With the developed world still enmeshed in the 2008 crisis precipitated by banks operating in a freewheeling liberalised financial industry, we hope the upcoming elections will encourage our competing parties to announce measures to avoid that dead end? The present precipitous plunge in the value of our dollar is just a hint of what lies ahead for the new “oil economy”. We raise the possibility, once again, of public and development banking.
Back in the 70’s, the government launched GNCB as a public bank, competing with the several commercial banks then operating, and GAIBANK as a development bank, securing its funds from grants and loans from the international community. By the 80’s the government effectively assumed control over the entire banking industry through varying levels of nationalisation of the private banks.
The rationale offered for our massive government intervention was bluntly, market failure. GNCB as a public bank was responding to the unmet need for a more distributed and accessible banking system while GAIBANK was intended to fill the endemic financing gap for targeted entrepreneurial activities left unattended by the commercial banks.
Unfortunately, the system quickly degenerated into a classic, rightly-criticised, “repressed” financial system: the government maintained artificially low interest rates, inducing excess demand for credit which the government must now allocate. The low interest rates (effectively so when the high inflation rates were deducted) became an effective disincentive to savings and combined with the inability of the government to borrow internationally, eventually resulted in low investment and thus, low growth. This situation was exacerbated by all the other potential negative features of development banking: cronyism, rent-seeking and corruption by bureaucrats, misallocation of funds in misconceived schemes etc. By the eighties we had plunged into negative “growth”.
The IMF’s Structural Adjustment Program (SAP) of 1989 bequeathed our present financial system: banks and other financial institutions totally privatised and “liberalised”. It was putatively subject only to market forces with government reduced to a “non- distorting” regulatory role. GAIBANK was dissolved and GNCB privatised. So we have three decades experience with the liberalised financial system. What have we learnt?
The developed world has now accepted what China and the other emerging economies have shown: participation of government is vital in the financial sector. Otherwise, the social function of overall national development – which necessitated the invention (and the ongoing maintenance) of the banking system in the first place – will inevitably be eroded and vitiated by the workings of unmediated human greed. A system driven only by the profit motive cannot do otherwise. We have been spared the worst excesses of the financial depravity experienced up north – through our relative “underdevelopment in financial instruments”. On the other hand we have not witnessed any turnaround in banking efficiency or the financial intermediation necessary to foster growth of our economy.
Their reluctance (even refusal) to service the domestic entrepreneurial potential necessary for our development, has resulted in billions of dollars lying idle in their coffers or parked abroad. However, rather than leaving the financial market to do what was necessary to clear itself – offering lower rates to borrowers – the government offered the banks a way out: Treasury Bills. The banks could then then lower their interest rates to depositors while raising it to borrowers.
The “spread” – the difference between the deposit interest rate and the lending rate – has persistently been in double digits. The banks were being rewarded for not doing what justified their existence in the first place – taking risks to lend money. The government was supposedly keeping down inflation. In our considered judgement, we should relook at the utility of development and public banks. The raison d’etre for those institutions is even more evident – and necessary – today, if we want to achieve the double-digit growth rates necessary for a quantum leap in living standards.
Of course, we have to rectify the downside risks inherent in government ownership, which in our case, having tried the model, can be easier identified.
