The news announced last week – just as it was annually for the last decade – by the Bank of Guyana that our banking system has “excess liquidity” always strikes a discordant note – especially to the countless individuals that have been turned away from the loan counters of banks. Guyana is not a rich country: if the truth be told, we are the poorest country on the entire continent of South America. We are also an underdeveloped country: so much of our vaunted “potential” remains locked away under the ground (minerals and oil) or in the uncultivated soil of our vast savannahs (soya and other crops).
So how come the banks are not funding projects to unleash this potential but are yet awash in cash? Is it that our business class cannot come up with plans that sound viable to the Banks’ loan officers? Is the Bank of Guyana creating money at too fast a clip for our economy – even though the latter has bucked the tide and produced some growth in the GDP? Or are the conditionalities of banks for loans – double digit interest rates for even favoured customers and onerous collateral demands – too stiff for borrowers?
One part of the answer surely lies in the news that the government issuance of Treasury Bills (T-Bills) to “sop up” the excess liquidity in the last year jumped by 13.2 percent to a mind-boggling $94.76 billion. The reason offered for this “sopping up” mechanism – as it has been for the last decade or so – is “to sterilise the excess liquidity to control inflation”. What does this mean? Simply that the Banks are onto a very good thing for themselves.
Banks are akin to a public utility. We allow them to collect money from the public (deposits) so that they can intermediate that money to those that want to borrow funds for investment or other forms of spending. They charge interest to the borrowers. But if there are no borrowers, how do they earn interest so that they can pay themselves (very important) and pay interests (small as that may be) to depositors? The market answer is that they should lower their interest rates to attract borrowers, so that at each phase of the business cycle, there is a reasonable interest rate.
In Guyana, however, Banks have obdurately refused to lower interest rates to the low single digit rates, prevalent in the developed economies, that we can only read about. So how can they refuse to lend and still survive? Simple: they have a fail-safe backstop in the government. Acting in accordance to some monetarist economic dogma or other, our government has resolutely assumed that if too much money (who created it in the first place? And how?) enter the system to chase too few goods, inflation will ensue. And we must prevent inflation even if the result is the stagnation of our economy.
The government therefore, issues T-Bills for the banks to invest their “excess cash”– and for which the government pays them interest totalling billions of dollars annually – and (this is the kicker) the government cannot use the funds. This is the meaning of the word “sterilised”: the money is simply locked away from the economy. And so we have a classic catch-22 situation.
Businesses and consumers want loans; the banks refuse to bring down their interest rates; the government steps in to offer a safe haven for the banks’ money (with interest to boot) and so the latter have no incentive to lower their interests. To paraphrase the Ancient Mariner, “money, money everywhere and not a dollar to spend”.
We simply point out to the policymakers that both China and India faced the problems of increased liquidity and inflation (actual, not hypothetical) earlier this year. They did not resort to mopping up operations (that places an interest cost to the government) but raised their reserve requirements – which forces the banks to effective sterilise more of their cash with no interest costs. But that may annoy the bankers here, wouldn’t it?
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