The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ fixed exchange rate has exceeded the average for small island states by coming under pressure three times’ between 1999-2010, an International Monetary Fund (IMF) paper has revealed, with its foreign reserves covering only 60 per cent of a new benchmark its authors have developed.

The paper, Reserve Adequacy in Emerging Markets and Small Islands, which has been obtained by Tribune Business, said that the 23 small island states in its sample had seen their exchange rates come under pressure once, on average, between 199-2010.

Its author, Nkunde Mwase, wrote: “Small islands have experienced about 30 episodes of exchange market pressure (EMP) between 1999 and 2010.

“Countries have experienced, on average, one episode of EMP pressure, though a number have experienced two or more - the Bahamas, Belize, Comoros, and Jamaica.”

Data attached to the report showed that the Bahamas’ fixed exchange rate, namely its one:one peg to the US dollar, had come under pressure in 2000, 2005 and 2006, although no further details were given to substantiate this.

Meanwhile, in determining a new ‘metric’ for measuring whether countries had an adequate level of foreign exchange reserves, the IMF paper came up with a formula for fixed exchange rate countries - such as the Bahamas - that required them to cover 35 per cent of exports, plus 10 per cent of the broad money supply and 95 per cent of the country’s short-term debt.

While acknowledging that this benchmark was more strict than that used by the IMF currently, the paper said that countries with foreign reserves covering 75 per cent of its metric were in an “adequate” position.

“The probability of a crisis for countries that hold about 75 per cent of reserves implied by this metric is less than 2 per cent,” the author wrote.

“Most countries hold reserves that would be adequate by the proposed metric. Based on end-2010 data, about 37 per cent of the sample was within the proposed adequacy range, with roughly 32 per cent with reserves above the range and about 42 per cent with reserves below the range. Of the 14 countries with cover below 100 per cent, six have currency unions and five have fixed exchange rate regimes.”

Graphs attached to the paper showed that in the Bahamas’ case, its foreign currency reserves in 2010 were only able to cover about 60 per cent of the paper’s benchmark, putting it among the 42 per cent of nations in the sample with cover below the stipulated range. Only Antigua and Barbuda and the Dominican Republic had lower coverage thresholds.

The time period assessed, though, was before the Bahamas’ foreign exchange reserves passed the $1 billion mark in April 2011 due to inflows from the BTC, BORCO and Baha Mar transactions.

The Central Bank’s report for June showed that foreign currency reserves remained relatively high, at $953.37 million, and Governor Wendy Craigg has frequently reiterated they remain at healthy levels and there is no cause for alarm.

Nevertheless, the IMF paper placed the Bahamas’ in 2010 as only having coverage for three months’ worth of imports. This was below the IMF’s four-month benchmark, and the paper’s five-and-a-half to six month metric.