The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Central Bank's governor has called for the development of "new private sector mechanisms" to put the banking system's $1.8 billion surplus liquidity to more productive use.John Rolle, addressing the regulator's Monday exchange control seminar, said Bahamian companies could be "underweighting" the potential returns on capital if they made productive investments in this nation before looking overseas."This point should not be downplayed given already significant liquid resources that lay idle in local banks," Mr Rolle said. "These resources and others are in need of greater deployment in the enterprise sector. New private sector mechanisms ought to be developed to deploy these resources."

He did not explain what these "mechanisms" should look like, but was clearly referring to the $1.8 billion in excess liquidity that continues to build in the commercial banking system, depressing deposit rates and penalising savers.

The Central Bank's December economic developments report suggested it was exploring ways to achieve "a soft landing" in terms of reducing these surplus assets, which were further bolstered by some of the proceeds from the Government's recent $750 million foreign currency bond.

This move was backed by one of Mr Rolle's predecessors as governor, James Smith, who suggested that the Central Bank "revisit" restrictions on Bahamian dollar lending to non-residents as a way to "grease" the economy and release the excess liquidity.

"That's a real, I think, problem for economic growth that is seemingly not getting the attention it deserves," Mr Smith told Tribune Business on Monday, adding that attention typically focused on other fiscal and monetary indicators, government and private sector spending and unemployment.

"Underneath all of that is the Government and private sector have to have continued access to funding, and the banking sector - which holds all the savings in the country - has been bitten by the recession and is reluctant to lend at the pace of a decade ago," the 2002-2007 finance minister said.

"They're only targeting 'A' class customers who are over-qualified, meaning they are sluggish and reluctant to lend.... Now you have the productive sector; small, medium and large businesses, who are probably not getting the overdraft facilities to expand and create jobs."

Excess liquidity in the Bahamian commercial banking system represents assets that are available for lending purposes, but for which the banks can find no borrowers who meet their qualifying criteria.

The banks' reduced risk appetite following the 2008-2009 recession, and aversion to lending to anyone other than those able to provide 100 per cent collateral or meet their strict approval conditions, has resulted in the Bahamian economy's productive sector - the mortgage market and business community - being starved of debt capital financing.

Meanwhile, focusing on exchange control liberalisation, Mr Rolle said the Bahamas had yet to develop a 'national consensus' on what the final goals should be and what it wanted the economy to look like.

Emphasising that any relaxation will be gradual, and conducted in a phased, structured manner, the Governor said: "It should be stressed that the Bahamas is not presently in the position to make a large leap to more liberalised, unfiltered financial flows, such that the stability of our exchange rate would be preserved.

"This is especially so considering the very liquid nature of flows to which some stakeholder groups aspire. Preparation is still required to strengthen our institutional capacity to function in a transformed environment, and to improve the structural health of the economy.

"Some of our important stakeholder groups do not yet fully acknowledge the trade-offs that could be involved between the extent of liberalisation introduced, and difficulty it would pose to preserve the fixed exchange rate."