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

48 stood at six per cent of deposits and the cash reserve requirement was doubled, to four per cent. The Bank also took decisive steps to strengthen its leverage over credit creation. From March the banks were restricted from using Euro-dollar borrowings to satisfy domestic loan demand. Although a four-fold increase in crude oil prices substantially raised the value of imports, the overall external current account did not deteriorate by as much as had been expected because of buoyant tourist receipts and sugar proceeds. But the Bank contributed to the outcome by more effective exchange control measures. For example, the designation of Sterling Area currencies as “foreign” enabled the Bank to more effectively monitor and regulate inflows and outflows of funds in all currencies. The Bank also tried to ensure that the productive sectors obtained adequate working capital by extending, in August 1974, the system of rediscounting commercial bank paper to non-sugar agriculture, manufacturing and tourism. The rate at which commercial banks could on-lend to their customers was set at 11 per cent for large firms and nine per cent for small firms. The banks were permitted a 1½ percentage point differential on these discounts but the Central Bank discouraged them from making borrowing too burdensome for businesses. When loan rates reached as high as 18 per cent, the banks were advised that the rates should be no higher than 14 per cent. Near year-end, the Bank started to make funds directly available to the Sugar Industry Agricultural Bank to assist plantations in financing the planting and cultivation of sugar cane. In the first half of 1974, the Bank approved a limit of $12 million for investment in Treasury Bills. Of this amount $2 million was to be held as a float to facilitate open market operations. This was the first action taken to promote the fledgling market for government securities which had been first discussed by the Board late in the previous year. There were frequent changes in monetary policy during 1975 as the Bank addressed contrasting problems. Given the high level of commercial bank liquidity and inflationary tendencies, the cash reserve requirement and the security requirement were raised to six