Time value of money is the foundation of finance

BY Raymond Grant

Tuesday, December 25, 2018

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The local currency deposits into the financial institutions are approximately $933 billion. Out of that amount, the leading commercial banks, National Commercial Bank and Scotiabank Jamaica Limited, account for over $500 billion.

The typical Jamaican worker lodges his/her money into a regular savings account, paying between 0.6 per cent to 1.70 per cent depending on the amount at the time of deposit and the remaining balance in the account.

Now, my question is: What is the real rate of return to the ordinary Jamaican worker? Not the nominal rate, but the real purchasing power of the funds after one year since deposit.

Equation: [+rate of return* (1 - tax rate)] - inflation rate Example: $1,000.00 deposit, rate @0.6%, inflation 4.8%, taxes 25% = $956.50; a loss in purchasing power of -$43.50 in just one year or -4.35%.

This is a major reason the average Jamaican worker is getting poorer in real terms. The banks hold deposits of approximately $500 billion, loss in purchasing power per year to the depositors is $21.75 billion, resulting in losses to ordinary Jamaicans of $418,269,230.77 per week.

With a negative rate of return you will experience less demand for goods and services; hence, lower growth in the economy.

For this reason, the gross domestic product (GDP) of US$5,000 per person has remained static in excess of 10 years, because there is insufficient demand in the economy, and therefore no increased production from the productive sector.

Of course, it is going to be said that imports will increase. This should only happen if the Government sits idle and does nothing, when the tools of import tariffs are available to encourage local production.

I don't subscribe to the notion where so much emphasis is placed on growing what we consume. We should be producing what we grow best given our technology and geographic location. The overseas markets are there in the waiting to receive our products, it must be explored and developed. For example, you only need to visit Publix Super Markets and Walmart in the USA and see imported products from Central America and South America that can be produced right here in Jamaica. Of course, there will be goods produced for local consumption in the mix, but the emphasis must be on maximum output, especially for goods like coffee, mangoes, ginger, pimento, turmeric, and other spices, avocado, cocoa, coconuts, callaloo, gungo peas, pineapples, yams and plantains. We have not begun to tap the potential of coconuts and its byproducts. Coconut water is now one of the preferred drinks at the gas stations in Florida. And, what about our schools, where there is a shift from sugar drinks to healthy choices?

The coconut industry can play a significant role in this transition. This venture is a multi-billion-dollar industry, and undeveloped, and could be financed by the banks to the coconut board at low interest rates.

My research indicates that the interest rate spread is just about the highest in the world, which is the difference between what is paid to the depositors and what the banks charge for loans. Jamaica's at 15.5 per cent and the world average at 6.5 per cent.

It would not be unreasonable to request the banks to pay an equitable interest rate to depositors very close to the rate of inflation. But let me be very clear here, not in all cases am I suggesting the banks match the rate of inflation, especially whenever the Government officials “run with it” and demonstrate a total lack of fiscal discipline.

I am on the front line with all walks of life of Jamaicans, from the inner city to uptown. Let me tell you that the average Jamaican is getting poorer by the day; I really don't care what the statistics say. Being in the school system tells you almost everything you need to know about the average Jamaican. It is not a comforting situation.


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