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THE ST.

VINCENT GOVERNMENT SAVINGS BANK A suggested new role

By Claude C. Samuel

Ministry of Finance September, 1967

THE GOVERNMENT SAVINGS BANK A suggested new role

Introduction The word ‘infrastructure’ is usually understood to refer to those basic physical structures – transport and communication system, basic education and health facilities etc. – which are generally slow in yielding their fruits and on which a country has to spend a great deal of its resources in the early stages of its development. The word is not normally associated with finance. However experience elsewhere seems to suggest that while economic development can hardly take place below a certain point of infrastructural development, the inadequacy of the financial infrastructure can similarly retard development. If such is the case then the building up of an effective financial infrastructure becomes just as important as the provision of an adequate physical infrastructure. [An important feature of an infrastructure is that it is local it cannot be provided for by importing it.] An effective financial infrastructure cannot be built up overnight nor can it be allowed to ‘just grow’ – “the developing countries have not time to wait for this to happen. Nor is it necessary that they should do so; there has been enough experimentation and accumulated knowledge to lay down with fair confidence both what is required and what is feasible.” (U. Hicks – Development Finance). In other words the financial infrastructure must be planned as a part of an integrated development policy. The financial infrastructure has four basic element viz:(i) (ii) (iii) (iv) the currency the Central Bank an effective commercial banking system (including savings institutions) a foundation for the growth of developed monetary institutions such as a money market and a stock exchange.

This paper is concerned with an aspect of the third element and in particular with the operation of the Government Savings Bank (G.S.B). It will be suggested that this institution is not contributing to the development needs of the economy. A number of reforms will be suggested which should go a long way towards ensuring that the bank makes its maximum contribution to the territory’s development.

[One must not conclude that the other elements are of any less importance. On the contrary, the basic element is the currency arrangement and the present system offers scope for substantial reforms. Such reforms will however have to be on a regional basis and will need the active cooperation of the Currency Board. The particular element under consideration in this paper lends itself readily to action at the national level.] In Part II the role of domestic savings in the public sector of the economy is discussed and the place of the Government Savings Bank (G.S.B) in the mobilization of domestic savings is indicated. In Part III a brief history of the G.S.B. is attempted and the main features of its operation are set out. Its efficiency is analysed from both sides of the balance sheet and a number of reforms are suggested. Part IV summarizes the main reforms. II. Domestic Savings and the Public Sector One of the major problems currently facing the public sector of the economy is the inadequacy of its financial resources. The position is one in which the proceeds of current revenue (i.e. taxation and other current receipts) are insufficient to pay for existing government services on current account. Budgetary aid on current account is a very important part of the total amount of financial resources available to the government sector in any one year. The realities of a small economy like St.Vincent are such that its development needs will require external finance for sometime yet. But even if this is granted, it will be admitted that undue dependence on external sources of finance (grants or loans) does tend to carry with it a certain amount of undesirable features which one should try to minimize. In so far as it is considered desirable to be rid of the constraints imposed by this dependent status, increasing importance will have to be given to local sources of finance. The role of domestic finance in economic financing investment in under-developed areas is being given great emphasis in international monetary circles. A.U.N. Commission on economic development explained that it “emphasized so much the role of domestic finance in economic development because it believes that that is the pre-requisite for enabling countries to implement the social, political and economic policies which they consider most suitable for the improvement of their standards of living. The role of foreign finance in economic development can therefore only be of a subordinate character …” (U.N. – Methods of Financing Economic Development in Under-developed Countries). Economic development presupposes investment i.e. the expenditure of funds on new productive capital assets. Out of a given amount of current revenue (Government income) that portion which is not spent on recurrent expenditure (Government consumption expenditure) will be available for investment. This excess of current

