Bajans continue to borrow money from the commercial banks and spend more on imports, despite economic troubles in  our major tourist-supplier countries but aided by a drop in interest rates last December.

According to new data from the Central Bank of Barbados, the total outstanding debt owed to commercial banks in Barbados at the end of the first quarter of 2008 was just over Bds$5.6 billion, about $76m higher than the total at the end of December last year. However, in just 15 months, we have increased our borrowings from the local banks by close to half a billion dollars ($488m).

But the increase in borrowing over that 15-month period does not even come close to the increase achieved in the twelve months prior, that is, the whole of 2006, when total borrowings rose by $658m. 

Now, there was an interest rate increase in December 2006, so that might have helped cause the slower growth of the last 15 months. 

The Central Bank of Barbados raised interest rates, on December 15, 2006, from 4.75% to 5.25%, noting that despite four interest rate hikes the previous year, bank loans were still scampering out the door, mainly due to the continuing strong demand for residential mortgages, and, as a result, the net international reserves (NIR) had fallen.

In fact, those four rate hikes in 2005 did nothing to stop the rise in borrowing by a seemingly insatiable public, as 2005 ended with total loans outstanding almost three quarters of a billion ($728m) above the figure at December 2004.

(Background note: Starting on April 1, 2005 the central bank had raised the minimum deposit rate - the lowest interest rate the commercial banks can pay for deposits - by half a percent, from 2.25% per annum to 2.75%. Just two months later, on June 1, it increased the rate by another one percent, to 3.75%, and on September 1 it moved the rate up again, to 4.25%. Then on November 1 the central raised the rate to 4.75%.)

But here’s where the main loans are going now: mortgages. Of that $488m in loans over the 15 month-period (the whole of 2007 plus the first three months of 2008), nearly $400m was for mortgages.

Compare that to the whole of 2006, when only a quarter of a billion dollars ($257m) went to mortgages, and the year before, when only $183m went into mortgages. 

Moving now to imports, we see that for the first three months of the year, retained imports are up 9.3% on the same period last year, rising from $732m to $800m.

It is noteworthy that imports in the first quarter of 2007 (that $732m) were on par with Q1 of 2006, when they totalled $727m. The reason: The bite of the cess, which was in force at 6% for the whole of 2006 and the first two months of 2007. 

It is also a little worrying to observe that that 9 percent increase for the first three months of this year is on a total for last year that was only half a percent higher than for the previous year of 2006.

So, assuming (for the sake of discussion only) that the central bank’s adjustment of the minimum deposit rate does directly influence imports, here’s what we have:

Going into hyperdrive over an 18% percent rise in retained imports in 2004 over 2003 (imports rose by $395m, from $2,221m in 2003 to $2,616m in 2004) the bank raises the interest rates four times in 2005, starting at 2.25% in April and ending at 4.75% in November.

• The rate hikes, because they are being phased in, do not slow the surge in 2005 as the year ends with imports another 11% ($295m) higher, but cumulatively they start to do as they’re supposed to in the following year.

• 2006 turns out a result that would warm the heart of an interest rate hiker, with retained imports actually $44m down on the year before (the last time that happened was in 2001 and 1992).

• Seeing that the medicine appears to be working, but maybe worried that with Cricket Word Cup coming up in a few months, restraint may be thrown out the window, the bank adds another 1/2% interest rate hike in December 2006, and imports, while rising, do so by only 4.4% in 2007.

• This, along with an increasing build-up of liquidity in the banking system, causes the bank to rethink its position and to undo what it did a year before: the rate is lowered back to 4.75%.

The result has been the above-noted resurgence of imports in the first quarter of 2008. But the bank did not stop there and reduced the rate by another 1/2% on April 1, at the start of the second quarter. 

Of course, there are other factors involved, for instance, the need to keep our interest rates competitive with those of the U.S banking system so as to not encourage investment flight (they say), but what will the effect be on both loans and imports? And are we once more heading back to the same situation of imports threatening to overwhelm our foreign reserve position, which originally led the bank to double them over the past couple of years?

As that interest rate pendulum swings back and forth, the effect on our import habits seems to follow suit, but so far nothing seems to be stopping the individual’s quest for piling on debt.•