Measure deigned to mop up excess liquidity in the banking system

The Central Bank of Suriname has increased the cash reserve ratio from 35 per cent to 39 per cent, meaning that the banking sector would have to deposit more cash to the banking regulator as banking prudential requirement.

The measure, which took effect on December 30, 2020, is designed to mop up excess liquidity in the local banking system. The Surinamese Central Bank says the monetary policy adjustment is attributable to the excess liquidity in the economy, which it says is a potential source of pressure on the exchange rate and thus also on the prices of goods and services.

An increase in the cash reserve percentage is usually accompanied by a slight increase in the interest rates that the banks charge on loans to compensate for the increased cash reserve ratio. However, analysts say the interest income that the banks will generate on short-term investments should mitigate the negative interest rate impact.

Remaining excess liquidity will be removed, offering short-sterm investments

But the Suriname Central Bank, in an effort to minimise a possible negative impact of the higher cash reserve requirement on the interest rates, will seek to remove the remaining excess liquidity by offering short-term investments to the banking sector.

In the second half of last year, the commercial banking sector mutually agreed with the Central Bank of Suriname to hold part of the required foreign cash reserves with the banking regulator. These funds will be ‘ring fenced’, meaning that these funds will be placed on a special account with a correspondent bank.

In implementing this arrangement, the Central Bank has managed the cash reserves of the commercial banks together with its own resources in a pool. This was done so that gross international reserves always had to be higher than the cash reserves obligations to the banks.

However, at some points, the liquid assets of the gross international reserves dropped below the Central Bank’s obligations. The Central Bank of Suriname has acknowledged this fact, explaining that when using these funds for foreign exchange interventions to support imports, debt repayments and other expenditures, it did not coordinate this with the commercial banks.

Nevertheless, the cash reserves used within the context of ‘pool’ management of the international reserves remains an obligation of the Central Bank, which will be honoured in all circumstances.