On November 25, 1996, Hon. Minister for Finance, Industry and Planning Mr. Julius Timothy, addressed the Nineteenth Annual General Meeting of the National Commercial Bank of Dominica.


I am indeed honoured to be invited again to present the keynote address at the Annual General Meeting of Dominicaís bank - the National Commercial Bank of Dominica. Since I spoke to you last year Dominicaís economic situation and its future, and the role of the National Commercial Bank in relation to the national economy has been constantly in my thoughts. On this occasion, I would like to share some of my thoughts with you, and to invite you to re-examine your performance and plans against the new challenges which Dominica must overcome in order to survive as an independent nation with a vibrant economy.

First, I would like to congratulate you - the Board of Directors, Management, and Staff - for another year of solid financial performance. I note especially that your efficiency ratio was impressive, and that your strong earnings allowed you to substantially strengthen shareholders equity while still proposing a 15% dividend on shares for the year ended June 1996. Also noteworthy is the fact that by retaining some $26 million in undistributed profit, you are laying a sound capital base for the planned expansion of your institution. You have shown prudence in increasing your Provision for Loan Losses; and by aggressive collection strategies and a proactive approach to managing credit risk you continue to achieve positive results in the quality of your loans. You have been good bankers.

Second, I would like to clarify the U.W.P. administrationís position on the role of indigenous banks, especially any set up by the government or in which government is a major shareholder. The National Commercial Bank must be seen against the background of the Governmentís commitment to assign to the private sector the lead role in productive and commercial affairs, based on the belief that the private sector is likely to be more efficient. In the case of the national bank the governmentís position is that it should be more than just one more commercial bank, or just an addition to the capacity for providing banking services to the society. It expects of the institution, sensitivity to the national development aspirations, in concordance with the development strategies being pursued, and assistance in promoting and maintaining economic stability. Undoubtedly, this imposes on an indigenous entity like the National Commercial Bank, responsibilities beyond those of merely preserving its financial integrity while maximizing profits for its shareholders. It has to simultaneously advance the national interest. This makes the task of the directorate, management and staff more difficult and of more comprehensive scope than that of their counterparts in other commercial banks.

This position is in keeping with the original rationale for setting up national commercial banks in newly independent states, especially in the Caribbean. Researchers at the University of the West Indies and elsewhere showed that the branches of foreign commercial banks (and insurance companies), which had dominated the colonial financial scene for over a hundred years, had been a powerful instrument for channeling the regionís savings to support investment in metropolitan countries. Indigenous banks and insurance companies would not do this; and would be more sensitive to the needs of the native economy. So most Caribbean governments set up national commercial banks; (the strategy used for achieving this is not important for the point I wish to make). Over time, the foreign-owned branch banks have changed. They are now almost completely managed by Caribbean nationals, in some cases they have incorporated locally and Caribbean nationals participate strongly in their ownership. Having become much more secure in the post-independence political and economic environment, these ďoriginal banksĒ no longer operate as a powerful instrument for outflow of our domestic savings. The setting up of indigenous commercial banks very probably provided part of the incentive for these changes and must be credited in part for these changes in the original banking system. Of course, the new post-independence policy environment also played an important part.

This does not mean that the indigenous institution no longer has a special role. It must continue to be the conscience of the banking sector so far as sensitivity to the national interest is concerned. To illustrate what I mean, let me review briefly the recent performance of the economy and against that background the performance of banks in Dominica.

Preliminary data for the first half of 1996 indicate that the Dominican economy slowed down considerably as compared to 1995. This was due to the severe damage to agriculture caused by unfavourable weather in the latter half of 1995. There was a sharp contraction in export volume of bananas - 30.5% - during the first half of 1996. Although, our small manufacturing sector is estimated to have grown during the first half of the year, the growth in tourism sustained, and activity in the construction sector increased minimally, developments in the islandís dominant banana industry continued to dictate the level of economic activity. Partly, this is due to the fact that earnings from bananas normally account for about 60% of merchandise exports, and these fell drastically during the first half of this year. This also is due to the fact that the region as a whole is dependent on banana exports for a large share of its foreign exchange earnings. In the first half of 1996 when Dominica and the OECS Region as a whole suffered a deterioration in the export earnings from bananas, the trade deficit worsened. Given the nature of the Regionís financial arrangements, monetary expansion depends to a large extent on the growth of export earnings and on the growth of the import bill. The enlargement of the deficit retarded growth in money supply. The slowdown in monetary growth was very pronounced in Dominica where bananas are more important in export earnings than in other OECS members. 1
The performance of NCB during this period is reflected in the following 
indicators:
	a.	Deposits fell by 2.9%
	b.	Loans fell by 5.6% 
	c.	Total assets increased by 2.6%
	d.	Net foreign assets increased by 28.4%
		Profit was $2.8 million compared with $3 million in the same 
                period of 1995 
	e. 	Net liquid assets ratio was 34.1% at the end of June 1996.