revenue over current expenditure results in a ‘budget surplus’ which is the ‘savings’ of the Government. Such savings can then be used to build feeder roads, electric power stations, irrigation dams etc. and other projects which will increase the productive capacity of the economy. A Government can also have funds for investment with a ‘balanced budget’ (i.e. Current revenue equal to current expenditure) if the people save and lend to the Government. If it is consider that the political climate at any point in time is not conducive to increased taxation in order to achieve a ‘budget surplus’, the only alternative (assuming no foreign aid) is to get the people to save and to make such savings available to Government. The G.S.B. is ideally suited to effect this transfer of resources. The efficiency of any financial institution has to be judged from two points of view. Firstly according to its efficiency in accumulating deposits (liabilities accumulation) and secondly with regard to its efficiency in the distribution of the funds so mobilized (asset distribution). The operation of the G.S.B. will be analysed within this framework. III. The Government Savings Bank – history and analysis to 1964 The G.S.B. as constituted today was set up in 1936 under enabling legislation – Ordinance No. 1 of 1936. Offices are maintained at the Treasury in Kingstown and the District Revenue Offices at Georgetown, Barrouallie, Bequia and Union Island. A significant feature of the Ordinance is that “all moneys deposited in the Savings Bank together with interest thereon is guaranteed by the Government of St.Vincent ….” (Section 8). The stability of the system is therefore dependent on people’s confidence in the ability of the Government to manage its affairs in such a way as to be able to meet all possible calls. Interest at 2½% per annum is paid on deposits. This rate has remained unchanged since it was set in 1936. There is an upper limit of $4,800 on the amount any depositor may hold in his account and no interest is paid on amounts which may even temporarily exceed such limits. The present limit was set in 1940 representing a 100% increase from the previous limit of $2,400 “in order to help the war effort”. The following table gives for the years 1954 – 1964 the total at the credit of depositor’s account at the end of each year, and the total of deposits and of withdrawals during each year.

Year

Total Deposits during year $ 241,871 232,056 305,056 328,740 354,900 350,387 287,856 302,122 237,490 264,764 233,379

Total withdrawals during year $ 215,649 237,573 289,034 307,349 339,138 362,862 353,558 313,842 351,218 282,283 265,921

Net deposits (Col. 1 minus Col. 2) $ 26,222 5,417 16,022 21,391 15,762 11,475 65,702 11,720 113,728 17,519 32,542

Interest credited during year $ 14,395 15,197 15,323 16,158 16,973 17,463 16,729 16,850 14,651 13,981 13,679

1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964

Total deposits a/c end of year (includes interest credited $ 627,744 637,461 668,802 706,375 739,135 744,122 695,152 700,331 601,231 597,750 578,750

(Source: Audited Accounts of Government Savings Bank)

This picture is one of a steady rise in total deposits from $628,000 in 1954 to $744,000 in 1959 (col. 5). From 1960 however the “rot set in” and right up to 1964 the total at the credit of depositors’ accounts showed a steady decline (except for a slight reversal in 1961 due to the excess of interest payments ($16,850) (col. 4) over net deposits ($11,720) (col. 3). Massive net withdrawals took place in 1960 ($65,702) and in 1962 ($113,728)*. The available figures for 1965 and 1966, though incomplete indicate a continuation of the adverse trend in total deposits. At the end of the period under review the amount at the credit of depositor’s account was some $50,000 less than what it was at the beginning of the period of ten years before. It is clear that the Bank cannot be said to have been particularly successful in mobilizing savings. *Note: It is significant that 1961 was an Election year. In suggesting reforms for this side of the balance sheet i.e. deposits accumulation, the aim must be to get people (and other institutions) to save more with the Bank. While people save for a variety of reasons the following words of Sir Arthur Lewis (Theory of Economic Growth) are pertinent: “Experience shows that the amount of savings depends on how widespread these facilities [i.e. Savings institutions] are; if they are pushed right under the individual’s nose, to the extent of having street Savings groups or Factory groups, or even deductions from earnings at source, people save more than if the nearest savings institution is some distance away. Saving is also a habit which can to some extent be created by propaganda. People save more if they are given some acceptable reason for saving. They save more in wartime partly because they are persuaded that this is a patriotic thing to do; they might also save more in countries launching upon development programmes if these programmes caught their imaginations, and if they were persuaded that this is a way of making their contribution.”

