Bahamas News

The Central Bank of The Bahamas might have to consider the option of reducing the prime lending rate of 5.50 percent as a means of keeping the Bahamian economy, if the global economic situation continues to deteriorate in the midst of what some have referred to as an ominous economic outlook for 2008.

The recommendation came from Raymond Winder, a leading Bahamian accountant who is also managing partner of Deloitte and Touche.

Following strong growth through the third quarter of 2007, the global economic expansion has begun to moderate in response to continuing financial turbulence, the International Monetary Fund warned yesterday in its new World Economic Outlook update.

Global growth is projected to decelerate from 4.9 percent in 2007 to 4.1 percent in 2008 and downside risks remain.

Mr. Winder proposed a reduction in the prime rate as a critical move to stimulate and encourage economic activity in The Bahamas.

“The Central Bank may have to, depending on how bad things get, reduce the interest rate to ensure that individuals will continue to build houses and businesses and borrow money because then the rates would be a little bit lower,” he said.

Calls to Central Bank Governor Wendy Craigg for a response to the suggestion were not returned up to press time. In her last comments on the economy featured earlier this month at the Bahamas Business Outlook seminar, Ms. Craigg offered a glimmer of hope in her economic outlook.

“I do believe that the prospect for the Bahamian economy for 2008 is, on balance, positive and this is because of the numerous foreign investment projects that are slated to commence during the course of this year,” she said at the time.

However, international ratings agency Standard and Poor’s this week made a starkly different point: while analysts were encouraged by commitments for mega projects in The Bahamas, they projected a slowing of their implementation given the uncertainties of the global environment. Officials stated that this, in turn, would likely pressure the government’s fiscal and external positions.

“The foreign exchange reserve position is, and will remain tight,” the S&P report said.

Mr. Winder stressed that the Central Bank has to be very careful in its monetary policy considering the current realities and projections.

For instance, he said, urging commercial banks to tighten the reins on lending, should not be an option.

“Clearly, for those commercial projects that are still viable those banks should still be lending those enterprises the necessary funds because by doing that those enterprises can then do the necessary developments and whatever projects they are doing that would help to circulate funds in the country and also help to ensure that we have a certain amount of jobs,” he said.

“So we don’t want to be tightening that rein at this particular point in time because by tightening it we will cause the problem to become even worse than it is, but clearly the Central Bank would have to be watching to see what happens.”

The IMF projects that economies in the western hemisphere will grow by 4.3 percent this year and Standard and Poor’s predicts a three percent rate of growth for The Bahamas, down from the four percent that had been forecast.

Another revision downward for global economic growth, growing commotion in the US market and worldwide financial turbulence have countries around the world scrambling to cushion their economies as best they can from the potential fallout.

Economic growth in the United States appears to have slowed notably in the fourth quarter of 2007, with recent indicators showing weakening of manufacturing and housing sector activity, employment, and consumption.

The IMF projects U.S. growth will slow to 1.5 percent this year, down from 2.2 percent last year, reflecting a carryover from 2007.

The risk that continues to generate concern is that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies with more significant spillovers into emerging market and developing countries.

In terms of monetary policies the difficult challenge becomes balancing the risks of higher inflation and slower economic activity while there is a possibility of softening oil prices moderating inflation pressures.

The Caribbean Development Bank has already predicted economic fallout for countries in this region from a very likely recession in the U.S. economy this year and urged jurisdictions to prepare for it.

Source: Bahama Journal