In the absence of a strong performance of the export sector and high inflows of foreign capital associated with external borrowing or development assistance from donor countries and organisations, a continued increase in the demand for imports will generate tremendous pressure on the balance of payments and create a major challenge to the authorities to maintain a satisfactory level of international reserves.
Within the context of a fixed exchange rate regime, a certain level of international reserves must be maintained by the Central Bank in order to protect the country’s exchange rate parity.
The maintenance of a satisfactory level of international reserves thus requires, among other things, careful balancing between the earning and use of foreign exchange. While exports earn foreign exchange, imports are associated with the leakage of foreign exchange. Hence, the maintenance of a satisfactory level of international reserves requires, at the minimum, policy initiatives aimed at both enhancing exports and curbing imports.
Once there are serious concerns that the continued rising demand for imports can potentially create major problems for the balance of payments, then, clearly, government has the moral obligation to take remedial measures even if those measures are implemented only out of caution.
If the Minister of Finance associates rising demand for imports with increases in credit demand; for example, and is concerned with the potential dangers of increased import demand for the country’s balance of payments and international reserves’ position, then, he would be justified in implementing monetary policies aimed at influencing credit conditions in the economy assuming that the demand for credit is a major determinant of higher imports.
According to the economic literature, the Minister of Finance has at his disposal several instruments of monetary policies such as reserves requirements, discount window, open market operations, credit ceilings, interest rate policy, and selective credit controls, which he can use to effect changes in the current credit environment. The present discussion focuses on selective credit controls.
The major objective of selective credit control is to manage the allocation rather than the total amount of credit granted by financial institutions. This broad objective makes selective credit control an attractive policy option for restricting the demand for certain categories of imports into a country.
In the present environment, the use of selective credit control can be justified if it targets the channeling of more resources for the extension of credit towards the productive sectors of the economy, especially those engaged in production for the export market, and limits the amount of resources available for the granting of credit for the purchase of imported consumer items that simply absorb foreign exchange.
Successfully implemented in this manner, a policy of selective credit control will improve a country’s balance of payments and international reserves position, thereby relieving potential pressures on the exchange rate.
Notwithstanding the preceding arguments, there is one caveat: If the Minister of Finance hints that he may very well implement selective credit controls if forced to should the high demand for imports continue, the financial institutions will be well-placed to devise alternative strategies to counteract the effects of selective credit controls if implemented and their actions could nullify the benefits to be derived from such monetary policy, making it necessary for the government to consider alternative macroeconomic policies to protect the balance of payments and international reserves position in a crisis situation.
(Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)