Published On:Friday, February 26, 2010

By NEIL HARTNELL

Tribune Business Editor

A ONE per cent interest rate cut that releases an additional $60 million per annum into the Bahamian economy is "needed more than ever" with the Government's fiscal stimulus having reached its limits, a well-known businessman said yesterday, as he urged banks to lower their interest spreads and commitment fees.

Dr Jonathan Rodgers, the 'eye' doctor and key investor in businesses such as Omni Financial Services and Transfer Solutions Providers, argued that reducing the Central Bank's discount rate and, in turn, the Bahamian PRIME rate, would not create an unsustainable credit boom and increased foreign exchange leakage because this nation's consumers and private sector were currently more focused on "survival".

Referring to Prime Minister Hubert Ingraham's Mid-Term Budget communication, Dr Rodgers told Tribune Business: "What he's saying is that there has to be an end in sight as far as fiscal policy is concerned, because the Government can't spend or borrow any more money.

"That's all well and good, but now is the time to initiate monetary policy, which will not cost the Government anything. We have $6 billion in outstanding private sector loans, and if they drop the Discount rate or the Prime rate by 1 per cent, that will inject an additional $5 million into the economy per month, or $60 million in 12 months. It's really needed more than ever."

Wendy Craigg, the Central Bank of the Bahamas governor, earlier this week indicated to Tribune Business that the use of interest rates cuts to stimulate the economy and private sector had all but been ruled out by policymakers.

"That has not been a consideration in our monetary policy discussions," Ms Craigg said of an interest rate cut. "At this time, we don't see that as a solution to the situation. Not in this environment."

The Bahamas' main monetary policy focus has been balance of payments related, ensuring this nation maintains enough foreign currency reserves to enable it to purchase imports and maintain the one:one current peg with the US dollar.

The Central Bank has always been concerned that an interest rate reduction, which effectively lowers the cost of money, could create an unsustainable credit boom and foreign currency outflows, which would be especially risky at this time of reduced capital inflows.

However, Dr Rodgers suggested such a scenario was unlikely to occur, telling Tribune Business: "People are currently just trying to deal with the basics of life, survival. I think the Governor of the Central Bank, the Minister of Finance and the business community need to sit down and discuss these issues, because it's affecting everybody."

Elsewhere, Dr Rodgers urged Bahamian commercial banks to increase the interest payable on savings accounts and Certificates of Deposit (CDs) as a way to encourage Bahamians to save, and give up the "enormous spreads" they earned between interest on deposits and interest income on loans.

"We're paying the price right now on a private and national basis for a lack of savings," the businessman added. "If the Government or the private sector had a cushion to fall back on, it would not be so bad."

Yet Bahamian savers were deterred by the relatively low interest available on savings accounts and CDs, and Dr Rodgers argued that Bahamian commercial banks enjoyed interest rate spreads of between 5-15 per cent, when all they needed to "make money" was a spread of between 2-3 per cent.

While many people were finding it difficult to meet the banks' tougher loan criteria, Dr Rodgers said this problem was exacerbated by the 1-2 per cent commitment fees that were attached to most credit advances.

These, he argued, were "just too high" and discouraged potential borrowers from entering into a transaction, in addition to making greater demands on their savings and liquid cash resources.

Commercial banks, Dr Rodgers suggested, should be able to make enough money from interest income that they did not need to levy commitment fees, pointing out that their Canadian counterparts did not seek such fees for residential mortgages and other loans.

Identifying another bugbear, Dr Rodgers argued that real estate transaction costs in the Bahamas, typically at "10 per cent of the purchase price" or higher, were "too costly". Apart from dampening the appetite and ability of Bahamians to purchase their own homes, this also stifled the construction industry.

Apart from legal fees that are usually fixed at 2.5 per cent of the purchase price, there are realtor's commissions (6 per cent for buildings, 10 per cent for new land), plus Stamp Tax that ranges all the way from 2-10 per cent (although first-time buyers are exempted from this on properties valued up to $500,000).

"It's way too high," Dr Rodgers told Tribune Business. "That makes people think two, three times before then enter into negotiations to buy a piece of property. It's got to be lower.

"There are too many fees, and that is going to stifle the construction industry. We've got to bring it down and look long-term, because structural inefficiencies in the economy are playing a big part in the difficulties people are facing at the moment. The cost of living is way too high for most people."

This, he added, had been exacerbated by the rising unemployment and reduced incomes caused by the recession. And it could be further impacted if the Government, as part of its fiscal medicine to bring the public finances back into line, was forced to introduce new or higher taxes, cut back on public spending or both.

This, Dr Rodgers said, would again leave Bahamians with less money in their pockets. Utility costs, too, exacerbated the problem, and he called for the Bahamas to install a "mini-nuclear" power plant to reduce electricity costs, given that the renewable energy forms long talked about had yet to materialise.

"If we bring the cost of electricity down in the long-term, house bills will be less, office bills will be less, and that will make it easier and more attractive for manufacturing to locate in this country," Dr Rodgers added.

He also called for more focus to be placed on investment by the private sector as the key determinant of demand and gross domestic product (GDP) in the Bahamas. Currently, the only component of demand that was growing was government spending, while consumption (consumer spending) "has to be reduced as it's driven by debt".

"We can't export our way out of this, because there's nothing to export," Dr Rodgers said. "We need to develop some type of manufacturing sector, and need to have a way to derive more GDP from investment.

"This is the segment that has been sorely neglected over the years. Over the past 25 years, unemployment has averaged around 10.2 per cent. That's because the Bahamian side of the economy, the non-tourism, non-banking side, has been neglected.

"We need to find a way to stimulate that side of the economy, resulting in more small and medium-sized businesses getting off the ground. That will lead to more demand and more employment in the system.

"This is the perfect storm situation for us. All the structural defects have been compounded by the recession happening in the rest of the world. It comes back to lack of planning and forethought."