Liquidity talk: Possible cash hoard, says economist

Picture: FT FILE

THERE is a possibility that the private sector, especially large businesses, are sitting on liquidity.

That’s the view of University of the South Pacific economist Dr Neelesh Gounder, who said this could happen if the future seemed uncertain and cash was being held as a precautionary motive.

He said stringent taxation requirements could also encourage business owners to hoard cash and during tight liquidity conditions, commercial banks might find it difficult to fund their needs.

If this happens, he said, banks might become less willing to lend money to businesses and households, many of who rely on bank loans to meet their large financial obligations.

“However, while liquidity is at a comparatively lower level of around $300 million, this is not necessarily a shortage of liquidity,” Dr Gounder said.

“At this point, this should not pose any threat to financial stability. “While it is technically challenging to put a figure on the optimal level of liquidity, excess liquidity can be a concern as well.

“In addition to this $300m, banks would also have cash on hand of around $200m. There is also about $650m currency in circulation.”

He said although liquidity in general was regarded a positive characteristic of an economy, excess liquidity could be a cost to the system.

“Data from RBF suggests that commercial banks’ new lending for investment purposes fell by 5.9 per cent in January, most notably in sectors such as real estate and building and construction sectors.

“However, this is only for January and we need to see how this changes in the next few months,” he added.

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