The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas cannot "shortcut" economic reforms essential to underpinning exchange control liberalisation that can go "much further", the Central Bank's governor said yesterday.

Signalling that further relaxation will be forthcoming, John Rolle said the Bahamas needed to "make more credible preparations" to deepen exchange control in a stable, sustainable fashion.

Speaking at the Bahamas Business Outlook conference, he suggested that 'dollarisation' - replacing the Bahamian dollar with the US dollar - would not shorten the time needed to remove the current regime.

"There are justifiable economic reasons to push for increased capital account liberalisation for the Bahamas," Mr Rolle said in comments likely to be welcomed by the private sector. "Where this process could end is much further than where the economy sits at present.

"However, there is no shortcut to the pre-requisite reforms to develop stronger institutions and policy frameworks, and healthier economic fundamentals."

Mr Rolle said the Government needed to put its 'fiscal house' in order, and improve both the public finances and its management systems, to facilitate further exchange control liberalisation.

Pointing out that the effectiveness of the Bahamas' one:one US dollar currency peg "should not be so quickly discounted", especially when it came to managing inflation expectations, Mr Rolle said the pace of exchange control liberalisation had to match the country's ability to implement the necessary safeguards. "It is the continued liberalisation of the capital account to which we should aspire in the Bahamas, to the extent that it is able to stimulate higher rates of national savings and investment, and provide more diversification opportunities for local investors," the Central Bank governor said.

"The proviso is that the flows, whether inward or outward, ought to be sustainable. We ought also to be able to maintain relative exchange rate and financial stability.

"The Bahamas must be prepared to move in this direction only as fast as we are able to erect the appropriate safeguards around highly liquid capital flows."

Mr Rolle said future exchange control relaxation could include allowing Bahamians to make foreign currency investments outside this nation without paying the investment currency market premium.

Other scenarios outlined by the Central Bank governor included allowing foreigners to "invest more freely inside the Bahamas in both long-term and short-term capital", and allowing Bahamians and foreigners to hold overseas and local currency deposits in local commercial banks respectively.

Mr Rolle said Bahamian and foreign investors could also be permitted to borrow in foreign and local currencies, but said the deployment of such measures should generate sufficient foreign currency inflows to compensate.

"Otherwise, they could become a net drain or burden on a country's stock of foreign reserves," he warned.

"The confidence boost that a financial system would need, before opening itself unchecked to short-term financial flows would be, in a case where deficits and debts are a concern, to quiet such concerns. "Deficits or debt burden need not disappear at the outset, but there has to be an anchored belief that such reduction would occur within a comfortable time frame."