The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor says the prospect of widening “trade imbalances” as a result of joining the WTO is “not a major concern” for The Bahamas’ fixed exchange rate system.

John Rolle told Tribune Business that the Central Bank would remain in control of monetary policy should this nation become a full World Trade Organisation (WTO) member, including the credit growth needed to “fire up” import demand.

He added that the regulator was “still in a comfortable position” to manage any post-WTO fall-out, with The Bahamas’ external reserves that support the one:one peg dollar standing at $1.582bn in April 2019 following 13.6 percent month-over-month growth.

Asked whether the findings of the Chamber of Commerce-commissioned Oxford Economics study, which suggested that import volumes would increase post-WTO accession to a level that may ultimately drain the external reserves, were cause for alarm, Mr Rolle said the issue was “not a direct concern”.

He explained: “When you look at imports, it’s an income-determined decision. In The Bahamas we know that depends on how the Bahamian income performs; they will import more or less.

“Cost of imports is a factor, but also income levels. To the extent WTO has a positive impact on personal earnings, that also provides the fuel to finance any increase in imports.”

Mr Rolle said the Central Bank’s primary focus was on credit demand stimulated by increased household and business earnings, and he added: “We don’t lose any control over that. We continue to manage the credit flows to make sure... it’s sustainable.

“Domestic credit growth remains in our control. That’s not a major concern. From the monetary policy side we are still in a comfortable position to manage what happens. Sometimes these analyses take a very static view.”

The Central Bank governor was responding after the Oxford Economics study, which assessed the potential impacts from becoming a full WTO member, found that growing “trade imbalances” may require The Bahamas to assess the merits of the fixed exchange rate that underpins the one:one US dollar peg.

This resulted from its forecast that imports will increase post-WTO accession as the lowering/elimination of many import tariffs makes them relatively cheaper for businesses and consumers.

With exports and foreign direct investment (FDI) inflows unable to fully compensate for the drawdown on foreign currency to purchase these items, the Oxford Economics study said this could widen The Bahamas’ merchandise trade deficit by up to 2.3 percent of GDP over the next decade and represent a significant drain on the external reserves.

Assessing a scenario where The Bahamas became a full WTO member without undertaking broad-based policy reforms to improve the business climate, Oxford Economics estimated that import volumes would increase by 9 percent over the four years from 2020.

With exports rising by 3 percent over the same period, the study found: “In light of the relative scale of the estimated impacts on merchandise imports relative to exports, the trade deficit in goods would widen significantly as a result of WTO. Our results show the deficit widening by around 2.3 percent of GDP relative to baseline levels, where it remains over the medium term.”

While this would be partially offset by trade in services, Oxford Economics forecast that the current account deficit would still be larger by a sum equivalent to 2 percent of GDP come 2029.

“While we expect that additional FDI inflows would fund over half of the gap that is expected to open in the current account, the remaining shortfall could still have negative repercussions on the foreign exchange situation. Over the period 2020-2025, the implied shortfall in funding averages around $100m a year,” the report said.

“There are no universally applicable measures for assessing the adequacy of reserves, but it is clear that this scale of shortfall would have the potential to deplete all of the Central Bank’s estimated ‘useable’ external reserves of $522m over this timescale. That said, the Central Bank has been successful in increasing the stock of reserves in recent years through proceeds from external bond issues and other sources.

“Still, it is clear that the authorities would need to think carefully about strategies to handle the increase in foreign currency demand that would accompany trade liberalisation and whether the associated costs are worth the benefits to the economy from maintaining the currency peg.”

However, in a scenario where The Bahamas undertook fundamental economic reforms to accompany WTO accession, Oxford Economics said the current and merchandise trade deficits would be lower due to stronger foreign direct investment (FDI) inflows and foreign currency export earnings.

“The impact on the current account is more muted, with the deficit levelling off at around 1.3 percent of GDP above baseline levels over the medium term (compared to 2.1 percent of GDP in the [other] scenario),” Oxford Economics said.

“This reflects both the larger size of the economy (which boosts GDP in the denominator) and an additional boost to exports of services, reflecting increased domestic investment in the sector.

“The more muted impact on the current account means that associated repercussions on the foreign exchange situation would be less acute than in the [other] scenario, at least initially. Our estimates indicate that increased FDI inflows broadly counterbalance the widening of the current account in the years 2020-2025,” the report added.

“However, the continued widening of the current account in subsequent years would eventually outpace these FDI inflows, implying that foreign exchange policies may still need to be reviewed later on.”