Wed | Sep 28, 2016

Duped by financial sector

Published:Thursday | January 28, 2010 | 12:00 AM

The Editor, Sir:

The commercial banks, insurance companies and other financial institutions have once again duped the Government and people of Jamaica. The Opposition People's National Party (PNP), and some financial analysts had suggested taxing the super profits posted by our leading financial institutions to raise funds to replace the approximately $20 billion shortfall in the third Budget revision.

The financial institutions countered by offering instead to reduce interest rates on Government of Jamaica (GOJ) securities, already issued at fixed contract rates, thus saving the Government some $40 billion per annum. Great patriotic sacrifice!

With much fanfare and praises by industry leaders, the GOJ accepted ( in reality was suckered into accepting) this alternative. Let's look however at the issues involved here:

1) The shareholder of these financial entities will not have to give up any of the huge profits.

2) The individual savers and investors in the financial institutions will sacrifice their 'guaranteed'earnings.

3) The earning capabilities of the financial entities will not, or minimally, be affected, as they make their profits from margins and administrative charges. The margin is the difference between the rate paid to depositors and the interest charged on loans. Whether rates are high or low, the margin (spread) will be maintained. In the case of investment fund managers, they don't make their profits on the interest earned by their customers (investors), but rather on administrative charges levied on the total fund under management. The interest earned on the invested funds is 'supposed' to be credited to the investment pool and thus increase the value of the units in the pool.

4) The financial institutions will therefore continue drawing in the super profits. The individual savers and the present and future pensioners are the ones making the big sacrifices.

5) The wealthy investors, always more committed to their wealth than to their country, will move their funds to foreign denominated investments, or offshore totally, thus putting pressure on the exchange rates and availability of foreign currency locally. The Government has decided to establish a US$400 million (or is it US$1 billion) fund to assist the banks in the eventuality of heavy withdrawals.

I hope that the GOJ has examined the Trojan horse fully, and has not been suckered into another faulty transaction.

I am, etc.,

RAMON MCKENZIE

JahJahSee@gmail.com

St Andrew