CENTRAL BANK ABANDONS
The International Monetary Fund (IMF) has, on numerous occasions, criticised the government for not making available up to date statistical information in a timely manner. While some data is available, the Central Bank’s own analysis of the economy, which is featured in its Quarterly Reviews, is important not only for the government but also for commercial decision makers. An independent assessment of the government’s management of the economy is the responsibility of an independent Central Bank.
Although late in arriving, the review for the last quarter of 2005 reveals, however, that under Francis Chang Leng - the controversial Governor appointed by President Michel - the new Central Bank is not acting in an independent capacity. While the report noted that government borrowing and over-spending have caused a record increase in the money supply (currency in circulation and bank deposits) at the end of 2005, the Central Bank refused to act to increase interest rates because, the report said, “it would have derailed the fiscal strategy” set by the Macro-Economic Reform Programme (MERP) introduced in July 2003.
Whose fiscal strategy? The Central Bank’s? Chang Leng, it appears, seems to have conveniently forgotten that the essential purpose of MERP was to reduce money supply. Now the opposite is happening, as the Central Bank itself has revealed, which necessitated actions to mitigate against its effect. The only means available to the Central Bank is to increase the cost of borrowing. Faced with this challenge, Chang Leng has proven that he has been appointed to be the facilitator for the government and President Michel.
But the Central Bank review also revealed that something strange was happening in the government finances at the end of last year. While President Michel, as Minister of Finance, was claiming in his budget speech that his government ended the year with a surplus of over SR 300 million, (meaning its revenue exceeded its expenditure) it was at the same time borrowing heavily from the banking system. According to the Central Bank, this was a paradox – in other words skewed behaviour that could not be rationally explained. In reality someone was lying and misleading the public.
This “paradox” is probably the reason why the Central Bank has not yet released a review for the first quarter of 2006, let alone for the second quarter which ended two weeks ago. Nevertheless, the CBS research department has been posting some interesting financial information indicating that the paradox is well and truly alive.
According to the Central Bank’s Selected Economic and Financial Indicators published on the CBS website, the cumulative recurrent budget deficit has reached SR 65 million as at 31st May. This deficit is based on actual money received by the government from taxation, license fees and grants against actual spending covering the period of 1st January to 31st May of this year. It does not take into account bills that have been received and not yet paid for.
The Central Bank figures also show that, as at end of May, the outstanding debt of government with the banking system has risen by SR 141 million compared to the beginning of January. In addition the outstanding debt of parastatals also increased by SR 63 million over the same period. The two together raises the total public sector borrowing from the domestic banks by SR 172 million for the first six months of the year. Once again the fiscal strategy is for the government to rely mostly on domestic debt to finance government expenditure.
This strategy has unintended consequences, one of which is an increase in the amount of money in the economy. The total amount of money in the economy increased by SR 55 million, according to the financial indicators. It would have been more had the private sector debt to the banking system not contracted during the period by SR 63 million. In other words during the first six months of the year only government spending, based on bank borrowings, kept the economy buoyant.
In the last quarterly report (October to December) for 2005, the Central Bank observed that “currency with the public” increased by SR 35 million during the period. In other words, the public had a preference to use cash rather than bank deposits for transactions. It explains this phenomenon as “an increase in monetary volatility consistent with the declining importance of the national currency as a store of value”.
On 31st December last year “currency with the public” stood at SR 345 million. But at 30th June this year it had risen to SR 378 million, an increase R 33 million. This preference to use cash for transactions, according to the Central Bank, is an expression of lack of faith in our currency.
Yet President Michel claims that our currency is strong and is even prepared to make such a declaration in his party political broadcast. Now we know why Francis Chang Leng is not publishing the Central Bank’s quarterly review until after the election, which proves that he was appointed in order to facilitate James Michel in his quest for political power.
Unfortunately, it will also mean that the re-alignment of the currency after the election will be more severe that originally anticipated.