By NEIL HARTNELL
Tribune Business Editor
THE Central Bank has been urged to "revisit" restrictions on Bahamian dollar lending to non-residents as a way to "grease" the economy and release $1.8 billion in excess banking liquidity.
James Smith, a former finance minister and Central Bank governor, told Tribune Business this was one method through which the monetary policy regulator could address a major impediment to job creation and economic growth.
Backing the Central Bank's decision to "investigate policies to promote a soft landing in terms of easing system liquidity", Mr Smith said that - if successful - it could break "a vicious circle" that has held the Bahamian economy in a no growth/high unemployment grip for nearly a decade.
He explained that the banking system's $1.8 billion surplus liquidity mountain often escaped the attention of policymakers, yet it represented potential oxygen for Bahamian businesses to invest in job-creating expansion and growth.
"That's a real, I think, problem for economic growth that is seemingly not getting the attention it deserves," Mr Smith told Tribune Business, adding that attention typically focused on other fiscal and monetary indicators, government and private sector spending and unemployment.
"Underneath all of that is the Government and private sector have to have continued access to funding, and the banking sector - which holds all the savings in the country - has been bitten by the recession and is reluctant to lend at the pace of a decade ago," the 2002-2007 finance minister said.
"They're only targeting 'A' class customers who are over-qualified, meaning they are sluggish and reluctant to lend.... Now you have the productive sector; small, medium and large businesses, who are probably not getting the overdraft facilities to expand and create jobs."
Excess liquidity in the Bahamian commercial banking system represents assets that are available for lending purposes, but for which the banks can find no borrowers who meet their qualifying criteria.
The banks' reduced risk appetite following the 2008-2009 recession, and aversion to lending to anyone other than those able to provide 100 per cent collateral or meet their strict approval conditions, has resulted in the Bahamian economy's productive sector - the mortgage market and business community - being starved of debt capital financing.
And the growing excess liquidity was exacerbated by the Government's recent $750 million foreign currency bond issue, a portion of which was used to pay-off Bahamian dollar-denominated debt. This increased the banking industry's surplus asset pile by nearly $300 million.
"I was wondering why we were staying in the recession so long," Mr Smith said. "Even though tourism is not doing well, it's not doing badly. We've got the same level of visitors and expenditure.
"I suspect it's the failure to stimulate the economy by the failure to provide the grease that gets things going; money flowing from bank to productive sector. The Central Bank is right to focus on it, but what type of policies will come into effect?"
The former governor suggested the Central Bank could seek to ease the liquidity pressure by permitting non-resident foreigners who owned Bahamian real estate to borrow in local currency - something that has been restricted or denied in the past.
"They might want to revisit that," Mr Smith told Tribune Business, explaining that this could also boost the external reserves and foreign currency earnings if non-resident borrowers serviced their Bahamian dollar loans from abroad.
"You're killing two birds with one step; reducing liquidity and bringing in foreign currency," he explained. "You want to increase aggregate demand, which has been reduced by high unemployment rates."
With commercial banks having identified the Bahamas as posing "a high level of risk", Mr Smith added: "If we're going to do anything, we have to mitigate that risk to make them feel freer to issue loans.
"They need to sit down with the banks to compensate them fairly around the risk and, in an economy like ours, see how we deal with it." He also pointed to the pressure placed on bank profit levels, compared to what they earned pre-recession, as a result of the non-performing loan situation.
With the Minnis administration having announced a revised housing programme, the former finance minister suggested it may have to mitigate risk through providing guarantees if the commercial banks remain reluctant to lend.
"It's a vicious circle where it's impacting on itself," Mr Smith told Tribune Business of the excess liquidity problems. "There are very few loans, high liquidity, a shortage of productivity and therefore a shortage of labour needed for that, resulting in high unemployment and an economy that appears to be at a standstill and shrinking. You've got to kind of stimulate it where you remove some of the barriers."