Confronting the debt crisis pt. 2
by Arinthia S. Komolafe
Last week we explored the effects that monetary policy at the turn of the millennium may have had upon the current mortgage and overall debt crisis. As several individuals are calling for a further reduction of the discount and prime rates (DR and PR), it is important to note the impact such a move will have on individuals’ credit positions and financial wellbeing.
There is no doubt that the reduction of the DR and PR proved beneficial to the government in that it provided the government with an opportunity to service its debt at a lower interest rate, even though the overall benefits to consumers appears to be minimal. On the other hand, the reduction of the DR and PR would have negatively impacted some organizations, Financial Institutions (FIs) and the National Insurance Board, as they would have lost millions of dollars in investment income.
In the final analysis, FIs usually win and are rarely dealt the bad hand of the stick in any situation within a credit-driven and consumer society like The Bahamas. Financial Institutions in response to the aforementioned reduction imposed charges in other strategic areas, increased some of their fees and maintained their rates for consumer loans. We have witnessed quiet increases in FIs’ fees for transactions such as ATM or passbook withdrawals – service charges on accounts and additional fees were applied to loans in the aftermath of the rate reductions. A well-known fact is that the ultimate and main loser is usually the consumer who on the one hand receives a ‘supposed’ break on his debt servicing due to the DR and PR reduction, but pays hidden fees and charges on the other hand.
The net effect on the consumer is that he/she ends up paying the same amount and in some cases more to the FIs, which may result in non-performing loans or lost property to foreclosure. This reinforces the point that an active Consumer Protection Commission ought to be in place to provide checks and balance on behalf of consumers relating to financial transactions among other things.
In addition to providing debt-servicing relief, it is expected that further reduction in the DR and PR should have also provided access to credit at a cheaper rate for individual and business consumers. The positive effect for business owners is that it creates the opportunity for expansion of the business and/or maintenance of inventory levels. However, it is estimated that approximately one third of commercial banking loans extended to Bahamian companies are in arrears. If businesses are faced with increased energy and gas costs combined with tax increases in National Insurance, business license fees and other diverse areas, it becomes less possible for businesses to be sustained during the current economic climate and more importantly create jobs that will help stem the growing unemployment rate.
The likelihood of FIs extending credit under already constrained circumstances is lower than normal and the underwriting of new loans is being done with extreme caution – a prudent course of action. This further emphasizes and highlights the importance of and the urgent need for a functional and effective credit bureau. It is noted that the Central Bank of The Bahamas had obtained assistance from the Caribbean Regional Technical Assistance Center (CARTAC) with the aim of establishing a credit bureau, albeit the process has been ongoing for a few years. Considering the history of adjustments to the DR and PR, these rates are normally revised (downwards for the most part) not more frequently than in five-year intervals. Whereas this does not suggest that monetary policy should be stalled or be predictable, the historical trends suggest that there is ample time to establish a credit bureau prior to any potential adjustments to the DR and PR.
What are the fiscal policies of the political parties?
In light of the challenges that our economy faces and the general consensus that we must revisit our economic model, it is disturbing to see that little is being said about the proposed fiscal policies of political parties as we enter the heart of the general election campaign. It is a well-known fact that during the election campaign seasons in the past, we have heard politicians produce their grand ideas of what they intend to do for the Bahamian people. The important part of the equation is, however, often omitted and very rarely if ever do we hear about how they propose to ‘foot the bill’ for their grand but necessary ideas.
It seems inevitable that the next government post the 2012 general election will have to continue this spate of borrowing at least during year one of governance to ensure the government is able to meet its obligations. Fortunately, government debt servicing has been aided by one-off payments in 2011 from the sale of the Bahamas Telecommunications Company and capital inflows from Baha Mar. However, the likelihood of similar capital injections for 2012 is slim. A part from a significant turnaround and increase in tourism numbers and the government’s ability to constrain its spending habits, it is difficult to see how we will get ourselves up out of this national disaster.
Our politicians seem to have mastered the art of avoiding reality and failing to inform us that hard decisions will have to be made. In essence, austerity measures are not unforeseeable and it could be argued that these measures are unavoidable. Of course such declarations are unpopular (albeit they would be truthful) and politicians fear the potential backlash of such honesty. The government has continued to borrow in the midst of declining revenues and increased taxes that placed a heavy burden on the Bahamian people. It would not be surprising, therefore, if the current tax levels are maintained or increased to meet budget requirements. Unfortunately, the persons most affected by these tax burdens form part of the working and shrinking middle classes. In the absence of foreign direct investment or new sources of revenue, any reduction in taxes will most certainly require the government to carry out extreme measures to cut its spending, increase the efficiency of state-owned enterprises to stop wastage and implement efficient tax collection policies.
The national debt crisis constitutes an unwanted and unsolicited gift to future generations of Bahamians that threaten their opportunity for economic prosperity. This crisis and prevailing macroeconomic indicators makes it difficult to see any significant economic growth in the near future. Our leaders and all of us must rise above the partisan politics and make a concerted effort to place our economy back on track.
• Arinthia S. Komolafe is an attorney-at-law. Comments can be directed at: email@example.com
Mar 15, 2012