Bank of Guyana - ChrisRam.net - Page 4

Clico, contagion, containment and concealment

If a loss of public moneys should occur and, at the time of that loss, a Minister or official has caused or contributed to that loss through misconduct or through deliberate or serious disregard of reasonable standards of care, that Minister or official shall be personally liable to the Government for the amount of the loss.

Introduction
This is a direct quote from section 49 of the Fiscal Management and Accountability Act which President Jagdeo signed into law in late December 2003. The Clico affair and related matters may be a good time to draw attention to the provision which has never been tested at the higher levels. When the dust settles, the taxpayers, NIS contributors and beneficiaries, members of pension and medical schemes and depositors in Clico and potentially in Hand-in-Hand Trust (HIHT) and the New Building Society could lose collectively several billions from the fall-out in the financial sector.

Other consequences will be equally severe, if not always as direct. Jobs will have to go. Moreover, with perhaps billions invested in Stanford Investment Bank (Stanford) by the HIHT and other so far unidentified pension schemes and individuals, their losses and their income stream − all in US dollars – will be gone. With the assertion that our economy is ring-fenced having proved naively misleading, and claims by Clico, the President, the Minister of Finance and the Commissioner of Insurance − all acknowledged as very bright persons − having proved to have been misguided at best and been guilty of misrepresentations at worst, there is a loss of confidence not only in the judgment and competence of our economic managers, but also in the independence and ability of the regulators to protect the public interest.

Last Wednesday, Ms Maria van Beek, the Commissioner of Insurance, presented a petition to the court seeking an order that Clico be wound up or alternatively, that a Judicial Manager be appointed. One day later, Ms van Beek was granted her wish by Chief Justice Ian Chang in an order returnable tomorrow, Monday, appointing her as Judicial Manager of the entity which she has supervised for more than five years. Instead of immediately issuing a statement advising affected persons – numbering tens of thousands – of the implications that flow from the order, Ms van Beek proceeded to the Office of the President for a press conference, where along with the Minister of Finance Dr Ashni Singh and the Governor of the Bank of Guyana (the Bank) Mr Lawrence Williams, she sat silently as the President made excuse after excuse for the failure of Clico and gave vague statements about protecting pensioners without once using the G word – guarantee − which is what people, worried about their savings, pensions, medical schemes and jobs most need.

Blame The Bahamas
President Jagdeo, who is not the responsible Minister, told the nation that it was the collapse of Clico Bahamas that triggered the action by the commissioner. Yet that is not what the commissioner said in an affidavit sworn to the court one day earlier. She said it was the business model and investment policies pursued by the company. The President, seeking to protect Ms van Beek and by extension his Minister of Finance, told the nation that the commissioner had told Clico more than one year ago that they should have regularised their investment position. So, did the commissioner write the company and then sit back as they breached the law even further? The problem with the President’s style of intervention is that at best, he does not check the accuracy and implications of the statements he makes and increasingly often, he is wrong. There is no need to remind anyone of the damage caused by such lack of respect for accuracy as we saw in the saga of tax concessions necessitating an amendment in the law to facilitate Queens Atlantic Investment Inc’s tax concessions.

In matters financial details are important and so is judgment, particularly when it involves self-serving statements. When the President assured the nation on February 5 that Clico’s assets were sufficient to meet its liabilities he was repeating a company line without having read the December 31, 2007 analysis showing that 81% of the company’s assets was invested in related parties, all of which were under various degrees of threat (SN February 7 and Business Page Feb 8 reported on this analysis). In fact as Minister-Extraordinaire he should have known that the 2008 figures had shown some deterioration, suggesting that the commissioner’s call was ineffective and/or ignored. Both he and the Minister of Finance should have wondered how a company that issued “insurance policies” with premiums running into billions of dollars only needed a statutory fund of under fifty million dollars.

Disregard for reasonable care
The disregard for reasonable care does not end with them. The nation would have expected the Commissioner of Insurance and the Bank of Guyana to recognise that those policies were investment products dressed up as insurance. It is hard to believe that such a major issue would have escaped the attention of the Bank with illustrious directors of the calibre of Drs Gobin Ganga, Prem Misir and Cyril Solomon.

