Sir K Dwight Venner: Issues of concern to the Eastern Caribbean Central Bank
and the Caribbean region as a whole
Feature address by Sir K Dwight Venner, Governor of the Eastern Caribbean Central Bank, at the
opening of the new building of ABI Bank Ltd, Antigua, 5 March 2005.
* * *
Mr Chairman
I would like to express my appreciation to the Directors, Management and Staff of ABI Bank Ltd for
inviting me to be the Feature Speaker at the Opening of your new building.
A few years ago, I performed a similar function for the ACB and you would appreciate that the ABI
Bank could do no less than invite me to bless their own undertaking, and I could do no less than
accept. In addition, the charm and persuasiveness of my dear friend, McAllister Abbott put the matter
beyond any doubt.
The ABI Bank Ltd has shown itself to be a very innovative institution. In addition, they respond to the
regulatory concerns of the Central Bank fully realizing that in the business of finance, innovation must
be balanced by prudence, and risks of any undertaking must be properly taken into consideration.
I consider this to be a very timely opportunity given the times we live in, to comment on some of the
issues which are of concern to the ECCB and the region as a whole. It is also an opportunity to share
with you some of my views on how we are approaching these challenges as the Central Monetary
Authority of the OECS.
I would go as far as to say that this is a defining time for the region, as we seek to grapple with both
external and domestic challenges of a very complex nature. There is also a great desire among our
people for information and knowledge on the events that affect our lives at this time, and into the near
and distant future.
The possession of information particularly when it is accurate and credible gives those who have it
considerable advantage over those who do not. In the economic and financial spheres, information is
so critical to the conduct of business that the provision of certain types, for example, accounts, are
legally required and have to be publicly certified.
The use of information under certain circumstances, such as insider trading is legally prohibited and
punishable by fines and imprisonment. Companies have to present statements of their performance to
Annual General Meetings of their shareholders. Governments have to present their Estimates of
Revenue and Expenditure to the Legislature, the elected representatives of the people or
shareholders in the country, and the Budget is a public document. Individuals have to present their
income and financial statements to the tax authorities so that they can be fairly assessed and make a
contribution, so that in exchange the government can provide the services of law and order, sanitation,
education, etc which add to the quality of life. All countries as members of the international community,
and, in particular, the IMF have to transmit to that organization for official publication in a document
entitled "International Financial Statistics" their National Accounts, Balance of Payments, Fiscal,
Monetary and Price Statistics. These figures obviously are of critical importance to the country itself in
two ways. Firstly, how can good policies be made if there are no timely and accurate statistics, and
how can the progress of the country be accurately assessed if there are no reliable statistics to make
the judgment?
Secondly, if both foreign and domestic investors have no access to accurate data, how can they make
serious decisions on potential investment opportunities?
In both developing and emerging market economies, TV and radio stations, newspapers and business
magazines keep the public well informed on commercial, financial and economic affairs. In this
churning up of information, analysis and commentary, individuals and business firms are presented
with increased choices for both saving and investment. In this environment, businesses rise and fall
based on the performance of markets, and their ability to manage their resources. While speculation
abounds this is mostly based on the review and analysis, no matter how cursory, of what is taken to be
accurate and credible statistics produced and published at set periods by official or publicly
acknowledged institutions.
Information is such a critical part of this era that not only do we speak of the Information Age but three
distinguished Economists have received the Nobel Prize for their work in this subject area. It is against
this background that we can outline the external and domestic environment in which we exist, define
the domain or theatre of action in which we operate, point out the goals and objectives we have set for
ourselves and/or have been set for us, and review the policy tools we have at our disposal to meet
these objectives.
In the case of the external environment, we live in what has now been accepted as an increasingly
globalised world. Barriers to trade and finance are being removed across the international community,
and the spread of technology both in basic sciences and materials, as well as information and
communication technologies have literally created a global village.
This trend has inevitably presented challenges to all countries in different ways. Free trade regimes
have had an impact on our traditional agricultural export commodities, such as bananas and sugar
whose preferences are being gradually removed. In the financial arena, the proliferation of standards
and codes, and the efforts of the OECD have had a negative impact on our embryonic Offshore
Finance Sector. They have also posed a challenge to our indigenous domestic banks by making it
somewhat difficult with their correspondent relationships.
Fluctuating output of the world economy, and particularly in the countries we trade with, mainly the
USA, Canada, the UK and Europe has a direct impact on our economic performance. The same is
true in the case of the fluctuations in major currencies. We are linked to the US dollar so that
fluctuations between that currency, the Euro, Sterling and the Canadian dollar have implications for us
in the Currency Union.
A major factor which impacts on the performance of our economies is the price of oil which in recent
times has been at unprecedentedly high levels. It is our major import, and the price passes through to
almost every item of consumption or production.
