The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s salary deduction cap “shock therapy” is long overdue but ill-timed, as it potentially threatens the still-fragile economic recovery.

Commenting on the Homeowners Protection Bill’s clause that attempts to limit loan payment-related salary deductions to a certain percentage of a worker’s salary, a banker has agreed that this is “a laudable goal”.

Yet, in his analysis of the Bill’s overall impact, shared with Tribune Business on condition of anonymity, the banker questioned why the ‘salary deduction cap’ was being imposed when Bahamian economic growth was still “fragile and fraught with risk”.

“Another area where the Government is jumping in with both feet is controlling the general indebtedness of Bahamians and the servicing of debt by capping ‘salary deductions’,” the banker’s paper said.

“The Government’s plan is to cap these deductions so that no Bahamian wage earner is left with meagre amounts at the end of the month to live on because the deductions account for most of the earned wage.

“This is a laudable goal and probably long overdue. But this problem did not arise recently – successive Bahamian governments have been aware of this time bomb and have made half-hearted attempts to slow down the Bahamian borrowing binge.”

Michael Halkitis, minister of state for finance, in addressing the House of Assembly on the Bill yesterday, confirmed it “seeks to prohibit excessive salary deductions” through its accompanying regulations. He noted the many “horror stories” that had resulted from this type of borrowing.

Yet the banker’s paper argued that the Bahamas was an economically polarised society, its “dichotomy in wealth distribution” leaving 99 per cent of the population without major savings or wealth.

Debt had fuelled their lifestyles - cars, TVs and vacations - and “the entire Bahamian economy is reliant on this level of consumer spending”.

The banker’s paper argued: “Government revenues are hugely dependent on import tariffs, and the consumption of tariffable items adds to Government revenues.

“In addition, the private sector is dependent on sales, most of which are financed by ‘salary deductions’ by the vendors themselves. From furniture and appliance stores to new and used cars, the retail industry employs thousands of people and a cap on salary deductions will cause a severe fall-off in sales, a cut back on the retail infrastructure, increase in unemployment, and a drop in rents for commercial properties.

“In addition, it will allow the borrowers who ‘game’ the system an opportunity to walk away from their debts. But, more importantly, it will propel the anger of middle income and lower income Bahamians, who will suddenly not be able to buy that used car they need, or pay for school fees and back to school items, or go to Miami to shop and, in general, maintain a lifestyle they are accustomed to, which may be beyond their means,” the banker added.

“Yes, Bahamians need to get into the habit of saving (why is there no mandatory pension plan?) for purchases, and not resort to borrowing and to distinguish between ‘Needs’ and ‘Wants’. But this education cannot be in the form of shock therapy. And it cannot be legislated.”

The banker’s paper argued that the Homeowner’s Protection Bill was motivated, at least in part, by the Government’s desire to find a ‘scapegoat’ for persistent high unemployment and increased social hardships.

“The Government’s assault on the domestic financial sector is based on the premise that the banks have historically taken advantage of the Bahamian borrower, and have been insensitive to the plight of ordinary Bahamians in this extraordinary downturn,” the banker said.

“It is true that the banking industry, long dominated by the large Canadian behemoths, has not particularly endeared itself to the populace. But that view needs to be tempered by an understanding of the Bahamian credit structure.

“This is not the time to ‘stick it to the banks’, or the private sector for that matter. The banks are vital players in any future economic recovery. As the US discovered, the financial health of banks will drive their willingness to take risk and provide liquidity to stimulate growth.

“There is already a growing cultural bias against repaying debt and the Home Owners Protection Bill will simply make the Bahamas ‘borrower friendly’ and discourage lenders when they are a critical catalyst for economic recovery to take place.”