Given the poor oversight exercised by the regulators in general and the Commissioner of Insurance in particular, the court would have been reluctant to appoint Ms Van Beek to manage the operations of Clico under its supervision. Her demonstrable failures to act expose her inappropriateness for such a job, or even to have been the lead regulator for an industry which also required legal expertise. The problem for the court is that the law appears to have given it little choice. Yes, the court could have made a winding up order on the ground that Clico is insolvent, and use the more practical test of “inability to pay one’s debt on demand” that may very well have been the case. But the Insurance Act makes it a bit more difficult for the court by requiring a determination of the value of a troubled company’s assets and liabilities, never an easy task even for accountants. The President compounded the difficulty by volunteering that he hoped that the entire sum from The Bahamas company would be recovered even as he failed to address the billion dollar debt owed by CRL, the Guyana forestry product subsidiary of the troubled CL Financial which has guaranteed the debt.

Once the court chose not to go with the winding-up option – though this may still happen at some time – section 68 of the act gave it no choice but to appoint the commissioner as the Judicial Manager. Apart from the fact that her past supervision of Clico inspires little confidence, and her inattention to detail was embarrassingly exposed when she wrongly identified the name of Clico in her petition, what then becomes of her statutory role and function as Commissioner of Insurance over Clico and the rest of the industry, including Fidelity, which would ordinarily require full-time attention? Additionally, there appears to be a conflict between her two roles which the court would have to consider given that the court itself is not equipped to make business judgments.

NIS
The poor NIS could stand to lose six billion dollars in investments in Clico which may not have been made in compliance with the NIS Act. This is no small change. It is the equivalent of more than 20% of earnings accumulated over forty years by the Scheme and about one year’s benefits payment. To check on the propriety of the investments, I wrote Minister of Finance Dr Ashni Singh a letter on February 24, pointing out that the NIS Act only allows the NIS to invest in securities approved of by the Co-operative Finance Administration (COFA) established under the Co-operative Financial Institutions. I pointed out that he is not only the Chairman of COFA but as Minister, appoints the Board of COFA. The Minister of course also appoints the Board of the NIS. I asked him the following questions:

1. The names of the persons he appointed to COFA currently serving as members of the administration, and the commencement and termination dates of their appointments.

2. The securities which COFA approved for purposes of investment.

3. Whether the NIS had sought and received approval for any investments other than those determined by the administration and if so, the securities which have been so approved.

4. Whether the administration during his tenure as Minister has ever taken the opportunity under section 4 of the act for its Chairman or Secretary to attend any meeting of the National Insurance Board, and in particular the meeting at which any decision was made by the board for any special investments.

I am awaiting his response. But if it were owing to the Minister’s “misconduct or through deliberate or serious disregard of reasonable standards of care” COFA did not approve of NIS investing in Clico the Minister would have some serious questions to answer, not to Business Page but to the nation.

To make matters worse for the NIS, Clico was allowed, even while Commissioner van Beek, the Minister of Finance, the President and the Bank of Guyana were “monitoring” the imperilled insurance company, to divest itself of $1.5 billion dollars of bonds in the Berbice Bridge Company Inc. The Board of the NIS, all the members of which are either ducking or hiding, needs to explain to the nation whether the terms of their $6 billion investment in Clico were breached by the sale of the bonds and whether the Scheme feels that its investment is any safer now.

The New Building Society
More than ten years after privately as a director of NBS and publicly as a columnist, I advocated that the country’s only building society with more than one hundred thousand persons’ savings and loans involved be brought under the supervision of the Bank of Guyana, the Bank exercises no jurisdiction over the NBS. During that time the government has drastically increased the lending limits while relaxing the conditions and security required to back the loans made. One only has to consider the Savings and Loans crisis in the US in the late eighties to appreciate the possible consequences of such laxity. But there is more to worry about. The board has also become increasingly politicized with its current Chairman being Head of the Public Service in the Office of the President and the decision about the new Head Office involving hundreds of millions of dollars being made against technical professional advice. Quietly, the NBS has been joined in the failed attempt to prevent the demise of Clico. The NBS has bought over $1.5 billion dollars of bonds in the Berbice Bridge Company Inc from Clico, and it is unlikely that this would have happened without the official agreement and sanction of the Office of the President in which both the Chairman of the NIS and the Chairman and one director of the NBS are based, or the Ministry of Finance which has to approve investment in securities issued by the Berbice Bridge Company.

The danger is obvious. The NBS with assets in excess of $30 billion is unsupervised and unregulated but subject to powerful political influences. If the bridge company which is proving the sceptics right about the hugely optimistic traffic projections, and the board, which is chaired by the Clico CEO, cannot meet its financial obligations to bondholders, $1.8 billion of the funds of the NBS – representing about 40% of its reserves – would be at risk. That is real money which added to the Head Office being constructed at a cost of approximately $800 million could pose real trouble for the society.

