Latest disaster is a flood of money

BANKS in Western Samoa have got themselves into the rather unusual bind of having too much money

on deposit.

So much cash flooded into the country by way of remittances following Cyclone Ofa that there are simply not enough borrowers to absorb it. The country’s two trading banks are losing money on much of the cash which is now being deposited.

Both the Bank of Western Samoa and the Pacific Commercial Bank are re quired to deposit surplus funds with the Central Bank. The problem is that the Central Bank pays six per cent interest on the money; but the Government sets interest rates for the commercial banks and insists they pay 10.5 per cent on term deposits lodged for more than 12 months, (most of the bank’s term deposits fall into that category). The result is that the banks are subsidising the Central Bank.

The general manager of the Pacific Commercial Bank, Michael Halloran, told Pacific Islands Monthly that his bank had possibly as much as SWSIS million (5U56.63 million) in deposits excess to its lending needs. He said the flow of remittances had been strong: over two weeks last October, a monitor of the inflow to Western Samoa showed remit tances from relatives abroad was running 70 per cent higher than at the same time the previous year. All up, about SWS92 million was remitted back to the country

by Western Samoans living abroad during 1990. The banks were “embar rassed” at the amount of money being deposited, said Halloran.

Pacific Commercial is still accepting some term deposits, but it clearly prefers customers who place money in cheque acounts or lower yield savings accounts.

Halloran said the bank has had an active lending programme to meet demands for reconstruction and development after the cyclone’s destruction.

The Central Bank last year raised interest on term deposits by 1.5 per cent.

The lowest rate on these is 7.5 per cent even those customers not putting their money on deposit for 12 months are being paid more than the commercial banks are getting from the Central Bank.

The issue is complicated by the fact that the Central Bank wants people to save and that is why it increased rates the commercial banks have to pay. If that money is spent, the fear is that Western Samoa will experience rampant infladon as an increasing pool of money chases a diminishing supply of goods, goods which can only be supplied by importing more.

The Central Bank has now asked the Government to allow it to issue Central Bank Securities as a means of soaking up all the excess liquidity in the country. At the moment the bank cannot deal directly with the public. □