The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor has revealed there are “pending” legislative reforms that are designed to “gradually reduce” the Government’s dependency on it to provide debt financing.

John Rolle, in a recent e-mail to Tribune Business, disclosed that the Government had agreed “in principle” to enacting such reforms by changes to the Central Bank Act.

“There are reforms pending to the Central Bank Act, [for] which we have received the Government’s endorsement in principle, that would gradually reduce (but not eliminate) the public sector’s reliance on funding from the Central Bank,” Mr Rolle revealed.

“Once this progresses we will be relying on new tools to manage liquidity that would only indirectly expose the Central Bank to holding government debt.”

Mr Rolle did not reply before press time to Tribune Business requests for him to expand on this, especially the specific nature of the reforms, the rationale for enacting them and how they will work.

However, his disclosure followed a pledge by K P Turnquest, the FNM deputy leader, to probe what he termed the “very worrisome” increase in Central Bank financial support for the Government.

This came after the Christie administration had to meet more than $100 million in one-off demands, on top of its $86 million first quarter deficit, during the three months to end-September.

This involved the Bahamian taxpayer, via the Public Treasury, picking up the “entire” $40 million Bank of the Bahamas rights issue, after none of the BISX-listed institution’s 3,000 minority investors elected to subscribe for their allocation.

Patricia Hermanns, the National Insurance Board’s (NIB) director, confirmed in an e-mail to Tribune Business that NIB took no part in the rights issue.

“We wish to clarify for the record that the National Insurance Board did not participate in the rights issue,” she said.

“The Minister of Labour and National Insurance, Shane Gibson, clarified this point on the floor of the House of Assembly.”

The Government also had to fund HoldingCo’s $62 million share of the start-up costs for the new mobile operator, Aliv, and Mr Turnquest said it was “reasonable” to ask why the Central Bank had increased its holdings of government debt securities (bonds and Treasury Bills) during the three months to end-September 2016.

He, and others, were querying whether the Central Bank’s increased financial support for the Government is a sign that the latter has exhausted its borrowing capacity with the private sector and other sources, forcing it to turn to the regulator as ‘lender of last resort’.

The Government’s increased reliance on the Central Bank was revealed in the latter’s monthly economic developments report for October, which said: “On the monetary front, an increase in Central Bank financing to the Government supported the growth in bank liquidity, while external reserves contracted, on account of the season uptick in foreign currency demand.”

The Central Bank’s increased holdings of government debt securities were said to have produced a $62 million increase in excess commercial bank liquid assets, which totalled $1.494 billion at end-October 2016.

Mr Rolle, though, said at the time that too much was being read into this, and that there was no cause for concern or speculation.

He added that any financial support the Central Bank provided to the Government was typically replaced quickly by the placement of Bahamas Government Registered Stock (BGRS) issues, two of which are designed to raise a collective $30 million by next week.

Mr Rolle, in his subsequent e-mail to Tribune Business, also took issue with suggestions that linked the Central Bank’s provision of funding to the Government to declines in the foreign exchange reserves.

Describing such assertions as “not accurate”, he added: “For 2016, the foreign reserves will end the year higher than in 2015.

“By the line of reasoning in today’s paper, the [Central] Bank’s credit to government should have declined in 2016, which is not the case.”

The Central Bank governor explained further: “The link between external reserves and credit expansion, and foreign reserves, should always be analysed in the macro sense.

“Our reserves are a residual component of the difference between total domestic credit expansion and domestic deposit growth. That is credit either by commercial banks or by the Central Bank, to the combination of public or the private sector. A careful read of the Central Bank’s reports would show that we always explain changes in the foreign reserves in this context.”

Mr Rolle then added: “A constructive analysis of Central Bank credit to government should consider whether it adds to an unsustainable trend in total domestic credit, or if it displaces private sector access to credit. Neither trend is presently the case.”