MONETARY POLICY AND WHAT IT MEANS FOR YOU

In times of economic distress such as those what are being faced by many economies, businesses and consumers are forced to contemplate on the role and functions of the monetary system. They further question the relationship and relevance of this system and how it has impact on driving consumption pattern.  These questions are very important indeed if there is to be a clear understanding of how the system functions generally and more particularly in Belize.  It is abundantly clear that by way of a thorough understanding one is better placed to navigate through the quagmire of uncertainty and to achieve the most desirable results possible. A good place for us to start in this quest is by examining, what is monetary policy and who are the players in this system?

Monetary policy can be easily defined as the policies governments implement to determine the level of money supply within the economy.  In controlling the money supply governments are able to influence the rate of economic growth, price levels, exchange rate and balance of payments.  Monetary policy also includes the determination of interest rates, sale and purchase of government securities and changes in the reserve requirement ratios for banks; all with a view to influencing the money supply within an economy.  In Belize, the Central Bank of Belize is the agency that is tasked with the execution and implementation of monetary policy as prescribed by the government.  This writer would opine that the type of monetary policy the Central Bank has been implementing can be classified as tight monetary policy, which results in restricting the level of demand for money, by making loans expensive and difficult to obtain.  One must bear in mind that the Central Bank is the regulatory body within this system.  The other players are the private and state financial institutions.  These include the commercial banks, credit unions, Development Finance Cooperation, Small Farmers Bank and Social Security Board.

For one to have an appreciation for the high cost of accessing credit in Belize a review of the weighted average interest rate on deposits demonstrate an increase from 5.8% in 2006 to 6.32% in 2009.  A review over the same period revealed the weighted average interest rate on lending shifted from 14.2% in 2006 to 14.1% in 2009.  The movements over the last 3 years have been minimal, but most revealing is that the interest rate spread between deposits and lending over this period has averaged 8.1%.  The interest rate difference between deposits and lending is the operating cost and profit margin of the institutions managing these deposits and making funds available for lending; taking into account the taxes payable by the banks.  The banks therefore, pass on a portion of their operating cost to the consumers.

A review of the financial position of the commercial banks in Belize as at June 30, 2009 illustrated the level of profits that were being realized despite the fact that Belize’s economy is in a recession.   A review of their profitability can be noted by their profit margin, return on assets (ROA) and return on equity (ROE).  ROA measures the banks’ profits for every $1 of assets, with 1% being the benchmark.  The higher the ratio the more income is being generated from a given level of assets.  All banks with the exception of the Alliance Bank recorded positive returns beyond 1%, the highest being 4.35% after tax for Scotiabank Belize.  ROE on the other hand measures profitability from the shareholders perspective and likewise all banks with the exception of the Alliance Bank recorded positive returns in excess of 10%.  The ROE could be further analyzed by decomposition of the ratio (DuPont analysis) to ascertain what is driving the high returns.  Alongside such positive overall performances, all five commercial banks combined had excess liquidity of $114.27M as at June 30, 2009.

The aforementioned snapshot thus reveals that although the economy is in a recession and consumers are faced with an increased demand on their cash flow the commercial banks have only been exacerbating an already depressed situation.  Therefore consumers must be able to know how best to manage their limited finances in light of the situation currently being faced.  One can clearly posit that the commercial banks in Belize function more like a cartel than competing entities.  In a competitive market place, consumers ought to benefit.  However, in Belize there is a captured market that is available for the taking between all five banks.  The Central Bank for its part does not play an active role in regulating the financial system; instead it allows uneconomical banks to continue functioning.  Therefore, the high levels of inefficiency experienced within these banking institutions are borne out in the additional cost to consumers.  These financial institutions, it would appear need to be more proactive in returning some benefits to their consumers that would enable them to weather this recession. There are so many instruments that are available at their disposal to aid in stimulating this recovery that it behooves us to wonder about this apparent lack of corporate concern.

The credit unions are not considered as direct competitors, although consumers must view them as safer institutions to bank with and a clear substitute to the commercial banks.  The performance of the top 4 largest credit unions has been positive in 2008 with the largest credit union, surpassing the smallest commercial bank in asset base.

Below are a few key areas that must be examined in light of individual circumstances.

• Verify when interest rate is subject to change on your home mortgage.  With the exception of DFC and SSB, interest rates on home mortgages are not always fixed.
• Refinance or reschedule your home mortgage if the loan payment has become too burdensome due to restricted cash flow.
• If you have a credit card and have expended full line of credit, it is cheaper to get a loan and pay-off credit card, than to service minimum payments.  Average interest rates on credit cards are 25%.
• If you require accessing credit only do so if the liability will increase value to your asset base.
• Funding for micro-enterprise development should be sought out from the credit unions The Social Security Board and the Development Finance Cooperation.
• Create a groundswell of consumer activism that could influence government via the Central Bank to play its role more fully and for our Banks to provide more client friendly options during this recession.

It is important for consumers to know how best to manage their finances in the current economic climate that exist in Belize.  Furthermore, it is essential that one have an appreciation for the structure of the financial system in Belize and to recognize the inefficiencies inherent in it.  Government intervention through the Central Bank of Belize will be slow to manifest itself, due in the main to the fact that Government lacks the institutional capacity to avail itself of the tools required to effectively guide monetary policies.  Therefore, consumers are left to make the best of a bad situation until Government takes its constitutional responsibility with some degree of urgency.

Gwyneth Sydney Nah – November 17, 2009

Send comments to GwynethNah@gmail.com

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