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Central Bank reveals: $32bn in blocked accounts

Sunday, February 28, 2016

The Government has $31.9 billion in blocked accounts at the Central Bank, monies that were placed there in an attempt to sterilize excess liquidity, the bank disclosed on Friday.

The Central Bank was responding to questions from the Guardian, following the publication of a newspaper notice last week that the Government intended to unblock some $1.84 billion that would then be available for use by the State.

“The $1.84 billion that was unblocked represented the proceeds of two bonds that had been issued in 2003 and 2008 ($640 million and $1.2 billion respectively) under the Development Loans Act. The Government made a specific request for the unblocking of these particular funds,” the Central Bank said.

The Government moved to unblock the $1.84 billion as a result of a sharp reduction in excess liquidity in the fourth quarter of 2015 that was partly due to the sale of US$500 million by the Central Bank to authorised dealers of foreign exchange at the end of October.

The sale of the US$500 million would have removed TT$3.2 billion from the authorised dealers, who are mostly commercial banks. T&T commercial banks had $3.36 billion in average excess reserves (excess liquidity) in December 2015, down from $7.19 billion at the start of the year.

The money in the blocked accounts belongs to the Government and it “represents the proceeds of the sales of Government of T&T securities,” for liquidity absorption purposes, the Central Bank said.

In piloting legislation in December to increase the government’s borrowing limit from $70 to $120 billion, Finance Minister Colm Imbert told Parliament that the previous administration had pledged funds of $12 billion in the Green Fund and the Unemployment Fund against borrowings it undertook. He made no mention of funds in the blocked accounts in December.

A Ministry of Finance official indicated yesterday, however, that T&T’s Exchequer Account had been overdrawn by more than $30 billion.

The official said yesterday, “As far as I know, the Government does not have any access to the funds in the blocked accounts, except the $1.84 billion it just unfroze.

“Additionally, you need to appreciate that the Government will have to replace that $1.84 billion when the principal payments become due in 2017 and 2018, either from revenue or from borrowings.”

Imbert has blamed the issues surrounding the government’s overdrawn accounts as being responsible for its inability to settle up to $2 billion owed to contractors and suppliers and some $5 billion in backpay owed to employees of regional health authorities and members of the protective services.

When it became clear in December that tight domestic liquidity was preventing the Government from borrowing money from the banks to pay those debts, the banks were reported to have suggested to the minister that the solution would be to lower the reserve requirement.

The reserve requirement, which currently stands at 17 per cent, is the percentage of commercial banks’ deposit liabilities that they are required to maintain in non-interest bearing accounts at the Central Bank. 

On Friday, responding to a question on the advantages of unblocking the $31.9 billion held in blocked accounts for liquidity absorption compared with lowering the reserve requirement, the Central Bank made it clear that unblocking the accounts gives the Government access to its funds at the Central Bank.

According to the Central Bank, “Lowering the reserve requirement would mean that commercial banks are obliged to keep a smaller proportion of their eligible deposits at the Central Bank, thus directly increasing banking system liquidity.

“On the other hand removing the proceeds from the blocked account increases the funds available to the Government for its fiscal operations; until these funds are withdrawn there is no impact on system liquidity. Over time, liquidity may increase as the funds are withdrawn.

“Consequently, lowering the reserve requirement may have a more immediate impact on liquidity than unblocking the account.

“Moreover, in the case of lowering the reserve requirement, it is the banks that have more access to their funds held at the Central Bank, while unblocking the government accounts provides the government with greater access to its funds at the Central Bank.”

Economist cautions: 

Be mindful of the damage if $$ released too quickly 

But an economist yesterday cautioned that even if the entire $31.9 billion were available to the Government, it would need to be very mindful of the damage to the country’s inflation rate and the demand for foreign exchange that releasing that money too quickly could have on the economy.

“Unblocking the accounts is, in effect, creating money and the Government would need to be very cautious about the inflationary and foreign exchange impact of unleashing too much, too soon,” said the economist, who requested anonymity.

Asked if the unblocking of the accounts was a form of quantitative easing, the Central Bank said, “Broadly speaking, quantitative easing is a process by which Central Banks increase the level of liquidity in the financial system by purchasing financial assets from banks and other financial institutions. 

“Removing money from the blocked accounts will make more money available for fiscal operations; liquidity could eventually be impacted according to the level and pace of government spending. 

“Overall, therefore, unblocking the accounts could potentially have a similar result as Central Bank purchasing of financial assets on liquidity but the impact may be slower.”