Finally, the geopolitics of the international system, particularly the fight against terrorism has to be
carefully examined, as it could potentially impact on our major foreign exchange earner, tourism.
Domestically we have to treat with the fundamental issue of small size, both in terms of land mass and
given the resources we have, what
population. The question we have to pose for ourselves is,
standard of living is possible and sustainable over long periods of time?
The imbalance between expectations and resources in most countries shows up in the Balance of
Payments on the external account and in the budget domestically. Not many, if any country, could like
the US get away with running these twin deficits over any period of time, as they are almost self
correcting as creditors both external and domestic will withdraw their support at some stage. In fact, in
the US, Chairman of the Federal Reserve, Alan Greenspan has expressed his concern about the
current situation. Antigua and Barbuda, as well as other countries in the Currency Union face this
situation, and I can only urge that it be vigourously addressed.
The OECS countries have understood more than the rest of the regional community the need for
regional integration. While the bigger countries like Jamaica and Trinidad and Tobago have felt that
they had other options, the smaller islands have understood that it meant their very survival.
This is a defining moment in the sense that we are about to embark on a new venture, the Caribbean
Single Market and Economy, CSME and for it to succeed the OECS as a bloc must step up to the
plate, define its interests and assert its leadership. We must, therefore, define to our satisfaction and
acceptance a unique and coherent space called the OECS, which at least in an economic sense is
continuous and coterminous.
We have two concepts to engage our minds in this regard, first the OECS as an Economic Union, and
the Eastern Caribbean Currency Union as a Single Financial Space. The only difference between the
two is the absence of the BVI from the Currency Union as it uses the US dollar as its legal tender.
The OECS is a highly integrated area as the Treaty of Basseterre, 1981 establishing the Organisation
indicates. In Article 3 (2), it sets out a number of arrangements which if all implemented would result in
the formation of a new state. The founders accepted that as very small states there were three
overriding advantages to the arrangement -
•
To take advantage of the economies of scale and scope through sharing vital services;
• To mitigate risks by spreading them over several countries;
•
Enhancing their capacity to negotiate with third countries or groups of countries.
The result is that the OECS is at a much higher level of integration than CARICOM with a common
court, a common currency, central bank and stock exchange, a directorate of civil aviation, a joint
pharmaceutical procurement system, joint diplomatic representation, and common projects in
education and health, as well as joint regulation of telecommunications.
We now need to focus on these achievements and use them as a platform for taking advantage of the
CSME and other arrangements like the FTAA. We also need to see how each individual island can
contribute to the whole instead of assuming that we will be worst off, or that one will gain at someone
else's expense. We need a different mindset in which addition and multiplication is seen as superior to
subtraction and division.
Having established the concept of a domain we must then identify the objectives of this entity. This will
require the convergence of both regional and national goals. At the regional level there is the OECS
Economic Development Strategy, the OECS Development Charter, and the objectives set at a Special
Meeting of Heads in November 2002. Those were:
• A sustainable growth rate of 6%;
•
An unemployment rate of less than 6%;
•
A poverty rate of less than 6%;
•
Maintaining and achieving the Human Development Indices goals consistent with the
Millennium Development Goals; and
•
The transformation of our economies into internationally competitive entities.
At the national level, these objectives can be gleaned from manifestos, development plans, medium
term economic strategy papers, public sector investment programs and budgets.
The policies which are available to achieve these objectives are -
• Monetary
• Fiscal
•
Trade
•
International Economic Relations
•
Incomes
•
Structural
• Social
•
Environmental
Let me on this occasion confine myself to monetary and financial policies, given the occasion for which
we are gathered.
The ECCB in assessing the situation both domestically and internationally has identified consistent
with the objectives set by the OECS Heads two major objectives which are also consistent with the
purposes of the Bank as set out in Article 4 of the ECCB. These are Stability and Development.
Under Stability the Bank has two goals, namely - Monetary Stability and Financial Stability.
Monetary Stability is tied to the performance of the exchange rate. We have chosen a fixed exchange
rate regime, and have managed to successfully maintain this at 2.7 EC to the US dollar since July
1976. This has required us to maintain a very high level of foreign exchange reserves, presently 96%
to the currency in circulation. This is above the legal limit of 60% and is approximately equivalent to
four months imports where the benchmark is three months.
In order for this parity to be maintained, we focus our attention on the performance of the Balance of
Payments, the fiscal and debt ratios of the countries, and the competitiveness of the currency as
assessed by the Real Effective Exchange Rate. The Monetary Council has therefore set a number of
benchmarks in the fiscal and debt areas which member governments have been requested to adhere
to.
Financial Stability is related to the safety and soundness of the banking system and the effective
regulation of non-bank financial intermediaries. This requires the appropriate legislative and legal
framework and the capacity to effectively regulate the financial system.
