Planning ahead: The central bank is modernising its regulatory functions


In October 2016 the Central Bank of Trinidad and Tobago (CBTT) published a new strategic plan, covering the five years between FY 2017 and FY 2021. This was the second medium-term plan adopted by the CBTT. The first had initially covered the three years between FY 2012 and FY 2014, under the theme of enhancing financial stability, governance and efficiency. That plan was subdivided into two pillars: strengthening monetary and financial stability on the one hand and enhancing governance, accountability and transparency on the other. Supporting these pillars were nine strategic objectives and 26 specific projects. The plan’s overall timeframe was eventually extended to cover two further years, FY 2015 and FY 2016.

SUCCESSES: Officials say the initial plan delivered important achievements. One was the creation of a Liquidity Management Committee, a joint CBTT and Ministry of Finance body that monitors money markets and makes recommendations on monetary action. The CBTT also introduced the mortgage market reference rate in an attempt to guide the pricing of mortgage loans. Another innovation was the introduction of regular stress testing of commercial banks. During the first strategic plan, the CBTT joined the Alliance for Financial Inclusion, an association of central banks and other regulatory institutions from 90 developing countries which promotes policies designed to improve the lives of the poor through increased financial inclusion. Other initiatives attributed to that plan included the expansion of the role of the financial services ombudsman and the extension of financial literacy programmes.

While the CBTT has successfully implemented a regulatory and supervisory framework for money remitters, it has not been able to finalise a new insurance bill or a credit union bill, as these initiatives have been delayed in Parliament. Among other projects still described as ongoing in early 2017 were a national crisis management plan and a project to accelerate the development of the secondary market in government securities.

CHALLENGING TIMES: The authors of the new five-year plan clearly believe the institution will be facing a number of important challenges. The plan describes the sharp fall in energy prices experienced up to 2016 as a major terms-of-trade shock. It expects the beginnings of a turnaround to take place in 2017, but stresses that it will take time for the recovery to become firm. It further expects there to be continuing uncertainty about international energy prices. The CBTT’s role of keeping inflation in check will have to be exercised in the context of important growth constraints. The bank must also monitor the strength of financial institutions.

The international environment is also expected to remain somewhat uncertain with a degree of investor nervousness over emerging markets. The strategy paper warns that rapid technological change may mean that financial contagion effects will occur with greater speed and become more far-reaching. There will therefore be greater pressure on the CBTT to adapt to a more dynamic financial landscape, the strategy says. It also warns that the loss of correspondent banking relationships could be a cause for concern in the Caribbean. “The growing integration of T&T’s financial market with the rest of the world, developments in international payment systems, creation of new financial products, incidence of cross mergers and acquisitions will quickly impact the domestic market,” the CBTT said.

STRATEGIC GOALS: The new strategy identified three main themes: monetary policy, financial stability and internal operations. Under each theme are specific objectives. For monetary policy there are three key aims: to contribute meaningfully to solutions to the country’s current and future macroeconomic problems, to strengthen economic and technical analysis, and to engage effectively with external agencies. Under the financial stability heading there are three objectives: to prepare for an evolving financial landscape, to ensure a well-functioning and stable financial system, and to “fortify the legal underpinnings of what we do”. Lastly, under internal operations the aims include implementing strong procurement, contract and budget controls; ensuring IT systems are appropriate to needs, allowing for meaningful engagement with staff at all levels; and widening the CBTT’s role in public financial education.

Many of these more internal objectives will be familiar to members of any large company or public sector organisation seeking to install a performance management system. However, it is the 23 projects intended for implementation over the next five years that may give better insight into some of the issues that the CBTT sees itself addressing. A number of analysts – including IMF officials – have commented on the less-than-comprehensive nature of the country’s economic statistics. It is therefore interesting to see the CBTT prioritising a project to strengthen the capture, collation, analysis and dissemination of high-frequency economic information. The strategy document outlines its aim to streamline and automate data capture, widen the coverage of balance of payments information and achieve comprehensive coverage of public debt statistics.

CURRENCY ISSUES: Another issue of controversy is the availability of foreign currency. In part this is a matter of day-to-day policy concerning how the CBTT executes its exchange rate policy. But it also involves the structure of local foreign currency markets and the way they operate. The bank has historically injected currency into the foreign exchange market in a controlled way to ensure a modest rate of depreciation of the TT dollar, however, its rate against the US dollar has been broadly fixed since late 2016. An undesired side effect of this was the emergence of a foreign currency “queue” where commercial banks were not always able to meet customers’ requests for foreign currency for transactions such as the payment of imports. The CBTT has thus identified a project to streamline operation of the foreign currency market, which it hopes will evaluate arrangements governing the way the CBTT interacts with currency market participants, and consider modifying them to “promote efficient market clearing”.

A further project, titled “Finalise CLICO resolution”, is particularly significant, given that it relates to the largest financial collapse experienced in the country in the last 10 years. Insurance company CLICO suffered a financial crisis in 2009, largely related to the difficulties of its parent holding company, CL Financial, known as CLF. The government was forced to step in, injecting just under TT$20bn ($3bn) and taking control of CLF. Successive administrations have been seeking to resolve the remaining financial disputes, pay off creditors and recover as much as possible of the public funding which went into the rescue operation. The CLICO issue remains significant in two different respects. One is that the regulatory lessons learnt from the crisis need to be agreed and acted upon to strengthen future resilience of the financial system. The other is that recovering significant income from CLF would be of great help to a government facing fiscal austerity. The strategy paper describes the project as updating and implementing the resolution plan, so as to assess the legal and other lessons learnt and adjust processes accordingly.

Project 14 out of the 23 in the five-year plan is designed to improve standards in financial institutions. This will also involve measures to strengthen anti-money laundering and combating the financing of terrorism framework. There is a project to improve risk-based supervision in banks and insurance firms, as the country seeks to incorporate some of the Basel II and Basel III standards. The remaining projects cover subjects including improvements to capital markets efficiency, modernising the monetary policy framework, improving the management of international reserves and strengthening technical and supervisory expertise.

MONETARY POLICY: The five-year strategy does not give analysts any clear short-term indicator of the CBTT’s monetary policy stance. During the course of 2016 the CBTT kept its main policy rate constant at 4.75%, citing what it said was the balance of domestic and international economic conditions. On the domestic front the CBTT was aiming to keep rates low to support an economy in recession. But it was also aware of potential inflationary pressures caused by the widening of the value-added tax base earlier in the year and the potential price pass-through effects of local currency depreciation. After a rise in the US Federal Reserve rate in December 2015, rates had remained largely on hold amid concerns that the global recovery remained weak. However, in December 2016 the US Federal Reserve increased its key interest rate by 0.25%, and then again in March 2017, moving the rate to a target range of 0.75% to 1%. In 2017 most analysts expect the CBTT to follow, but not to anticipate, a tightening of international rates. In its May 2017 monetary policy announcement the CBTT said it was holding the rate steady in view of overall economic conditions and the continuance of weak inflationary pressures. The CBTT’s monetary stance will evolve as the economic situation changes. The five-year strategy, on the other hand, is designed to increase its effectiveness by modernising and updating its regulatory and supervisory functions.