Meeting economic

challenges head-on

THE importance of the banking sector overall to enhance private sector development was critical if Pacific Island countries were to meet the challenges confronting them, said

New Zealand foreign affairs and trade minister Mr Don McKinnon.

He made the comments, at the recent Forum Leaders’ Meeting in Pohnpei, Micronesia, in a paper titled “Banks as the engine for growth in the private sector”.

Mr McKinnon said governments could promote efficiencies within their banking sectors through deregulation and increased liberalisation. He praised an announcement by the Samoan Government earlier this year to remove interest rate and credit controls,

saying it was a good example of the types of reforms required if the region was to make banking more efficient. “While banks in the region will continue to look at their bottom line, they are, it would seem, becoming more aware of their responsibilities to promote economic development and are beginning to look at ways they can achieve this,” he said. The private sector, the minister said, was the key to prosperity, and banks a potential engine for growth.

“As with any engine it requires to be correctly tendered and operated in condi tions aimed at maximum efficiency. The people whose responsibility it is to keep the engine running smoothly - that is peo ple in government - need to have the right skills and knowledge to make those con ditions as attractive as possible. In other words if we are going to make our banks work for us we need to get the fundamen tals right,” Mr McKinnon told Pacific Island leaders. He said the Asian crisis demonstrated that badly managed banks could contribute more to recession than to growth. But, he said, the economies that would ride out the storm best were those that already had strong, transparent finan cial systems in place. Mr McKinnon said there needed to be “an open and trusting dialogue between the financial sector and government. This is clearly important for our domestic business sector as well as potential foreign investors which we all depend on”. He said the complexity of managing 21st Century banking practices with “traditional” subsistence based com munities, often remotely located, could not be ignored.

Governments and the public alike, he said, placed unreasonable expectations on development banks, which have “all too often been used to lend to government determined priority areas”. He said reduc ing the high risk nature of banking in Pacific Island countries was, “to a certain extent, dependent on the ability of gov ernments to foster sound fiscal policies and monetary conditions. The strength of the domestic economy and its medium term outlook will also significantly influ ence banks’ willingness to lend”.

Mr McKinnon said “banks are critical to the mobilisation and custody of sav ings, the channelling of credit into its most productive uses, and the operation of a prompt and efficient payment system - all of this using a reasonably stable cur rency as the medium of exchange”. ■