The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Devaluation of the Bahamian dollar “is not on the horizon at all”, a former Central Bank governor said yesterday, adding that the country’s all-important foreign reserves have several protective mechanisms around them.

James Smith, also a former finance minister, told Tribune Business that pressures on the Bahamian dollar’s one:one peg with the US dollar were unlikely to emerge “in the immediate term” even though the tourism shutdown has made finding an alternative source to replenish the foreign currency reserves arguably the country’s greatest economic challenge.

He added that a resumption of tourism was likely “not long in coming”, given the prime minister’s ambition to open The Bahamas’ borders “on or before July 1”, with the critical issue being the revival of confidence among international travellers.

“Once that happens, the economy will open up and we will get foreign currency from our major sector, tourism,” Mr Smith said. “The thing is all we have to is continue borrowing foreign currency with the understanding that when we re-open we’ll have to pay it back. Otherwise we’re going to suffocate our economy.”

Noting that the foreign reserves remained at a relatively high $2.033bn going into April 2020, he added that the tourism shutdown and wider COVID-19 lockdown had initiated a self-correcting mechanism to some extent.

Mr Smith explained that The Bahamas’ food import bill had dropped as a result of there being no visitors to feed, while the spike in unemployment and lost income as a result of the pandemic-enforced lockdown also meant that Bahamian demand for goods and services from abroad had also dropped.

This, the former finance minister said, meant that foreign currency outflows were being reduced at the same time as inflows disappeared. This will help to minimise the pressure on the foreign reserves, and helps to explain why they remained above $2bn going into April despite the pandemic shutdown.

The Central Bank is projecting that the foreign currency reserves will decline by around $1bn during the rest of 2020 to hit around $800m to $1bn by year-end, and Mr Smith said the decline could be slowed further if the Government is able to defer many of its foreign currency principal repayments coming due over the next two to three years.

He also argued that the flow of tourist dollars has not been “reduced to zero”, pointing out that expatriate permanent residents and homeowners in communities such as Lyford Cay and Albany are spending locally on goods and services using US dollar and other foreign currency accounts.

The Central Bank has also taken measures it believes will conserve some $300m worth of foreign currency, including suspension of the repatriation of dividend payments by the Canadian-owned banks; suspending the ability of Bahamians to buy real estate and securities abroad; and asking the National Insurance Board (NIB) to liquidate some of its overseas investments and repatriate the proceeds.

Similarly, Rupert Pinder, an economics lecturer and teacher at the University of The Bahamas, told Tribune Business that any devaluation threat to the Bahamian dollar remains a long way off. “In my estimation I don’t think we’re that close,” he said.

“I was in Barbados in the early 1990s as a student at the University of the West Indies at the time, and Barbados was going through austerity measures and a real clamp down on foreign reserves to protect the Barbadian dollar at the time.

“There are a number of steps before you get to a devaluation, and we’re not even at the second or third step in my estimation.”

Messrs Smith and Pinder were in accordance with both the Central Bank’s governor and government, which yesterday blasted suggestions that The Bahamas is on the verge of a dollar devaluation or “running out of cash”.

John Rolle, in a series of Twitter tweets, said: “Fifty percent of our demand liabilities determine the legal floor on the external reserves. These move in close synchronisation with reserves because they fund the balances. The Bahamian dollar is not facing devaluation threats. Policies already anticipate vital local needs.

“Demand liabilities are banks’ Bahamian dollar reserves lodged with the Central Bank, currency issued to the public, and deposits of other entities with the Central Bank. Keeping reigns on government borrowing from the Central Bank checks divergences between demand liabilities and the external reserves.”

The Ministry of Finance, in its riposte, described claims that the Government is running out of money as “false”, and added: “Further, the Bahamian dollar is not facing a devaluation threat.

“Our economy has not survived and thrived for so long because of good fortune. As a country, we have historically taken a very prudent approach to fiscal and monetary policy to protect ourselves in situations like the emergency we face today.....

“Since the COVID-19 crisis, the Central Bank has taken several preemptive steps to shore up our reserves, and they will continue to take necessary action as needed. I echo the Central Bank’s statement today, indicating that monetary policies have already taken into consideration vital local needs, and any reports of devaluation threats are entirely misleading and without merit.

“The Government will continue to take the necessary steps to stabilise the economy and support the Central Bank in its mandate to preserve the integrity of the Bahamian dollar.”