Meanwhile, for other commercial banks (as a group) in Dominica the 
indicators showed a somewhat different picture:
			
	f.   Deposits increased by 2.7%;
	g.   Loans increased by 0.7%;
	h.   Total assets increased by 0.7%;
	i.   Net foreign assets increased by 36%, (but one 	      	    
             bank decreased it);
	j.   Profit (average) was $1.42 million compared 	            
            to $1.45 million in 1995;
	k.  Net liquid assets ratio was 19.2% at the end of  June 1996.
Before indicating the tentative conclusions which one may draw from these figures let me tell you that the source is The Eastern Caribbean Central Bank and specifically the Governorís Report to the Monetary Council which met in St. Vincent in October. The report presents the data for individual banks, but for the purpose of comparison with our indigenous bank I have shown the other banks as a group.

One such conclusion may be relevant to the NCBís thinking about its future strategy. It is that NCBís ability to attract deposits seems to be more sensitive to a downturn in economic performance than other banksí. Admittedly, it would be desirable to examine data over a longer period to have more confidence in the outcome; hence, I can only suggest that this is something the Bank should look into. If on more thorough study the conclusion seems valid, then you will want to formulate some tentative hypotheses as to why this is so. I will hazard some conjectures.

l. It may be that NCBís depositors are drawn from occupational groups in sectors which are more seriously affected by economic downturns generally. Or it may be that its depositorsí income streams are more dependent on banana export earnings.

m. It may also be that the composition of NCBís deposits (demand, savings, and time) differs substantially from other banks. The fall in deposits in the Dominican banks as a group during the first six months of 1996 was due to the fall in demand deposits, savings and time deposits having increased slightly.

These would suggest that NCB needs to diversify its deposit base. You may wish to tailor your efforts to attracting more of those categories of deposits that may be less sensitive to economic downturns. See what sections of the community are not being served by your institution and plan accordingly. The ECCB noted that the downturn in the Regionís foreign exchange earnings from trade would have been more disastrous had it not been compensated to a small but important extent by increase in voluntary inflows, mainly deposits from overseas. This is an important lesson for Dominica and the national bank. NCB should examine the merit of redoubling its effort to attract foreign savings especially by Dominicans living abroad. If done in conjunction with land settlement and development schemes, this may prove attractive to Dominicans who plan to return home eventually.

The difference in lending performance cries out for explanation, since with the increase in total assets and the high liquidity ratio the reduction in loans by NCB does not seem warranted by the decline in deposits. Although there was also a slowdown in the growth of their lending, other banks did not reduce loans outstanding during the downturn. Before determining this matter, it should be remembered that lending is a two-way street. There must be willing borrowers and willing lenders. Did the decline in lending reflect a decline in demand and in number of creditworthy borrowers or a decline in willingness to lend due to a heightened sensitivity to risk and a concern about profits? Did NCB not share adequately in the apparent switch of lending from agriculture to construction and housing? These are not questions to which I yet have the answers. I raise them however to sharpen your awareness of the importance of the lending strategy of an indigenous national bank. But let me opine that given the greater sensitivity to the national interest which the indigenous bank should demonstrate, it is not expected to react to a downturn in economy activity in a manner which exaggerates rather than minimizes the downturn. In other words it is expected to help preserve national economic stability and to contribute to an orderly adjustment.

There was no difference between the indigenous national bank and other banks in the direction of adjustment in their Net Foreign Assets. Bear in mind that a positive net position in the bankís foreign account means positive net lending abroad since the bank would be holding more of foreign liabilities than foreigners are holding of the bankís. Before I reveal my concerns and preference on this issue, let me make clear that prudent banking requires holding foreign assets both for reducing risk through portfolio diversification and for facilitating foreign transactions in the daily operations. That said, the issue is when is it appropriate to increase lending abroad. I am concerned that the building up of foreign assets at a time when the country is experiencing a severe fall in foreign exchange earnings will exacerbate the economic adjustment necessary to halt the deterioration in the balance of payments account. It is understandable when foreign-owned banks run for cover when there is a hiccup in the economy, but indigenous national banks are expected to stand their ground. This should not be interpreted rigidly; I only intend to say that what is best in the national interest at the time should be given appropriate weight in your decisions.

My final comment on the performance comparison relates to the profitability of banks during the downturn. All experienced a slight decline in dollar terms, but the decline appears to have been marginal given the severity of the decline in export earnings and other indicators. It seems fitting to comment that the banking sector cannot expect to remain aloof within an economy in a prolonged recession, and it is therefore in the sectorís interest to invest in helping to bring about the economyís early recovery. This may mean reducing the spread between deposit and lending rates, reducing certain discrete charges, providing greater assistance in cases of delinquency among cooperating borrowers, providing more pre-lending assistance to borrowers wanting to invest in modernizing or expanding their plant, and being generally more helpful to clients. Yes, this could imply lower profits. Purely private, partly or wholly foreign-owned banks do not accept lower profits except where they are convinced that the returns over the longer term are worth the sacrifice of profits in the short term; but its shareholders may prefer the certainty of short-term gains. An indigenous bank with substantial government ownership, has the advantage of being able to count on one shareholder who will always put the national interest first, and will be willing to stand aside in the matter of dividend distribution in order to make the investment for the economic recovery and the countryís future. This advantage requires of you that you play the role of leader among banks in giving consideration to the national interest.