The first reform which suggests itself will be to provide savings institutions “right under the people’s noses.” The re-organization of the G.S.B. to allow for it’s operation through the District Post Offices will be the logical way to do this in St.Vincent. Such reorganization will use existing facilities (no doubt some improvement in personnel and physical facilities will be needed in some cases) to mobizise the large number of small savings which are crucial to efficient capital accumulation in a dependent, low-income economy like that of St.Vincent. Economists differ as to the precise effect of the rate of interest on the amount saved. However, in spite of this disagreement, it is probable that a rise in the rate offered on deposits to say 3% or 3 ½% will have favourable results. It may be argued against the rise that it will increase interest charges with no necessary increases in the yield on investments but as will be shown when the assets side of the balance sheet is discussed, the cost of a rise in interest rate will be a small price to pay for the use of funds when the alternative is at 6 ½%. Another aspect of the Bank’s operation which will require some change is the stipulation of a limit of $4,800 on any one depositor’s account. The reason for a limitation, as stated in the ‘Ezechiel Report’ of 1935 (the basis for the Model Ordinance for G.S.B’s in the Commonwealth) is that it will prevent the bank being used for: “deposits which are not genuine ‘small savings’ but which may be temporarily attracted from other and more suitable channels in certain circumstances.” The Report continues that “the presence of such ‘uneasy money’ in any quantity constitutes a potential danger to the bank’s stability …..” The question to be asked at this stage is whether the forces which were then operating throughout the greater part of the Western World – the depression of the 1930’s and the general financial anarchy in the international monetary circle – giving rise to ‘uneasy money’ are still present (if ever they were in St.Vincent) to pose a threat to the stability of the bank. The answer must surely be in the negative and this limitation does not appear to be valid in the context of the 1960’s. If any limitation is deemed desirable the present figure would need to be increased substantially. The available evidence seems to suggest that this limitation has had an adverse effect on the accumulation of deposits which can hardly be put in the category of ‘uneasy money’. The following case is particularly instructive. In January 1964 the local representative of a Life Insurance Company forwarded to the Accountant General a cheque for $10,000 to open an account with G.B.S. This was as a result of a request by the representative to his Principals who readily agreed to the proposal. The cheque could not be accepted in view of the legal limitation. If the limit is abolished altogether or substantially raised it should be relatively easy for Government to persuade all Life Insurance Companies operating in the island (these institutions are very efficient mobilizers of savings which are invested mostly abroad) to hold on deposit some minimum amount in the G.S.B. Alternately, and this is perhaps

more desirable, they can be persuaded to make substantial contributions to Government’s development efforts directly. Then there is no reason why Government Boards and semi-commercial undertakings should not hold their surplus funds with the G.S.B. A most glaring example ( and others may be found) has recently been documented by Mr W.R. Carroll – the Marketing Board keeps substantial surplus funds on current account at a commercial bank earning no interest. Some $80,000 in his view can be placed on fixed deposits. Why not in G.S.B.? The attitude of officials in the past towards the bank was that it was some kind of social service. I do not think that it should be looked at in this light today. It should be made to serve the developmental needs of the economy. A National Savings Committee (officials and non-officials) should be set up to guide the ‘thrift propaganda’ (the Ordinance provides for expenses on such matters to be met form the Bank’s funds) which would be necessary to supplement any reforms. Members of Government can play a very important part in ‘spreading the word’ and in persuading people (locally and abroad) that this is a way in which they can make their contribution to the development effort, thereby demonstrating their confidence in the Government. The greater the confidence in the Government the less is the likelihood of ’panic withdrawals’ stemming from the real or imagined inability of Government to meet its obligations. In other words ‘confidence’ is crucial and this must be maintained. A National Savings Bonds Scheme combining a lottery element is likely to have some appeal. The Jamaican experience on all this (Savings Committee and Savings Bonds Scheme) should be invaluable. The MacIntosh Report mentions the possibility of introducing a lottery). Apart from any increase in deposits which is likely to result from these reforms one other desirable result, which is in a sense more important, is that more people would have got accustomed to saving in a financial institution. In so far as people ‘save under the mattress’ the effect is to withdraw money from circulation with the resultant dampening effect on economic activity. This is particularly so under existing currency arrangements which preclude the discretionary increase in the money supply. Saving in a financial institution especially a Saving Bank prevents this economic decline while it leaves the individual feeling just as ‘rich’ since his financial asset can be encashed at short notice. Turning now to the assets side, it will be found that the law stipulates that up to ⅓ of the total deposits can be invested in local securities, the rest must be invested in London. Although legal provision exists for local investment no such investment takes place.
[See list of Investments in 1964 in Appendix].

In other words of the $578,000 of savings mobilized locally up to 1964 all was lent abroad to U.K. Central and Local Governments, Public Corporations and other Commonwealth Governments.

