Excess liquidity in the commercial banking system stood at $16.5 billion at the end of 2003 and Pravin Dave, CEO of Demerara Bank Limited (DBL), says it is imperative that this is sterilised or instead Guyana develops new money market instruments for investors.

Otherwise, Dave predicts, there will be a sharp deterioration of the Guyana dollar this year. The dollar depreciated by two per cent in 2002 as well as in 2003, taking the total depreciation of the dollar since 1998 to 18.6%.

The excess liquidity in the banking system averaged $15B per year in the last two years while the actual stock has varied at the end of each month. However, commercial banks' share of the stock of government treasury bills moved from an average $23B in 2002 to an average of $26.7B last year. This was while total loans and advances fell from an average of $50.5B in 2002 to $41B last year.

Dave, in his report to DBL shareholders today for the 2003 financial year says the liquidity in the system continues to be high and notes that interest rates on treasury bills have been on the softer side of 2.99%.

"This (excess liquidity) is also reflective of the lack of deployment opportunities for banks in the economy by credit and investment. Under this situation, it is imperative that excess liquidity in the financial system be sterilised; or we develop new money market instruments for investments; or develop avenues for gainful deployment of funds by developing (the) capital market in the country," Dave says.

Money market instruments are fixed income securities that mature in less than one year and are also known as cash equivalents since their marketability and characteristics provide easy liquidity. Included would be government securities, negotiable certificates of deposit, commercial paper, bankers' acceptances and mutual funds.

Acting Chief Executive Officer of Guyana's Stock Market, Patrick van Beek, says the range of instruments available in the money market in Guyana is limited to the Treasury Bill (T-Bill) but there has been no secondary trading in this instrument to date.

"For us to have a developed money market, you need to see some primary issue of longer term bonds," van Beek says, noting the success of the Caribbean Money Market Brokers in Trinidad which offers debt and equity and is also a broker in government securities (T-bills, T-notes and T- bonds).

There has been no signal to the exchange that the government may be willing to go this route and van Beek says the only new bond issue has been the debenture the government issued to the National Bank of Industry and Commerce Limited (NBIC) last year in keeping with its sale of the Guyana National Co-operative Bank (GNCB).

van Beek points out that the government can issue zero coupon bonds instead of T-bills, which are equivalent to longer term T-bills but the repayment is of capital as against redeeming T-bills at their face value. He notes that there need not be any exposure to interest rates as a floating rate can be applied tied to the T-Bill rate.

Local companies have not been known for using the bond mechanism to secure cheaper credit while still crying under the pressure of high interest rates from bank loans and overdrafts. Some of the larger companies have worked around provisions in the Income Tax Act with commercial banks to restructure loans as corporate bonds. However the government has put an effective halt to this by increasing the withholding tax rate applicable to earnings from such debt to 45%. One of the characteristics of a corporate bond is its tradability.

At least two private companies are currently in the process of raising funds through bonds but are using the private placement mechanism (issued to under 50 persons).

Bonds are a cheaper source of financing but because of a misconception that to go public would mean relinquishing control of a company's shares, many businesses are unwilling to go this route.

However, van Beek argues against this, saying it is a grave misconception of how the capital markets in Guyana operate today.

He explains that private interest only needs to be given up if a company wishes to issue new "shares" to the public or it wants to have its shares traded on the exchange.

van Beek says a company can register with the Guyana Securities Council as a "reporting issuer" (a public company) but the securities which it chooses to register - be they staples like shares or corporate bonds or more exotic instruments like options, convertibles or warrants - remain completely at the discretion of the Company.

"In fact it is possible to be a "public company", that is, a reporting issuer, without registering any securities at all! So a company in which the shareholders want to retain their interest could issue a corporate bond to the public, by registering as a reporting Issuer and registering the corporate bond as the only security. Though the company would remain "private" in the sense that the owners retain their private interest, it would be "public" in the sense that it would be registered as a reporting issuer and its bonds were issued to the public."

However, he notes that registering as a reporting issuer brings with it all the disclosure requirements.

"You must provide the same quality of information to the bond holders and potential investors as you would provide to shareholders if your shares were traded publicly. So all the requirements of Section 58 of the Act and the Disclosure by Reporting Issuers regulations would be required.

In addition the issue of the securities must be in compliance with Part VI of the Act (distributions) including a prospectus filed in accordance with Section 61 of the Act and prepared in accordance with the prospectus regulations. Nevertheless the costs of compliance may be significantly less than savings made if capital can be raised much more cheaply when it can be tapped through issuing the securities to more than 50 persons," van Beek says.