Third and last, I will tell you a little about what the Governmentís strategy for long term recovery is, and ask that you plan your role and future performance against that background. Our strategy is essentially the same as that for other OECS member states but especially those affected by the deterioration of our banana marketing arrangements. Dominica must restructure its economy to reduce dependence on only one export, namely bananas. This involves diversification within the agricultural sector to other crops and to livestock production. It also involves diversification among sectors by increasing the contribution of other sectors, such as tourism and services, to Gross Domestic Product and to export earnings. Diversification is expected to come about through active sponsorship of the process by providing appropriate infrastructure, efficient institutional support and a positive policy framework, including incentives to the private sector. The private sector is expected to play the lead role in production and therefore in the direct investments to change the composition of capacity.

The Government of Dominica recognizes that the restructuring of the economy requires the reformulation of the objectives and functions of the public sector to improve its efficiency and reduce the burden it imposes on the rest of the economy. It will have to attempt to do more with less. This means being not only more efficient, but being sufficiently flexible to accept the need for change and to accommodate the process of change.

At the sub-regional level the efforts to maintain financial growth and stability and ultimately economic development are being spearheaded by the ECCB, and one of the instruments used towards achieving these goals over the past two decades has been the strong EC dollar policy, which has worked well.

Put another way a strong EC dollar policy simply means pursuing measures which will defend the exchange rate of the EC dollar at the current level that is EC$2.7 = US$1.00. In other words devaluation is not considered a policy option.

First of all, the system we operate in the ECCB area makes us each other's keeper. The ECCB operates a common reserve pool in which all the countries place their reserves into a common fund on which they can draw. But since there is no automatic access to the fund, countries have to follow good fiscal policies in order to access the fund. The conditions governing access and amounts available to each member government are stipulated in the Central Bank Agreement of 1983. So that this pooling arrangement which of necessity requires limits to access to the fund by any one member government has made it impossible for indiscriminate practice which has contributed to some of the exchange rate pressures in some of the larger Caricom countries where one Minister of Finance "call the time". Adherence to these limits are reinforced by the requirements by its agreement that the ECCB shall at all times maintain external reserves not less than 60% of the value of currency issued by it and in circulation and other demand liabilities including exchanging commemorative coins. It is in recognition of this in-built control in a multi-state Central Bank model that efforts are being pursued for the establishment of a Caricom Central Bank. Another in-built benefit of the multi-state Central Bank and the pooling of reserves, in defense of the strong EC dollar, is the fact that it is hardly likely that all member countries will experience economic downturns at the same time, so declines in direct investment capital in St.Kitts will be compensated for by higher export earnings for agricultural produce from St. Vincent and vice versa. Similarly, declines in foreign exchange earnings from bananas can be compensated for by increases in earnings from tourism. This pooling arrangement indeed makes us our brothers' keepers, and cushions the EC dollar from the impact of foreign exchange losses in any one member country.

As can be seen from the following table with selected balance of payments (bop) data obtained from the ECCB, tourism has become by far the largest contributor of foreign exchange in the ECCB area
				FOREIGN EXCHANGE EARNINGS
		
		TOURISM		BANANAS		DIRECT FOREIGN 
								INVESTMENT	
		($000)		($000)		         ($000)

1990		1,465			 387				565
1991		1,584			 328				518
1992		1,727			 376				425
1993		1,925			 269				385
1994		2,145			 217				499
1995		2,064			 239				608
while any sharp contraction in banana export earnings will lead to a decline in foreign exchange earnings for the sub-region, it is clearly evident from the data that the impact does not have to lead to an exchange rate crisis for the EC dollar.

Confidence in the system, and the way it works which have resulted in the strong EC dollar have even been underscored by international financial agencies in Washington who have agreed that the system should not be tampered with and they in effect accept that devaluation is not the panacea for economic growth in the EC dollar area.

The ultimate signal of confidence came with the liberalizing of the exchange regime in March 1996, which did away with the bureaucratic red tape involved in getting foreign exchange up to $100,000. One can now simply walk into the bank and purchase foreign exchange up to $100,000. Up to today, while I address you, the ECCB holds reserves in excess of requirements by the IMF in relation to imports, and the EC dollar remains backed 99% by foreign reserves, way in excess of the 60% required by the Bank's agreement.

In conclusion, we want to urge all the players in the financial sector to take up the challenge. In being more involved in financing the diversification process, you are making your contribution to maintaining a strong EC dollar, and ultimately development of Dominica.

It is against this new challenge, that I ask you to review the role of your institution in the economy and society. It is against this view of the requirement for moving toward a brighter future that I ask you to approach your task with flexibility and resolve. Sensitivity to the demands of the national interest does not mean throwing out traditional objectives of profitability, security and efficiency. Your record of stewardship as bankers makes me confident that you will continue to mind these objectives. My hope is that you will now demonstrate a greater sense of balance between the more private and the public good.

Thank you again for the opportunity of sharing these thoughts and concerns with you.



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