Let me put these two stability conditions in a way that the ordinary layman would understand. If the
currency is devalued, the ability to purchase goods from abroad will be decreased and the prices of all
goods will go up due to inflation. Also, on the other hand, if wages and prices increase faster than
productivity we will become less competitive. The Monetary Council has recommended to
governments that they establish Tripartite Committees comprised of representatives from the
government, private sector and the trade unions to monitor wages, prices, employment and
productivity.
With respect to financial stability, whereas in the case of the devaluation you will lose the ability to
purchase more goods and services, in this case, if a bank closes you will lose all of your money. A
proper legal and regulatory environment is therefore vital to the maintenance of stability. Stability can
therefore be spelt out under the following headings with the appropriate responsibilities assigned to
different institutions:
•
The Central Bank has the responsibility to maintain the external and domestic value of the
currency;
•
The Central Bank in conjunction with the Governments has the responsibility of ensuring the
safety and soundness of the financial system;
•
The Banks have the responsibility of ensuring the safety of their obligations to their
depositors;
• The Government has the responsibility that they keep their obligations for salaries, services
and debt repayments.
Without this stability, growth and development will be very difficult to achieve, much less maintained.
This brings me to two fundamental premises which I have taken great pains to bring to the attention of
our governments and citizens, and will continue to do so on every available occasion.
Number one is that banks do not lend out their own money. They only lend what is deposited with
them. It is therefore depositors money which is at risk. Secondly, governments can only provide
services with money which they take in through taxes or its citizens. If the government provides a
particular service it can follow several procedures. Firstly, it can decide on full cost recovery, that is, if
it cost $100 to provide, they will charge $100. It can outsource the service so that an external firm
provides it. The firm will charge the full cost plus, unless the government subsidises all or part of the
service. It can provide the service free of cost to the consumer.
In the case of the subsidized and the free provision, the question would be, who pays? The simple
answer is the Tax payer.
There is, of course, another route where these costs can be shared with other countries in the OECS,
thus bringing down the unit costs.
These issues are important, not only in informing our citizens of our reality, that is, that there is no free
meal and that someone has to pay or someone has to be held responsible, but also that they have
developmental costs and implications.
With respect to costs, the expense of running so many services which have to be passed on to
individual tax payers or business firms either directly or indirectly impacts negatively on our
productivity and competitiveness. This high cost of government means less disposable incomes for
individuals and higher running costs for businesses. The implications are that if we get our citizens into
the mode of depending on the government for everything this will not get them into the creative spirit of
creating wealth and jobs.
We must always remember that a nation is the aggregation of all its individual citizens and that if the
nation is experiencing difficulty all of its citizens are also suffering in one way or the other. In rectifying
the problem there has to be some level of equity in sharing the pain, but the basic fundamental
problem still remains and has to be treated with. To give a basic example, suppose an individual
earned $10,000 a month and was able to spend through credit $15,000 a month. At the end of the
year he/she would be in debt to the total of $60,000. At this point the creditors would say we have
stopped extending credit and you now have to start paying back. If the repayment period was one
year, the individual would now have to live on $5,000 a month, which is quite a drop from $15,000. Of
course, they might be given more time. The moral of this example is that this holds for individuals,
firms and governments.
Speaking directly to the question of development, the ECCB sees its role to be in the area of money
and capital market development once the stability conditions have been treated with. We have
analysed the gaps in the system and are proceeding along the lines of establishing markets and
institutions, putting in place the regulatory framework, and removing legal and administrative barriers
to the creation of a single financial space. In the area of markets we have the following:
•
A common market for the EC dollar and foreign currencies;
•
An IBM to provide liquidity for banks;
•
A RGSM to provide markets for government securities;
• A securities market for shares;
• A secondary market for primary mortgages.
With respect to institutions we have established:
•
The Eastern Caribbean Securities Exchange Depository and Registry;
• The Eastern Caribbean Home Mortgage Bank.
We are now working on an Eastern Caribbean Enterprise Fund to be followed by an Eastern
Caribbean Unit Trust.
A number of supporting institutions such as the Eastern Caribbean Institute of Bankers, the Eastern
Caribbean Bankers Association, and the Eastern Caribbean Institute of Accountants have also been
established.
We need to have close liaison with the OECS Bar Association and we hope that a vibrant OECS
Business Council will be created to push the development of the private sector in the region.
We need the support of our governments and our people to create a highly sophisticated and
internationally competitive financial sector, which can pave the way to the achievement of our goals
and objectives.
We are confident that this is the correct path to proceed on and that with the political will of our
governments, the innovativeness of our private sector, and the societal consensus of our people
across the OECS, we will SUCCEED.
However, in conclusion, we must remember that success comes before work only in the dictionary.