The Tribune

* Bahamas must 'first rack up serious US dollars'

* Economist, ex-finance minister against move

* Say B$ bond sales to foreigners is alternative

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

COVID-19 is "the worst time" for The Bahamas to consider full dollarisation, an ex-finance minister said yesterday, arguing there were better options for attracting mass foreign currency inflows.

James Smith, also an ex-Central Bank governor, told Tribune Business that the near-total drying up of tourism-related foreign exchange earnings over the past six-and-a-half months would make it "almost impossible" for The Bahamas to effect a one-to-one conversion of its financial system's multi-billion dollar Bahamian liabilities into US dollars.

To address the urgent need to further bolster the external reserves, which stood at $2.128bn at end-August 2020, Mr Smith instead called for The Bahamas to temporarily lift restrictions on foreign investors acquiring Bahamian dollar government bonds from their local counterparts via the secondary market that is now listed on the Bahamas International Securities Exchange (BISX)

To guard against market volatility, and limit the Government's exposure to foreign currency debt servicing, Mr Smith suggested the Government impose a two-year lock-in to prevent foreign investors from being able to sell or redeem these investments.

The lock-in period's end would likely coincide with the tourism industry's return to near-normality, he projected, while the Government could set a cap or upper limit on how much Bahamian dollar bonds foreign investors are allowed to buy to minimise its - and the reserves' exposure - to foreign currency debt servicing.

Mr Smith's stance on full dollarisation was backed by Rupert Pinder, the Bahamian economist and University of The Bahamas (UoB) lecturer, who argued that "The Bahamas is not a candidate" for replacing its own currency with that of its northern neighbour.

Arguing that The Bahamas should instead be focused on the post-COVID "fundamentals" of growing its economy and creating jobs, Mr Pinder echoed Mr Smith in suggesting that The Bahamas will "have to rack up some serious US dollars" to effect full conversion of Bahamian dollar bank deposits and notes/coins in circulation without risking a devaluation.

Both men, responding to former attorney general, Alfred Sears, call earlier this week for dollarisation to be "put on the table" as an option for getting The Bahamas' out of its COVID-19 economic meltdown, said the issues involved are "far more complex than people give weight to".

Mr Smith, in particular, said "the amount of liabilities is three times' what the actual reserves are, meaning The Bahamas simply lacks the US dollars required for a one-to-one conversion of all existing Bahamian dollar deposits and notes/coins in circulation.

Present Central Bank data supports his case, as at end-August there were just $2.128bn worth of external reserves to match up with $7.595bn in Bahamian dollar liabilities. These included demand, saving and fixed deposits.

"A country going down this road needs sufficient reserves to back its own currency. You can't just convert Bahamian dollars to US dollar assets," Mr Smith told this newspaper, adding that the US Federal Reserve had no obligation to provide The Bahamas with the supply of US dollars required.

"If you're looking for a solution to help us out of this crisis brought on by the pandemic you need more reserves than the outstanding liabilities. Because you're not currently earning foreign currency, you are running down the reserves for normal debt servicing and imports, so at a time when you would need an additional buffer of reserves to dollarise it's almost impossible.

"I didn't see us in our history building up more than a few months of import cover, and you'd need more than a year for this and probably more. I don't see it when you have more than $9bn in debt and $2bn in reserves, and try and convert the Bahamian dollar debt," he continued.

"This would be the worst time to do it when you have high unemployment, no foreign currency inflows coming in because of the shrinking of the economy, and continuing outflows."

Mr Pinder, meanwhile, argued that if dollarisation "was that simple you would have had countries in the region like Jamaica and Guyana following that path". He added that countries that typically took this path were racked by hyperinflation that made their currencies worthless in the eyes of their population, with dollarisation seen as a route to achieve some economic stability.

"In my view, I don't see how this whole discussion of dollarisation helps in terms of changing the fundamentals," Mr Pinder argued. "The fundamentals remain the same, and are how to increase our capacity in terms of growth in the economy and how to increase foreign exchange earnings.

"To be hones with you, I think the peg has done us well, and semi-dollarisation of the economy. The focus really needs to be on how we address the fundamentals. Dollarisation is not something you just run into. You need to be more measured."

Advocates for dollarisation acknowledge giving up the Bahamian dollar would effectively cede control of Bahamian monetary policy to the US Federal Reserve and its setting of interest rates.

However, they argue that The Bahamas currently enjoys little monetary policy flexibility anyway because this is geared solely towards the balance of payments, and preserving the one:one peg with the US dollar via always ensuring the foreign currency reserves are maintained at sufficient levels.

As a result, they suggest dollarisation would effectively remove the hook, or strait-jacket, on which Bahamian monetary policy is hung. However, Mr Pinder countered that The Bahamas still retains other monetary policy options such as credit controls and moral suasion, while adding that dollarisation would also restrict the Ministry of Finance's fiscal flexibility.

Mr Smith, though, suggested that easing the restrictions on foreigners acquiring already-issued Bahamian dollar bonds from local investors represented a better alternative to solving the country's need for immediate US dollar inflows to bolster the reserves and currency peg.

"You'll have inflows of foreign currency to increase the reserves and, at the same time, not increase the debt levels," he added. The former finance minister added that the higher interest returns available on Bahamian domestic bonds compared to US Treasuries could prove attractive to investors and more than compensate for any perceived currency risk.

To eliminate "volatility" and foreign investors "dumping" local currency government debt, Mr Smith proposed a lock-in timed to coincide with tourism's recovery where they would be unable to sell their holdings.

And, depending on the Government's debt servicing "appetite", the amount of Bahamian dollar bond debt that foreigners could acquire would be capped at a certain level. While these holdings would eventually be redeemed, Mr Smith suggested that this could be minimised by enticing foreign retail investors to switch their portfolio investments for Bahamian real estate.

"I agree that everything should be on the table," Mr Smith said, "but you need to find things in the short-term, and the biggest issue going forward for the next 12-18 months is how do we attract inflows to support imports. If we can do that without increasing the debt, better still."