Once again the recurring players are the President, the Minister of Finance and the Bank of Guyana, the last-named of which has failed to assume any jurisdiction as it should have. Of course this in no way exonerates the Chairman and directors of the NBS from their fiduciary obligations.

Hand-in-Hand Trust
The President also referred at the press conference to the investments made in Stanford by the Hand-in-Hand Trust, which holds depositors’ funds and manages some of the country’s largest pension schemes. He said that in the case of the HIHT, “total current exposure” to the Stanford Group amounts to $827 million or US$4 million, in addition to $297 million or US$1.5 million invested on behalf of pension funds. He then went on to confuse the nation by referring to the direct exposure which he said represented 9 per cent of the total assets of HIHT.” Whether it is 9% or closer to 10% is less important than the fact that this is not how one measures exposure. With the head of the Bank of Guyana and the Minister of Finance sitting in at the press conference as his technical advisors, the President as an economist should know that the measure should have been total exposure of the company – direct and indirect – relative not against total assets which do not belong to the company but only to equity which does. In other words he was downplaying the problem in more than one way.

The question has also been raised whether it was permissible for the HIHT, regulated by the Bank of Guyana under the Financial Institutions Act, to place so much of its funds in a single investment – what lay persons would refer to as putting too many eggs in one basket, but which the more technically-minded Bank of Guyana would call asset concentration. In the case of the failed Globe Trust, the Bank of Guyana received more than a mild criticism from then Chief Justice Carl Singh for its poor oversight. It must now hope that by some miracle the investment by HIHT in Stanford will be recovered. If that does not happen, then the Bank can expect not only a strong rebuke but perhaps even a lawsuit.

Conclusion
Faced with a financial crisis, the first step is containment. Instead we had concealment with the consequence that it has widened and enlarged now including, with potential negative and costly consequences, the National Insurance Scheme, the New Building Society, pension schemes and savings accounts of hundreds of thousands. Confidence is also crucial but this comes only from the competence, judgement and independence of our leaders and regulators. None of these qualities has been adequately demonstrated in this instance by the President, the Minister of Finance, the Commissioner of Insurance, the Bank of Guyana, the National Insurance Scheme and the New Building Society.

The rest of the financial sector and perhaps with one exception the insurance sector all appear very solid. Every effort must be made not to contaminate them and to restore confidence in the entire system. I believe that the National Assembly needs to take an active role in this.

Staggering increase in external debt

Bad news
The country’s stock of external public and publicly guaranteed debt rose by 20.3 per cent to US$804 million from the end of September 2007 to the end of September 2008. This dramatic increase has been reported in a quarterly report by the Bank of Guyana for the nine months ended September 30, 2008. As a consequence, external debt service costs increased by 10.5 per cent to US$11.5 million, reflecting new debt payment schedules primarily for multilateral creditors. These were among a number of interesting issues raised in a most commendable effort by the central bank, and the Governor, Mr Lawrence Williams and his team deserve kudos for what appears to be a first for the bank.

Otherwise the report makes for a most depressing report on the management of the economy by President Bharrat Jagdeo and his Finance Minister Dr Ashni Singh, of whom so much was expected when he first was appointed a minister after the 2006 elections. By almost every measure the economy in the three months July to September 2008 performed worse than it did in the same quarter in 2007.

There was lower output in all the country’s major commodities during the third quarter of 2008 compared with the same period in 2007. Sugar fell by 3.6%, rice by 1.6% and poultry by 12%, while in forestry products, diamond and fishing the story was the same. Someone counted the eggs and came up with a 64% increase in the country’s production of eggs while there was modest growth in the mining sector, including the foreign owned bauxite companies blessed with generous concessions which the government has refused to disclose.

More bad news
If the overall performance of the manufacturing sector is depressing, the non-performance of segments of the sector must be a cause for serious concern. The production of paints and alcoholic beverages increased by 1.7 per cent and 6.3 per cent, respectively, whereas there were declines in the production of pharmaceuticals by 2.5 per cent and non-alcoholic beverages by 33 per cent. Our pharmaceutical company is another beneficiary of concessions and valuable contracts to supply Indian manufactured drugs to the government.

