The Monetary Council of the Eastern Caribbean Currency Union (ECCU) has sought to assure depositors that it has adopted several measures aimed at strengthening the banking system in the sub region.
Prime Minister Ralph Gonsalves, who is also the chair of the Council said the strategy “will result in a stronger banking sector, which along with other financial institutions, plays an essential role in facilitating economic growth and development in our region.”
“The Monetary Council is resolved to do whatever it takes to improve the economic fortunes of our Currency Union and has agreed to take deliberate and concrete steps to stimulate economic activity and strengthen our banks to help secure a better and brighter future for all our citizens and residents,” Gonsalves said as he praised several regional and international governments and financial organizations for their “significant technical and financial resources required to implement these decision successfully”.
Gonsalves told the populations across the OECS that the Monetary Council at its last meeting has adopted “several vital decisions” that “touch upon our lives and living, our socio-economic well-being”.
He said since it was created in 1983, the ECCU has had to deal with changes in the global environment and as time changes “all of us must be ready to adapt.”
“Thirty-two years later, since the founding of the Central Bank, our region is slowly recovering from the effects of the Great Recession, that period from 2009-2012 particularly, which are still with us. “In that period of the Great Recession and the period immediately thereafter, many of our economies contracted following the global economic and financial meltdown of 2008,” Gonsalves said, noting in 2014, economic growth in the sub-region was 2.4%.
“This is good news. Our regional economy is starting to improve. Not withstanding this improvement, our economies continue to face challenges to sustainable growth, fiscal and debt sustainability and financial stability. The Monetary Council desires to see faster economic recovery and stronger job creation.”
Gonsalves said as a result the Monetary Council has agreed to lower the minimum deposit rate from three to two percent in order to spur economic development.
He said the last occasion the rate was reduced was in 2002 defending the new rate policy.
“Our banking system has a lot of money – excess liquidity, yet credit to the private sector (new loans) is declining. Last year, despite the fact that the banks had excess liquidity, credit declined by 4.5%. Declining credit to the private sector makes economic recovery slower. This situation has to change.”
PM Gonsalves said at the same time, non-performing loans in the banking system are very high and average 18.8% across the ECCU, largely because of the difficult economic situation in many of our countries.
“High non-performing loans make our banks less willing to lend and weaken our economies. This situation must change. In the face of declining profitability or losses, banks have sought to lower operating expenses. This cost reduction effort has led to the closure of several branches in the ECCU and beyond.”
“Combined with the economic recovery taking place in our economies, we expect to see banks start lending more to the private sector. There are too many potentially good businesses struggling to secure working capital and struggling to survive. Some of these businesses are paying very high interest rates on loans from our commercial banks.
“As a consequence of the lower deposit rate, we anticipate a lowering of interest rate spreads. More importantly, we expect to see businesses pay lower interest rates on loans provided by our commercial banks.
“We are especially keen to see lower interest rates for all export-oriented firms. We would also like to see interest rates on mortgages continue to fall so that more of our people can afford to own a home,” he said.
Gonsalves also said there was the need to strengthen the regulatory and supervisory framework for banks, noting that since 2009,”our banks have recorded declines in profitability and performance” and the global crisis has led to significant contraction in domestic economies and increases in non-performing loans.
He said these experiences led to the Monetary Council’s decision to pursue a comprehensive bank resolution strategy aimed at strengthening the resilience of the financial system in the ECCU.
“Ultimately, our strategy will result in a stronger banking sector resulting in greater financial stability and faster economic progress. The measures that we have taken are to ensure that your deposits are safe,” Gonsalves said, adding that a decision had also been taken to extend the timetable to reduce the debt to gross domestic product (GDP) ratio to 60% from 2020 to 2030.