The International Monetary Fund (IMF)’s January update of its flagship World Economic Outlook (WEO) projections estimate a 2020 world output contraction of 3.5% on account of the economic lockdown brought on by the global response to Coronavirus (COVID 19) pandemic. Disaggregated further to the country-groups levels, Advanced Economies, which include the United States, the Euro Area, Japan and the United Kingdom, saw their economies collectively shrink by 4.9%. Emerging and Developing Asia, of course, with China clocking in positive growth (2.3%), saw a somewhat milder contraction of 1.1%, outperforming even its European counterpart’s 2.8% downturn. Closer to home, the Latin America and the Caribbean (LAC) region registered a 7.4% contraction, with Mexico declining by more than 8%.
While the world output contraction of 3.5% is notable, it is nonetheless 0.9 percentage points higher than the WEO’s previous forecast of -4.4% for 2020, an improvement attributed to, among other things, the monetary responses taken by monetary authorities around the world. As the IMF’s January 2021 update states, “Aggressive and swift monetary, fiscal, and financial sector policies have helped prevent worse outcomes.” On the monetary policy front, the Fund would further advise emerging market economies’ central banks to “continue to deploy asset purchase programs”.
The New Central Bankers’ Normal?
Not only have central bankers taken that advice, in many instances the pandemic-induced recession has inspired monetary authorities to go beyond long-established norms. As pointed out in a June 2020 working paper published by the United States of America (USA)’s National Bureau of Economic Research (NBER)’s Eric Sims and Jing Wu, Central Bankers— conventionally known for lending strictly to financial intermediaries—have opted to extend lending to entities outside the financial sector. As pointed out by Sims and Wu (2020), the “newer, and far more controversial, actions by the Fed [Federal Reserve] in response to the COVID-19 crisis involve direct lending to non-financial firms.”
In the case of the US Fed, among their new programs or facilities one would find the likes of the “Main Street Lending Program” (MSLP), which—via its various sub-programs—made approximately US$600 billion in credit available to qualifying small and medium-sized (SME) firms that are outside the financial sector.
The fundamental argument in favor of the transition to the non-traditional lending to non-financial institutions (dubbed “Main Street Quantitative Easing, or QE” by NBER) is that it helps to alleviate cash-flow constraints faced by firms. When firms are cash strapped, financial intermediaries—even if they have high levels of liquidity—are often reluctant to lend, as the low levels of the non-financial firms’ cash flow increases the risk that debtors may be unable to satisfy their obligations.
“To stimulate economic activity, it is not simply important for the Fed to purchase assets and lend freely, it is important that they allocate funds to where constraints are most binding,” Sims and Wu added. “In a ‘balance sheet’ recession like the one induced by the Financial Crisis in 2007-2009, purchasing assets from banks makes sense. But if the key constraint is facing [non-financial] firms, no amount of easing bank balance sheets will stimulate the economy. In a situation like this…direct lending to firms can be a powerful stimulative tool”.
Enter the Central Bank (Amendment) Bill
It is within these economic and monetary-policy contexts that we find the recently tabled Central Bank of Belize (Amendment) Bill, 2021. The Bill, published in the January 9th 2021 Government Gazette, seeks to add two new powers to the Central Bank of Belize (CBB) Act.
Specifically, section 67(1) states: “In unusual and exigent economic, financial, or systemic circumstances, the [Central] Bank may, through banks, financial institutions, statutory corporations or other similar bodies, establish emergency programs or facilities with limited or broad based eligibility.”
The subsequent sections of the Bill would go on to layout the genus of programs that would be allowable if the new legislation becomes law. Apart from being able to grant “credit facilities to any [non-financial sector] participant in any program or facility”, the Central Bank, under section 67(2)(a) of the Bill would be given authority to institute programs via which it can purchase “financial assets, including debt or equity instruments or other securities from any participant in any program or facility.”
Similar to the US Fed’s “Main Street Lending Program” (MSLP), the section 67(2) provision would allow the Central Bank of Belize (CBB) to, inter alia, likewise engage in asset purchasing programs. Under the MSLP, the Fed established a Special Purpose Vehicle (SPV) via which it would purchase up to 95% of the eligible loans made under the program; however, it is yet to be seen what form any program in Belize would take. The Bill also makes broad provisions for the ‘discounting’ of notes, bills of exchange, and the like.
The proposed amendment does not delineate the specifics of any program or facility, but rather it leaves such details to the purview of the CBB’s Board, subject to the approval of the Minister of Finance and parameters set by section 68 of the Bill. For instance, apart from mandating that the CBB must take steps to ensure “that the security for any” program is “sufficient to protect taxpayers from losses”, it also obliges the monetary authority to ensuring that program is strictly designed for the “purpose of providing liquidity to the financial system, and not to aid a failing financial company”. Among the Section-68 restrictions, the Bill also prohibits lending to insolvent firms.
While it was not specified in the Bill itself, Belize’s Prime Minister Hon. John Briceño, speaking in the House of Representatives, alluded to another “restriction": That is, that any program or facility must be tailored exclusively to providing cheaper source of financing to non-financial-sector firms that generate foreign exchange. For a country with a fixed-exchange rate regime, that sort of requirement is fairly practical.
Briceño also spoke on the fact that while the country’s banking system does indeed have close to $400 million in excess liquidity, these monies have not necessarily flowed to the private sector to the degree necessary. The rationed state of lending is likely due to myriad of factors, including as cited earlier the cash-flow-constrained state of many business entities since COVID 19, a fact that is especially true for the Tourism sector.
Speaking to TradeScape360, Ervin Perez, managing director of financial advisory firm Legacy Fund Limited, said, “Given the sharp rise in risk perception and decline in credit approvals in the market brought about by COVID 19 and its associated recession, as well as the realities of the Government’s fiscal space limitations, the expansion of the available CBB’s tools to assist is a prudent strategy.”
Perez, having underscored the point that these new powers are in line with what other Central Banks have exercised in developed and emerging markets, reminded that Belize still needs to be judicious in how it manages these programs. “Belizean regulators would need to ensure that these facilities are used carefully, especially considering that the country does have need to monitor its peg with the United States.”