The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) has nudged the Central Bank towards a more proactive monetary policy stance by saying it has "some room to lower interest rates" amid the COVID-pandemic.

The Fund, in a report accompanying its decision to grant The Bahamas some $252m in "emergency" funding, warned that any move to lower the discount rate from its present 4 percent would have to "weigh" the potential negative repercussions for the $2bn foreign currency reserves.

"Staff sees some room for monetary easing, but the policy stance should take into account developments in the foreign exchange market," the IMF said. "Against the backdrop of a collapse in economic activity and limited inflation pressures, there is some room to lower interest rates. The benefits of doing so have to be weighed against the potential erosion of international reserves and structural bottlenecks in the monetary transmission mechanism."

The IMF's comments will likely hearten those observers who have been urging the Central Bank to adopt a more proactive approach and use monetary policy as a stimulus tool. However, John Rolle, the Central Bank's governor, last month ruled out using interest rates as an economic stimulus tool - and even the Fund itself admitted that the present 4 percent discount rate was at an "historically low level".

He argued that interest rate cuts were "not an option for The Bahamas", as any reduction or relaxation of credit policies would spark a surge in import demand and undermine the foreign reserves at the worst possible time when there are virtually zero replenishing US dollar inflows from the tourism industry or foreign direct investment (FDI).

The Central Bank's position has always been that the use of monetary policy as an economic stimulus tool has been restricted by the need to maintain the one:one currency peg with the US dollar, and the need to maintain sufficient underlying foreign currency reserves to support this.

However, others have argued that the 30 percent-plus unemployment rate generated by COVID-19, together with the reduction in disposable incomes and low consumer confidence, means that import demand will be muted and there is space - as suggested by the IMF - to lower rates and provide some relief for hard-pressed Bahamian borrowers - both households and businesses.

The Fund, though, backed the $300m worth of measures taken by the Central Bank to safeguard The Bahamas' currency peg and international reserves. Besides the the bar on Canadian-owned bank dividend remittances and relaxation on bank foreign exchange sales to the public, the regulator has suspended all approvals for Bahamians seeking to invest in foreign securities and real estate, and requested that the National Insurance Board (NIB) liquidate "some" of its overseas investments and return the proceeds back home.

"While the recent Central Bank interventions could help ensure an adequate level of international reserves, the repatriation of NIB assets needs to be done in a controlled manner that avoids any potential fire-sale dynamics and preserves the NIB’s financial position," the Fund added.

"While there are no significant capital outflows at this stage, the Central Bank views the recent foreign exchange measures as necessary to preserve reserve adequacy. Repatriating some of the NIB’s external assets, representing a small portion of its portfolio, and allowing domestic banks greater latitude in open positions to purchase funds in the interbank market should contribute to foreign exchange liquidity.

"The Central Bank argues that it has adequate systems to monitor the effects on the banking system of these interventions. The Central Bank also highlighted their temporary nature, and that they will not jeopardise recent progress in exchange control liberalisation. The Central Bank does not consider expansionary monetary policies to be appropriate at the current juncture."

The Government, in its response to the IMF, forecast that the Bahamian economy will suffer "a deep recession" in 2020 with GDP shrinking by between 9 percent and 15 percent. Unemployment was forecast to reach as high as 35 percent, and the Fund added: "The authorities are projecting significantly lower growth in 2021 and higher growth in 2022-2023.

"They expect the lingering effects of the global COVID-19 travel restrictions and consumer hesitancy to temper the pace of the recovery in tourism demand through the first half of 2021..... The authorities highlighted the severe revenue shortfalls they are experiencing, with April revenues being 50 percent lower than last year."

Mr Rolle and K Peter Turnquest, deputy prime minister, in a May 22, 2020, 'letter of intent' to the IMF said the 2020-2021 Budget will incorporate "sunset clauses" detailing when the measures to combat COVID-19 and Hurricane Dorian will end.

"To ensure compliance with the Fiscal Responsibility Act over the medium term, we intend to embed sunset clauses in the new Budget for the temporary measures put in place in response to COVID-19 and Hurricane Dorian, and resume various measures planned before Hurricane Dorian (including the review and reform of investment incentives, reform of tax administration, and review and reform of state-owned enterprises to make them self-sustained entities) once the COVID-19 crisis abates," the duo wrote.

"We will also develop detailed contingency plans to protect priority spending, including on social assistance, healthcare and key infrastructure projects. In addition, we will take steps to increase revenue collection, contain the wage bill and reduce transfers to SOEs at a measured pace over the coming years."

Messrs Rolle and Turnquest promised that the Auditor-General would audit all COVID-19 related spending within nine months of year-end, and post the results on the Government's website. They added: "The Government of The Bahamas will maintain an open dialogue with the IMF. We are committed to ensuring continued macroeconomic stability and will avoid any measures or policies that would exacerbate balance of payments difficulties.

"We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements....

"In line with the IMF safeguards policy, we commit to undergoing a safeguards assessment in connection with the [$252m loan]. We will provide IMF staff with the Central Bank of The Bahamas’ most recently completed external audit reports, and authorise our external auditors to hold discussions with IMF staff," the duo continued.

"Given that financing from the IMF will be disbursed for budget support, a framework agreement will be established between the Central Bank of The Bahamas and the Ministry of Finance on the respective responsibilities for servicing financial obligations to the IMF."