And if non-alcoholic beverages include Coke, Pepsi and I-cee, is it an error or did we in the third quarter produce only two bottles when three months earlier we were producing three? Where are we going and what does it say that a senior official of one of those beverage companies is a top member of the increasingly useless National Competitiveness Council?

Inflation
The Bank of Guyana, sourcing its information from the Bureau of Statistics reported that the inflation rate “during the third quarter of 2008 grew by 7.8 percent compared with 13.9 percent for the corresponding period in 2007.” There must be some error here, however, since the inflation during the quarter could not be 7.8% and was probably the rate for the nine months. The food basket maintained by Ram & McRae for the quarter reflected an increase of 8.2% over the three months but for the year the firm’s basket of food showed an increase of 33%, similar to the increase in Trinidad and Tobago. Conveniently, the Bank of Guyana concludes, without offering the kind of analysis and evidence expected from such a body, that the level of inflation in Guyana was driven by higher international fuel and commodity prices.

What is troubling is that the report indicates that price data for the third quarter were not available. Yet we will be expected to accept without question inflation figures pronounced by Dr Singh when he presents another of his big budgets that would not only include all of the third quarter but the entire year! It is hardly surprising therefore that leading economists and the public have ceased to give any credence to the numbers provided by the government, particularly on inflation and GDP, two politically sensitive variables.

Wages and employment
The Bank of Guyana clearly forgot that these are key issues in the economy since they give them a complete pass, meaning no mention. Expectedly, it did devote much attention to the financial sector reporting that the foreign exchange market continued to grow during the review period. The bank seems to forget as well the role and scale of the underground and parallel economy, and as our newspapers show, the role of drug money in the economy. It has decided, again without solid information, that sales of foreign currency “were related to higher import costs.”

Almost half of the transactions by value in the foreign exchange market were accounted for by the cambios with the bank itself purchasing some US$376 million, comprising mainly purchases of US$212 million from GuySuCo and the Guyana Gold Board. Despite the perceived strong links between the non-bank cambios and the underground economy the report does not reflect any cause for concern on the part of the bank in its supervisory role over these entities, most of which are unincorporated businesses not requiring independent audit of their books.

The drugs trade
At least as readers of the daily newspapers, the bank must be aware of the drug trade with its own oligarchy. And so too must be the one-man Financial Intelligence Unit, located within the Ministry of Finance, that is supposed to prevent money-laundering. The report indicates that sales by the non-bank cambios represented 8% of total currency sales. Even Lewis Carroll would have hesitated before writing this figure. This column has criticised the law regulating the non-bank cambios, noting that they have outlived their initial purpose and called for their abolition. In a remarkable sign of impotence and or lack of will, the response has been that it will drive the business back onto the streets. This seems to suggest that instead of running the country on the basis of laws, we are at best closing our eyes and ears to reality, operating on fear of stepping on the toes of the powerful.

Despite the bank’s poor record of supervision of the cambio sub-sector the report devotes several pages on the remittance business, advising of the steps being taken to bring it under its control. The report notes the significant increase in the inflow of remittances during the past six years, increasing from US$3.4 million in 2002 to US$224.4 million in 2007. In the first half of 2008, net flows of remittances increased by 6.3 per cent, or US$6.6 million to US$111.8 million compared to half year 2007. Interestingly, Caricom countries now rank only behind the United States of America as the dominant countries from which Guyanese receive remittances.

Tax, borrow and spend
The report emphasises that the overall surplus of the public sector contracted during the review period, resulting from relatively higher expenditure by the central government since receipts from corporations and tax revenues increased slightly. The tax and spend approach that has characterised President Jagdeo’s style of financial management seems to have been taken to new levels by Dr Singh. With him at the helm of the Finance Ministry, it is now tax, borrow and spend. Since moneys borrowed have to be repaid later, no government, elected or otherwise, should be allowed to borrow away the future of a country. There should be a cap on how much a government is permitted to borrow, even if it is to stabilise excess liquidity in the financial system as the report indicates.

The report which was created in PDF format on December 29, 2008 for publication on the bank’s website “predicted” that in the fourth quarter, the economy would continue its growth path, particularly in the mining, construction and services sectors, and that the agriculture sector which had faced “minor setbacks in the third quarter” would register modest growth. Clearly it could not be referring to sugar where the drama became even more surreal. In a cleverly worded disclaimer for the (mis)management of the economy, the report notes that the efficacy of the bank’s policies will depend on the stance of central government fiscal policy. And we all are aware of the history of that policy.