A Bahamian financial services provider yesterday joined the International Monetary Fund (IMF) in urging the Central Bank to cut interest rates to stimulate economic growth and investment post-COVID-19.
Robert Pantry, Simplified Lending’s founder and chief executive, called on the government to work with the Central Bank to explore the feasibility of cutting the four percent discount rate to coincide with the end of temporary COVID-19 loan repayment waivers.
Noting that the Bahamian economy is projected to shrink by up to 15 percent in 2020, with the world forecast to take almost a decade to fully recover from the pandemic, Mr Pantry argued that reducing the cost of capital and debt repayments for hard-pressed borrowers could provide much-needed relief as the country struggles to rebound.
“There is always a delicate balance between adjusting the prime rate for an economic stimulus tool and maintaining a certain standard to protect necessary reserves,” said Mr Pantry. “I understand that delicate balance but believe that if we at least start the national conversation we can move towards taking a positive step to restart the growth we were beginning to enjoy before the coronavirus struck.
“I would like to see the government work with the Central Bank to evaluate the possibility of lowering the prime rate as individual mortgages and business loan waiver programmes begin to expire,” he added, referring to temporary repayment holidays provided by the commercial banks to ease the burden on clients following the COVID-19 related lockdown.
Mr Pantry’s comments came a day after the IMF suggested that the Central Bank has some flexibility to cut interest rates. The discount rate, which is the rate the Central Bank charges to lend to the commercial banks, currently stands at four percent, while the prime rate - the benchmark used by all banks to price their loans - is at 4.25 percent.
“Staff sees some room for monetary easing, but the policy stance should take into account developments in the foreign exchange market,” the IMF said. “Against the backdrop of a collapse in economic activity and limited inflation pressures, there is some room to lower interest rates. The benefits of doing so have to be weighed against the potential erosion of international reserves and structural bottlenecks in the monetary transmission mechanism.”
However, John Rolle, the Central Bank’s governor, last month ruled out using interest rates as an economic stimulus tool - and even the fund itself admitted that the present four percent discount rate was at an “historically low level”.
He argued that interest rate cuts were “not an option for The Bahamas”, as any reduction or relaxation of credit policies would spark a surge in import demand and undermine the foreign reserves at the worst possible time when there are virtually zero replenishing US dollar inflows from the tourism industry or foreign direct investment (FDI).
The Central Bank’s position has always been that the use of monetary policy as an economic stimulus tool has been restricted by the need to maintain the one:one currency peg with the US dollar, and the need to maintain sufficient underlying foreign currency reserves to support this.
However, Mr Pantry argued: “Reducing the prime rate will allow those who have adjustable rate mortgages or loans to enjoy lower monthly payments. That’s a plus for businesses, individuals and families, especially in the middle class.
“It also frees up more money, allowing it to flow into the general economy, igniting long-term economic growth. That growth ultimately benefits everyone, including banks, which may experience a slight reduction in profits in the short term but would be expected to experience stronger profits over the long-term.”
Besides the savings from a lower mortgage rate for homeowners or landlords, Mr Pantry said the reduction in interest rates would allow businesses to borrow at more attractive terms or meet obligations for existing loans at lower costs.
“It would also fuel demand for real estate and new construction. That generates more money for government in fees and taxes as well, creating a win-win for all,” he said. And it could save struggling businesses.
“For many businesses that are teetering on the edge, trying to hang on until the new reality is established, a reduction in financing costs could be the difference between surviving and closing,” added Mr Pantry, who founded Simplified Lending less than two years ago.
The firm was one of those selected to partner with the government in the Small Business Accelerator loan programme that distributed millions in grants and low-interest loans to small and medium-sized businesses during the COVID-19 pandemic. The economic fallout from the pandemic has been especially hard on countries like The Bahamas dependent upon visitors from abroad to survive.
Declaring that The Bahamas is at a “turning point”, Mr Pantry said: “We have to look at three major indicators – investment by the private sector, movement and pricing in real estate and liquidity in the banking sector, and reserves.
“What links those three ingredients together is lending, and that is why tweaking the cost of money through a reduction in the prime rate can be helpful. We have to make lending accessible to entrepreneurs.”