Jamaica: Dr Davies dismisses shaw's
interest rate suggestions
The Jamaica Observer
KINGSTON
Petroleumworldtt.com
01 07 07
Finance
Minister Dr Davies has dismissed the suggestion
of opposition spokesman on Finance Audley Shaw regarding
single-digit inflation .The Opposition Finance spokesman
has repeatedly argued that he would use "moral
suasion"( gentle persuasion) with private sector
representatives and lending institutions, to get
them to accept single-digit interest rates. According
to Shaw, this would be critical to bring the local
economy in line with our trading partners.
Shaw.....says
he will be meeting with banking sector to pursue
discussions aimed at narrowing the spreads between
bank's deposit rate and lending rates
Just this week, he was on record as saying he would
be meeting with the banking sector, to pursue discussions
aimed at narrowing the spreads between the bank's
deposit rates and lending rates, as part of his
rate reduction strategy. But, in a quick response,
Finance Minister Davies dismissed these suggestions
concerning negotiated rates as simply impossible
and just not on.
Putting it succinctly Dr Davies
said, "Can you imagine telling an institution
holding long-term pension funds, that you would
not be paying the agreed rates of return?".
And, in a very strong tone, Finance Minister Davies
stated that it was irresponsible of Shaw to express
such a view at this time as, if word got out to
the overseas financial community that any such move
was being contemplated, it would have negative ripple
implications for the economy . "The Opposition
spokesman must get real," he declared.
What is noticeable about this divergent
interest rate position of Dr Davies and Shadow Minister
Shaw is that they share common perspectives regarding
the use of the relatively cheaper Petro Caribe funds.
Shaw had recommended that the Fund be used to pay
down expensive debt thereby reducing the country's
substantial stock-of-debt problem.
Dr Davies agreed with this prescription
and argued that government had taken it on board
but pointed out that, paying down the debt did not
merely imply reducing the actual debt stock, but
included other current government initiatives such
as making cheaper financing available to the Port
Authority and assisting Petrojam's expansion plans.
But looking specifically at Shaw's recommendation
regarding negotiated interest rates, it is this
recommendation that has generated much furore among
market analysts .
One analyst, who preferred to remain
anonymous, said Shaw should back off his proposal
as with interest rates falling and inflation being
brought under control, he should focus his attention
on keeping the lid on inflation, while stimulating
increased production. "Let the financial markets
continue to work," he added.
Economist Lloyd Prince was equally
dismissive of Shaw's suggestion.
Prince argued that historically interest rates have
been largely determined by exogenous factors (external)
and not market forces. "Invariably interest
rate policy was determined by successive Ministers
of Finance", he noted.
Prince continued, "Now that
we are running a capitalist model, we can't have
it both ways. The finance minister could use moral
suasion to influence lending rates but banks would
argue, if they incurred any loan losses, the finance
ministry would have to underwrite them. Clearly
the role of government now is one of facilitator,
and the private sector takes business risks including
what it regards as a reasonable rate of return on
an investment.
"There is a spread of approximately
8-9 percentage points between rates in the US and
the domestic rates. If we reduce domestic rates
too low, that could affect the supply of potential
loanable funds into Jamaica."Expanding on his
point he said,"Given our high propensity to
consume, if the supply of loanable funds is choked
off, then interest rates would have to be hiked,
the very situation Shaw is hoping to correct".
Economist Cedric Wilson, part-time
lecturer at the University of the West Indies, agreed
with Shaw's views on interest rates. Wilson contended
that with the rates of return on government paper
falling, banks should look for creative ways to
move their loan funds especially to business . Wilson
argues, "Currently the real interest rate is
negative.
This is so as deposit rates average
5 per cent, while inflation is currently 7--8 per
cent. This converts to a negative rate of return
of approximately 3 percentage points. Banks are
enjoying a big spread of twelve percentage points
on average." He concluded," I don't necessarily
agree with the way Shaw is handling the issue but
he has a good point regarding the high level of
bank spreads.''
Meanwhile at last Wednesday's Treasury
Bill Auction, interest rates inched down further
with the 6-month rate coming out 2 basis points
lower than the previous auction, and the 3-month
rate stood 12.09 per cent - 3 basis points lower
than the previous rate So while the debate on the
strategy to be employed to reduce rates continues,
it takes place In a context where the market seems
to be signalling lower rates admittedly at a reduced
pace.
The
Jamaica Observer
Sunday, November 26, 2006
Copyright©2005-2006
The Jamaica Observer.
All Rights Reserved.