A World Bank Mission to British Guiana in 1953 commenting on similar situation there said “although existing regulations provide that up to ⅓ of total deposits may be invested locally the funds of the Bank are invested …… in issues of the Dominions and of other Colonies. Whatever grounds may have existed for this practice in the past, it seems anomalous at the present stage that the development of other parts of the Commonwealth should apparently have a prior claim on British Guiana’s savings”. There appears to have been two instances of local investment from Savings Bank funds. A loan to Agricultural Credit Societies at 4% for 1 year and one of $24,000 to the C.H. & P.A. in 1964 at 3 ½%. In commenting on the second loan the Secretary of State said: “while such employment of funds is technically permissible under Section 11 of the G.S.B. Ordinance it is contrary to general colonial practice and would appear to be at variance with the intention of Section 11 of the Model Ordinance” (Emphasis mine). The Secretary of State went on to refer to the considerations which were intended to govern the investment of Savings Banks Funds locally and indicated that they should be invested in “publicly issued and marketable securities”, stressing the point that “the local loan, small as it is, is not a public issue and evidently not marketable”. It is important to note that this condition is not in the law – local investment is legally permissible but the criteria of such investment, that it must be publicly issued and marketable, made the law a dead letter since St.Vincent and other similarly placed Colonies could not possibly meet these criteria. The only rational thing to do in those circumstances was to remit all the funds overseas so as to maximize interest income. In view of Government’s guarantee to depositors this limitation on the type of investment that will be permitted is indeed anomalous, since in any case the Government has to find the money to pay depositors if they all came running to the Treasury tomorrow. If one takes the extreme case and assumes that the value of all existing foreign investments fall to zero, the Government is obliged to find the money to repay the depositors with all interest due. There seems to be no reason therefore why Government should not make use of as much of the deposits as is prudent to do, say up to ⅔ *as in Jamaica, since it has to pay when called upon to do so whether it has used the money itself in ways which precluded immediate realization or whether it lent the funds to a third party. The Ordinance also stipulates the monies of the Saving Bank should not be used to meet the day to day needs of the Treasury. Some such used took place in the past but was discontinued when it was realized that it was illegal. There is no reason why some of the Savings Bank’s funds should not be used by the Treasury for its day to day needs provided it pays interest at a rate not less than the rate at which the Bank pays on its deposits. If the Bank is temporarily short of cash provision exists for it to borrow from the Treasury with interest.

Note: *The Jamaica limit since 1957. The following gives the distribution of the Asset portfolio of the Jamaica Post Office Savings Bank as at 31st December, 1966. £000 Local – Short term (Treasury Bills) - Medium and long term Government Securities Foreign 509 6,175 6,684 1,670

(Source – Bank of Jamaica Bulletin – March 1967) The Treasury Bill system, i.e. short term (90 days) borrowing by the Treasury from the commercial banks, other financial institutions and the public, is one of the chief means used by Governments to secure funds at a relatively low rate of interest for their day to day financing. If some of the Savings Bank’s funds (i.e. a proportion of the ⅔ is used by the Treasury for day to day purposes, it is virtually the same as if the Treasury issued a number of Treasury Bills and the Savings Bank took up the whole issue. The existing arrangements preclude the Treasury from using any of the Savings Bank’s funds for day to day purposes, forces it to lend all abroad to 2 ½% - 4% and when the Treasury is faced with cash shortage it is ‘forced’ to borrow from foreign commercial banks at 6 ½%. The foreigner thus getting the best of both worlds’. The proposed use of $200,000 of Savings Bank funds in the capitalization of the Agricultural Bank is a step in the right direction. The Savings Bank does not extend credit and if deposits can be substantially increased, lending can take place indirectly through the Agricultural Bank. The former will thus enable “the owner of savings to retain liquidity individually while the latter facilitates long term finance collectively”. (NEVIN – Capital Funds in Under Developed Countries). In this way both banks are complementary and if efforts at increased deposit accumulation meet with success, the Agricultural bank should be able to lend at lower rates of interest than if it obtained most of its funds from other sources, since the cost of the Savings Bank’s fund will certainly be lower than funds from other sources. This paper has been based on the premise that the move from a ‘dependent Colony’ to an “independent Associate State” calls for a new look at our existing financial institutions. Another basic assumption is that we will have to provide the money from our own pockets so to speak to pay for most of what we want. Given these assumptions therefore, I have attempted to indicate an area in which modest beginnings can be made. Even though we may still have to beg and/or borrow abroad it will be in our interest to make the most of what we have since we are likely to get more help if it can be demonstrated that we are really trying to help ourselves. One final word of warning – this paper does not claim to be a blueprint, in fact, it is a rough outline of what, broadly speaking is needed to revitalized both sides of the operation of the Bank. It should be a good base for further investigation and discussion from which should emerge a plan for action.

