BELIZE CITY, Mon. Feb. 14, 2022– The approval of the 70-million-dollar supplementary appropriation by the Senate during last Wednesday’s meeting has paved the way for the Government to make an investment of 20 million dollars in the capitalization of the Central Bank of Belize—the largest investment made in the Bank in its entire history. According to Minister of State in the Finance Ministry, Senator Christopher Coye, this investment is being made in an effort to fortify the bank and prevent any potential weakening of its financial position, as well as to enable it to “catch up” with the rest of the central banks in the Caribbean region in regard to its level of reserves in proportion to its GDP.
“Currently, the percentage of total capital and reserves relative to GDP for Central Bank is around 1.3%. Once we capitalize with this additional 20 million we will be around a little over 1.8% of GDP. The regional average in the Caribbean is closer to 2% of GDP, so we’re basically just—from a comparative standpoint—really just catching up with the rest of the Caribbean in terms of the strength or the capitalization of the Central Bank,” said Coye when interviewed by local media.
Coye then went on to explain how the financial relief provided by the government (via the Central Bank) to private businesses during the COVID-19 pandemic, particularly the lockdown in 2020, could pose a risk to the country’s financial system, and he noted that the capitalization of the Central Bank will ultimately help to mitigate some of that risk.
“To provide some relief to businesses, including tourism businesses in particular, the Central Bank established certain forbearance measures and other guidances to provide a level of relief—cash flow relief through debt-servicing relief. That was adopted from way back then [in 2020] and extended for a period of over a year and a half. And that meant that a lot of businesses (this is all about private sector, this isn’t about Government or anything like that) took advantage of those forbearance measures, and so they didn’t have to pay or they restructured their debt and capitalized interest,” he stated.
“But a number of businesses were not making any payments for maybe a year or more. And that period where they don’t have to make any payments at all ended in December of last year—December 2021. So now that means that they will have to start paying, and some will be able to; some will not be able to. And so that’s obviously a risk, and the larger the number of businesses or number of overall debts that cannot be serviced, that has an impact on the financial system. It has an impact on the banks. Typically, those would become non-performing loans and you would have to do provisioning. The banks or financial institutions have to do provisioning for non-performing loans and that can come out of their capital,” he further explained.
One of the key justifications for fortifying the Central Bank, said Coye, is that the Central Bank needs to be in a position that enables it to provide support to institutions that might be affected by those unserviceable debts.
“A prudent financial institution will ensure that they have security and is well capitalized to back up any losses, but you have to think of the different scenarios. In looking at those scenarios, to the extent that the Central Bank can leverage up in terms of lending, but it can also suffer losses. And so if it does suffer losses, those losses effectively come out of its capital reserves. And so it’s important to fortify the capital of the Central Bank to make sure that it is able to withstand losses not only just—it’s not just about lending, it’s about withstanding losses as well.”
Coye calls the investment in the bank a proactive approach, motivated by the government’s desire to ensure that there is absolute confidence in Belize’s financial systems, its banks, and its credit unions. He also noted that it also serves as a public affirmation of GoB’s confidence in the Central Bank and how it operates.
During the debate in the Senate over the appropriation bill last week, Lead Opposition Senator Michael Peyrefitte had pointed out that, at present, there is no financial institution in Belize that’s in danger of failing, and he thus questioned why it is currently necessary to invest 20 million dollars in the Central Bank. In response, Senator Coye explained that, when it comes to financial matters, a proactive approach—as opposed to a reactive one—is always necessary, and stated that the government is simply planning ahead.
“That’s not how you manage anything that has financial implications. You have to prepare. You can’t be reactive. Look at where we were with the pandemic because we weren’t prepared—no money, borrowing a million dollars a day, there’s no contingency whatsoever. That’s what contingency is about, setting up a contingency fund so you can prepare for unforeseen events,” said Coye, who also referred to Senator Peyrefitte’s comments as irresponsible and unfortunate.
“We have to make sure that we do not create havoc in our financial system without basis. You look at the US and their Federal Reserve and how the choice of every word is so important that it impacts the financial and stock market throughout every day. It all ties back into the psychology of the consumer, the psychology of the investor, and how their confidence is affected. You can’t send the wrong message. You have to send the correct message—the true message—so that there are no missed or mixed messages put out there,” Hon. Coye further pointed out.
The Central Bank estimates of revenues and expenditures were tabled at a meeting of the House of Representatives last Friday and at the Senate meeting on Wednesday. “If the Senator had read his papers, he would have seen the financial position of the Central Bank,” noted Coye.
In its 2020 annual report and statement of accounts, the Central Bank itself expressed the importance of assessing the stability of the financial system and ensuring that that stability is maintained, noting that the importance has grown even more now due to the adverse impact of COVID-19, which has caused an increase in financial vulnerabilities.
“The Central Bank is faced with the difficult task of balancing the appropriate amount of support to provide to the financial system in the near term against containing the potential rise of medium-term macro-financial stability risks,” it stated.
