The Tribune

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

THE Bahamas "must have" a gradual approach to exchange control liberalisation, an Argentine economist said yesterday, adding that it was "critical" to have a well-developed economic framework in place.

Miguel Kiguel, speaking via Skype at a half-day seminar hosted by the Central Bank on exchange control relaxation, said there are considerable benefits but also risks to the liberalisation path the Bahamas is pursuing. "Most countries that have liberalised their capital accounts have done it because they think they can increase the pool of financing," said Mr Kiguel. "It tends to reduce the cost of financing because in emerging markets, capital is a scare resource, and countries think that if we can get access to international financing they can can get more financing, cheaper financing and more long-term financing."

Mr Kiguel acknowledged the potential risks flowing from exchange control liberalisation, saying: "You need to have a very well developed regulatory environment. The first risk is at the financial level with banks and financial institutions.

"Because borrowing is cheap, many institutions borrow abroad in foreign currency and lend domestically at the higher interest rate. Those who do that have their liabilities in foreign currency and their assets in domestic currency. That generates, essentially, a currency mismatch.

'The risk is that at some point there could be a change in the exchange rate, and devaluation is most likely to happen. Those institutions that borrowed in foreign currency and lent in local currency can find themselves, all of a sudden, with solvency issues because their liabilities have gone up, their assets are in local currency and they would have a lot of problems paying the borrowing abroad."

Mr Kiguel said that having a "macro-prudential" framework which addresses - and seeks to prevent - problems stemming from borrowing abroad is "critical".

"There must be good regulations and supervision in the banking system," he added. Mr Kiguel said the removal of exchange controls has often resulted in crisis, referring to the economic crisis of 2001/2002 in his Argentine homeland, which led to a drop in gross domestic product (GDP) of around 20 per cent over two years.

"The removal of controls has a lot of benefit for an economy, improves competitiveness, access to lines of credit, but experience shows you have to do it gradually," he explained. "You want to do it step by step, ensuring that all the pieces in the regulatory framework are in place.

"You want to make sure that when you go through this process you have a realistic exchange rate, not an overvalued currency or undervalued currency. A pre-condition, I would say, for successful liberalisation of the capital account is to have a reasonable macro-framework, a fiscal deficit which is financeable and sustainable, a monetary policy that can be sustained over time and a financial sector that that is strong, well capitalised and liquid but with good supervision and regulation."