Both Sides of The Coin: The Story of The Central Bank of Barbados 1972-2017

240 RESPONSES TO THE FINANCIAL CRISIS OF 2007-2008 AND BEYOND Between 2008 and 2016, the Bank was challenged by economic stagnation, a burgeoning fiscal deficit and declining foreign exchange reserves, resulting, in part, from the 2007-2008 financial crisis in major trading partner economies. During 2008, the economy grew by a mere 0.5 per cent which was well below the average of the previous five years; the decline in GDP was about four per cent in the following year and the sharpest downturn since 1992. The Bank responded to the situation with a variety of measures that included adjustments to monetary and foreign exchange policies, financing for government operations, institutional changes, support for the cashflowpositions of private entities and assistancewith external borrowing. Changes in policy tools In the immediate aftermath of the financial crisis, the Bank relaxed its monetary policy stance in an effort to stimulate the economy. Between November 2007 and October 2008, the minimum deposit rate of interest was reduced from 5.25 per cent to 4.00 per cent. In addition, between December 2008 and June 2009, the discount rate on temporary advances to commercial banks was lowered from 12 per cent to 7 per cent. However, given the high liquidity in the system, the banks did not use that facility. During mid to late 2009, the foreign exchange reserve requirement for commercial banks was also reduced from 6 per cent to 4 per cent. In April 2009, the Bank introduced a local reserve requirement for non-bank financial institutions and by year-end 10 institutions held $11.6 million with the Bank. This adjustment enabled the Bank to provide financial support to Clico Mortgage and Finance Company which had liquidity problems because of the difficulties encountered by its parent company. During August 2011, the Bank introduced a five percent surrender requirement on foreign exchange dealers’ purchases from their customers and reduced its foreign exchange margins on sales to the dealers. This was intended to spur inter-bank trading in the foreign exchange market and increase inflows of foreign exchange to the Bank. Simultaneously, the Bank’s monitoring of the foreign exchange market was enhanced.