IV SUMMARY OF MAIN REFORMS 1. Reorganise the operation of the Bank through the District Post Offices. (Mr Anthony of the Treasury had looked into the operation of the Jamaica Post Office Savings Bank during his attachment in 1966. Mr Williams, Postmaster, had also examined the U.K. system). A start can be made with Post Offices at Chateaubelair, Layou, Mesopotamia and Biabou. 2. Raise interest rate on deposits to 3 or 3 ½%. The Ordinance stipulates not less than three months notice of such change which must have Secretary of State’s approval (this latter provision will no doubt lapse on attainment of Statehood). 3. Abolish (or raise) limit on depositor’s accounts. 4. Request Insurance Companies to hold a minimum sum on deposit or preferably make attempt to persuade them to contribute to the territory’s development. 5. Surplus funds of Government’s commercial undertakings to be kept with Government Savings Bank. 6. Appoint a National Savings Committee and look into possibility of introducing a National Savings Bond Scheme with a lottery element. (The whole question of a public lottery can also be investigated) 7. Arrange machinery for voluntary deduction from salaries of Government employees for credit to Savings Bank account. 8. Amend law to raise the proportion of investments to be held locally from ⅓ to ⅔. This can be done in two stages, firstly to ½ and then to ⅔. 9. Day to day use of a proportion of Savings Bank funds by Treasury should be sanctioned.

Appendix ix Investments held on behalf of the Government Savings Bank as at 31st December, 1964
Particulars Redemption Date Face Value Market Value at 31st December, 1963 £ s. d. 865 0 0 1,861 17 0 1,440 0 0 1,884 14 9 3,372 18 7 8,962 0 5 2,281 6 4 3,010 10 5 1,010 16 7 17,500 0 0 960 1 9 1,721 4 11 428 18 5 7,050 0 0 143 7 5 575 11 5 946 9 11 2,984 13 0 7,602 1 9 977 10 0 9,939 6 5 900 0 0 13,168 4 5 1,107 13 10 2,173 11 5 30, 498 9 1 123,366 7 10 =$592,158.68

Australia 3 ¼ percent stock do. 3 “ “ do. 3½ “ “ British Electric 4½ “ “ do. 3 percent stock do. 3½ “ “ British Gas 4 percent Stock Conversion 3 ½ percent Stock Consols 4 percent Stock East Africa High Commission 4 ½ “ “ Essex 3 ½ percent Stock Federated Malay States 3 percent Kenya 2 ¾ percent Stock do. 4 ½ percent Stock Nigeria 3 ½ percent Stock New Zealand 3 ¼ percent Stock Northern Rhodesia 3 ½ percent Stock Savings Bonds 2 ½ percent Stock do. 3 percent Stock do. 3 percent Stock do. 3 percent Stock Sheffield 3 ½ percent Stock Tanganyika 3 ½ percent Stock Trinidad 3 ½ percent Stock War Loan 3 ½ percent Stock Joint Consolidated Fund -------

1965/69 1975/77 1961/66 1967/69 1968/73 1976/79 1969/72 1969 1957 1964/69 1952/72 1960/70 1971/78 1971/78 1964/66 1962/65 1955/65 1964/67 1960/70 1955/65 1965/75 1968 1970/73 1958/68 1952 ------

£ 1,000 2,659 1,500 2,043 4,269 12,193 2,622 3,401 1,630 20,000 1,185 2,013 686 10,000 151 587 951 3,279 8,996 1,000 13,252 1,000 19,223 1,210 3,988 30,498 149,344

s. d. 0 0 15 9 0 0 1 6 10 7 4 7 4 0 14 4 7 5 0 0 5 10 3 0 5 5 0 0 14 3 6 4 5 0 16 8 11 0 0 0 8 6 0 0 13 8 11 10 4 1 9 1 12 10