The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister yesterday backed the government's move to obtain a $252m "emergency" loan from the International Monetary Fund (IMF) as "a very prudent and logical thing to do".

James Smith, who held the post during the first Christie administration, told Tribune Business he was "glad" the Ministry of Finance had chosen to act now in obtaining the low-cost financing rather than wait until The Bahamas' foreign currency reserves came under sustained pressure.

Pointing to the low 1.054 percent interest rate attached to the loan, he said it was critical for The Bahamas to have access to such relatively cheap foreign currency borrowings given that the COVID-19 pandemic had brought the country's main export earner - tourism - to a standstill.

Mr Smith also supported the government line that the $252m borrowing, which is likely to be approved by the IMF's board in early June, is not part of any "structural adjustment" initiative where the Fund would impose a variety of austerity measures on The Bahamas as a condition for providing such financing.

Rather than the IMF forcing this nation to raise taxes, slash spending and cut the public service down to size, the former finance minister said the loan facility now being sought by the government was effectively being raised against The Bahamas' own "shares" in the Washington DC based organisation.

Mr Smith's reaction contrasts sharply with that of Chester Cooper, the opposition's deputy leader and finance spokesman, who yesterday argued that the government's move is taking The Bahamas into "unchartered territory" since it is the first-ever time this country has borrowed from the IMF.

However, the former finance minister yesterday suggested that The Bahamas had obtained similar financing against its IMF "shares" - known as Special Drawing Rights (SDRs) - in the wake of the 2008-2009 global financial crisis. A Tribune Business report dated almost exactly one decade ago, from April 30, 2010, confirmed the then-government had obtained $178.7m in IMF SDRs in late 2009.

Mr Cooper, though, noted that the government had rejected a previous IMF offer of $200m in financial assistance to deal with Hurricane Dorian reconstruction. And K Peter Turnquest, deputy prime minister, in mid-March 2020 - at the onset of the COVID-19 pandemic and related economic shutdown - said that seeking the IMF's help would be a last resort.

Demanding that the IMF loan agreement be tabled tomorrow in Parliament together with the Budget communication, Mr Cooper called on the Government to provide full transparency over whether any "implicit or explicit conditions" are being imposed on The Bahamas in return for this financing.

"That the Government intends to borrow $250m from the IMF is not surprising in and of itself," the PLP deputy leader said in a statement. "However, just weeks ago the Government said no borrowing was foreseen, which speaks to the validity of the Government's financial forecasts."

The Government, via Mr Turnquest, had previously indicated that no further borrowings would be necessary to make it through to the 2019-2020 fiscal year-end on June 30. The need to tap the IMF suggests that the depth and length of COVID-19's economic fall-out will now surpass the Government's initial projections, although the deputy prime minister said the IMF borrowing remains within the scope of parliamentary approvals.

Mr Cooper, meanwhile, said: "On the face of it, 1.05 percent is not an unattractive rate in a market where government paper [due to mature in 2024] is trading at 15 percent following the recent downgrade and negative outlook."

However, he questioned how the Government will use the IMF loan proceeds and whether they would cover outstanding obligations it has yet to meet. Bemoaning the absence of "a rainy day reserve, as well as borrowing headroom", Mr Cooper argued that the need to seek IMF help shows "the chickens may be coming home to roost" with the Government's finances.

Yet Mr Smith, speaking to Tribune Business, said the Government's bid for the $252m "was a pretty logical move to me if you understand the IMF". He explained that one of the Fund's core founding functions was to help its members deal with short-term cash flow and monetary issues.

All 190 member nations hold shares in the IMF, namely the SDRs, which are treated as an asset on their respective central bank's balance sheet. In effect, Mr Smith said The Bahamas is borrowing against its SDRs or shares in the fund, which will act as security/collateral for the forthcoming loan.

And he added that this facility is completely different, and separate, from an IMF-imposed "structural adjustment" initiative that would only come down when a country has lost access to all other available capital market funding sources. The Bahamas, Mr Smith said, has yet to find itself in this position and 90 other nations - including many from the Caribbean - have already obtained such COVID-19 loans from the MF.

"They [SDRs] are used as emergency short-term facilities if governments suffer a disruption to their economies and foreign exchange flows," Mr Smith said. "It was set up for that purpose, borrowing against your assets.

"You couldn't criticise the Government for putting in an insurance policy and using it when they run into a problem. Look at the interest rate. One thing we know is that no visitors are coming into the country because of the virus, but we still have to pay foreign currency loans and import stuff.

"We don't want the Central Bank reserves to dwindle, and need to have foreign currency available, and the facility was set up for that purpose. Look at the rate. It's a logical thing for them to do. It's proportionate to the size of our SDRs, and we will have funds to repay it," the former finance minister and Central Bank governor continued.

"It's a very logical think to do, and I'm glad they did it, rather than wait to the last minute when we've used up the reserves and and running around left, right and centre, or other countries have crowded them out. It's a very prudent thing to do at this time."