as the exchange rate was low,
the parent Banks were satisfied with the conversion
of the repatriated profits.
Right now, the banks earn a spread of seven per
cent between the average of lending and deposit rates,
verified by the Central Bank in its monthly monetary
But in the USA, the present spread is half, 3.5 per
cent instead of seven per cent. http://www.gobank-
In the UK, the spread is 2.5 per cent:
Overseas, the huge money markets competing with
the banks keep margins low.
Onto the 1970 s and in our country, localisation
meant reporting to shareholders, as well as initial
costs of the move to electronic banking. The banks
created a prime commercial rate of 7.75 per cent for
businesses, the prime stayed at 7.0 per cent for the
Deposit rates were steadily falling in relation to
prime, although premium savings accounts paying
higher rates were introduced. And the banks started
to charge fees of bewildering variety.
Royal Bank s managing director has defended the
indefensible. It is true, as he says, that with excess
liquidity there is no need for deposit rates to go up.
But, by the same token, there is absolutely no jus-
tification for the banks to increase loan rates, because
there is no demand for loans. The fact is the banks
have increased only lending rates as a result of the
Central Bank s moral suasion.
From a practical point of view:
1. An increase of 0.5 per cent on a 30 year $1 million
mortgage payment is only $162, which all borrowers
ought to stomach, otherwise they did not weigh the
risks before taking on the debt
2. The corporate borrowers will pay the same,
regardless of the increase in prime. Because of low
demand, high competition.
Consumers are at the mercy of the banks and its
regulator, there is little one can do except to keep
the issue at the forefront of discussions.
Bournes Road, St James
No case for banks
to increase rates
In my last article I showed that the
increase in the repo rate would only
bring an early Christmas to the com-
mercial banks and will, in no way,
result in the desired objectives of
the Central Bank, they being,
increase in the yields in investments, a
reduction in inflation rate and a spur in eco-
nomic activities. I went on to show that an
increase in the repo rate and the quick
adjustment in the commercial banks prime
rate defies conventional wisdom.
Instead of pulling levers that are discon-
nected to any variable the Central Bank and
the Government must look at realistic alter-
natives to increase the interest rates on
investments. I recommend the following:
1. Immediately implement the tax free
savings bonds programme. This was sug-
gested to the Government many years ago
and was finally included in the 2015 national
budget but never implemented.
There are several advantages for this strat-
• With rates of 2 to 3 per cent, depending
on maturity, there would be a migration of
excess liquidity from the banking sector
towards the savings bonds;
• The migration of excess liquidity from
the banking sector would put pressure on
the interest rates on the savings and term
deposits and, in this regard, there would be
legitimate reasons for the banks to increase
their prime rate.
2. The Government should immediately
increase the rates on the T-bills and on gov-
As we know the interest rate on govern-
ment instruments establishes the risk-free
yield curve which is used by all other market
players to price their investment instruments.
These measures would achieve the objective
of increasing rates on investments to dampen
the flight of capital beyond our shores.
The idea to reduce the inflation rate and
encourage economic growth by increasing
the commercial banks prime rate is a major
mistake and must be re-examined.
It is a common mistake to assume that
by just shifting one variable the economy
will move one way or the next. To manage
this economy, one must have a sound under-
standing of the structure of the economy
and how it works. There have been much
talk about diversification and targeted areas
What exactly is economic diversification?
Let s look at this question another way.
What would T&T be without oil and gas?
The temptation is there to look at current
government inflows and say that 30 per
cent comes from oil and gas and 70 per
cent revenues comes from the non-energy
On that basis the country is well diver-
sified. The facts are that we do have an
energy sector and a non-energy sector that
depend solely upon the subsidies from the
energy sector. In essence, therefore, there
is absolutely no diversification in the T&T
Without oil and gas we would have to
import our energy requirements, prices of
electricity would skyrocket by approximately
600 per cent, the cost of fuel would double
to reflect market prices, inflation would
spike, labour cost would also rise, cost of
transport, cost of imports etc would also
The service sector would shrink, the con-
struction sector would collapse, the auto
industry would collapse and the size of gov-
ernment would have to shrink to be in line
with revenues. We have gone through this
before in the mid-eighties. The dramatic
collapse was well demonstrated when vehicle
sales fell from 23,000 units in 1983 to less
than 5,000 units in 1984.
No one can deny that our propensity to
import is exceedingly high. Without foreign
exchange the economy would collapse. What
is the status of our stock of foreign exchange?
This would have to be monitored with a
hawk s eye and with the low energy prices
and declining production only an optimist
would forecast a bright future for T&T.
There is ample evidence to support my view
and there is urgent need to restructure and
overhaul the economy, adjust expectations
and seek means to feed and clothe our-
There will be temptations to try and bor-
row our way out of the looming crisis and
it is not unusual for governments around
the world to take this easy way out. This
is just a way of kicking the can down the
road and exacerbating the problem instead
of finding a lasting solution.
As a nation we need to ask ourselves if
we want to spend the dwindling foreign
exchange in high cost luxury cars, in high
cost construction equipment we do not
need, in large high rise offices, in wasteful
education leading to no meaningful jobs, in
rapid rail, and in causeways?
Should we be conserving and living within
our means? The global economy is very
fragile and in such an environment it is
better to err on the side of caution rather
than on the side of unbridled optimism.
So, how can an increase in the interest
rate impact favourably on the stock of foreign
currency and, by extension, an improvement
in economic growth and a check in inflation?
Clearly, we would need to treat the issues
more seriously and greater engagement by
all sectors of society is required if lasting
solutions are to be found for the problems
facing the nation.
Ved Seereeram is a financial consultant.
His contact: firstname.lastname@example.org
without oil and gas
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