Finance Minister Larry Howai has made moves to adjust borrowing limits in a bid to help the Central Bank’s efforts in mopping up approximately $6 billion in excess liquidity in the nation’s financial system. The move came up for debate on Friday before the House of Representatives, where Howai sought approval for the adjustment to borrowing limits under the Treasury Bills Act No 14 of 1995 and the Treasury Notes Act No 14 of 1995.
Howai, in a short contribution, said the adjustments “do not count as part of the country’s debt obligations.” “This increase is to facilitate open market operations by the Central Bank of Trinidad & Tobago as the build-up of excess liquidity in the financial system is not expected to be fully absorbed in the short term despite a return to private sector borrowing,” he said. Howai noted that the money borrowed would “simply be sterilised or held in a deposit at the Central Bank.”
He also noted that the move was part of the Government’s sustainable growth and development vision and said there was a need to manage excess liquidity. He said while the move may act as an incentive to increase investments, prolonged excess liquidity can have a negative impact on the financial system. “A prolonged low interest rate environment can negatively impact individuals on a fixed income, create asset bubbles and increase the possibility of asset price inflation,” he said.
“The current build-up of liquidity in the system has arisen as a result of the combined effect of the fiscal deficits, the economic decline which occurred in 2009, the funds injected as a result of the CL Financial bailout and the initial period of slow economic growth,” Howai said.
Howai also told the debate that the open market operations were a normal policy measure to manage high liquidity levels, adding that the increased borrowing was an appropriate measure, “given the economy’s return to growth following a prolonged period of decline since 2009.”
“The Central Bank estimates approximately $6bn in excess liquidity in the system. The urgency of addressing this build-up of excess liquidity in the system has increased as the expansionary effect of the cash injections associated with the CL rescue operation (although some was sterilised) coupled with the return to positive economic growth has the potential of increasing the rate of inflation,” he said.