By Dr Isaac Newton
The recapitalization of the banking industry in North America and Europe, which transferred massive wealth from the public sector, to a selected elite cadre of the private sector, is now showing some positive signs in this global recession.
But some economists warn that these early signs offer more hope to political leaders, than the somber reality of the market warrants. Overall, the global economy continues to forecast steady contraction, yet governments in the Caribbean owe their survivability to the generosity, stability and resilience of local banks.
Local banks are best positioned to foster hopeful contrasting scenarios for the Caribbean’s domestic economy, if governments take proactive steps and provide local banks with lighter regulations and fiscal incentives. There are several factors that account for these banks pivotal contribution to local economies.
First, indigenous banks have supported much of the governments’ social and infrastructural programs to the tune of hundreds of millions in loans and credit. But reduced credit lines and liquidity shortage--consequences of the global economy, from which locals banks must recover-- are having an adverse effect on the region’s long-term growth prospect.
Second, local banks are also forced to manage operational challenges, which have impinged on their capital scope. Yet, indigenous banks are part of the answer to point the Caribbean in the direction of economic improvement. By keeping internal customers employed, they continue to lesson the human cost of the impact of this market recession.
Third, typical of a Caribbean mindset that things foreign are superior, local banks are forced to function against a false but widespread belief, that simply because major regional and international conglomerations have failed, local banks are likely to go under. This is not true. What is true historically is that indigenous banks have offered much more support to local businesses than foreign owned competitors. And, they have accomplished this, by tailoring their programs to fit the nuances of the region’s cultural needs.
Fourth, local banks emphasize employment initiatives by keeping small business from going under. For example, in cases where customers are experiencing difficulties servicing their debts, local banks are more likely to help them consider lower payments or identify models that may lead to the early retirement of other current debt. In other instances, local banks help customers consider smaller loans requests to keep their businesses afloat.
Fifth, local banks have extended second life chances to governments in the region. Yet governments have not yet brought forth remedies to address the local financial circumstances by leveraging the resourced intelligence of local banks. Now more than ever, the need for local banks to help their customers get access to finances specific to their unique needs is urgent.
No one is sure how this changed economic landscape will turn out. The free market economy as we knew it has been altered by unethical behaviors of several prominent financial institutions and poor governmental regulations. This means that prudent financial decisions must be pursued by regional governments. If not, they will subject the people to worse forms of economic drag and stagnation than they are faced with today.
But regional governments can use this depressed economic climate as prime-time opportunity to partner with local banks. They could:
- Repay outstanding loans to local banks from funding received from various international agencies and institutions and from tax revenues. This will boost financing and help local banks resume more flexible lending practices. These practices are designed to match individualized needs,
- Provide innovative tax breaks to local banks so that they can reduce economic inactivity. Governments must be mindful that sound economic recovery will depend on the success of local banks.
- Inject local banks with confidence-building capital; local banks are likely to become drivers for growth that will facilitate steady economic upswing, ensuring future prosperity for the Caribbean,
- Reduce security risks to the business environment in general but pay special attention to the explicit security risks that local banks face.
- Draw on the skills of local banks to help them plan for a worst case option, should in case recovery plans fail. Local banks are equipped with the right personnel critical to help governments activate initiatives leading to long-term growth recovery and regional financial strength and,
- Remove adverse economic policy making barriers to the growth and profitability of local banks.
However, there is not sufficient clarity about the strategic aims of regional governments’ economic recovery plans. On the positive side, governments have at least identified broad recovery areas: lessening expenditure, borrowing from the IMF as a form of fiscal discipline en-route to downsizing the public sector, and intentions to preserve employment.
It is glaring nonetheless, that governments’ revitalization plans do not generally include a radical vision to expand special skills designed to put the right mix of talent in the right places, in order to take advantage of every opportunity for sustainable prosperity.
But with all the uncertainties that exist, another thorny issue irritating regional governments is how to take proactive actions to cut cost, while preserving portions of the social safety network that employment in the public sector represents for the masses.
Given the small, fragile nature of regional economies, local banks must be given the flexibility to support people and businesses without choking growth. I suspect that greater lending capacity by local banks can pull the economy back to satisfactory growth levels.
The Caribbean’s economy is expected to be dismal for the next five years. So whether in Antigua and Barbuda, St Lucia, Dominica, St Vincent, Barbados and St Kitts and Nevis or Trinidad, Jamaica and Guyana, governments will continue to face short, middle and long term challenges to their economies.
To confidently move forward, honest assessments must be undertaken. In retrospect, the region’s economic troubles were not exclusively caused by unbelievable greed and the irresponsible pursuit of power that occurred on Wall Street. Much of the problem is a sobering reminder of gross mismanagement of local economies. Expressions of this include:
- Failure to innovate tourism dependent, financial services and real estate industries
- Failure to capitalize on global financial trends through research and innovation
- Failure to explore new alternative energy, global sports and leisure markets
- Failure to adjust quickly to North America’s and Europe’s protracted economic depression
- Failure to be more fiscally disciplined while incentivizing productivity in the private sector and,
- Failure to tighten spending by reducing an already overburdened public sector and to increase credit rating
Regional governments should make sure that the economic climate is beneficial to local banks, especially if public/ private partnerships are going to be used as a credible means to finance important projects. Giving local banks the right mechanism so that they could become a credible alternative to cross-border financing, must be part of the region’s tough task, of pulling itself out of recession.
November 9, 2009