The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former Central Bank governor says The Bahamas' critical foreign currency reserves are "surprisingly strong" at a level that is around $1bn higher than he had forecast.

Julian Francis, who held the post from 1997 to 2005, told Tribune Business he had expected the reserves to decline to around $1.2bn by end-September yet they closed August 2020 some 77 percent higher at around $2.128bn.

Besides the Central Bank-imposed restrictions on capital outflows, Mr Francis said the COVID-19 induced recession and high unemployment had likely produced a significant fall in demand for foreign currency as Bahamians slashed spending amid the ongoing economic uncertainty.

He added that foreign travel restrictions alone were likely to have saved "in excess of $100m" in airline tickets and other transportation costs as Bahamians were unable to head to Florida and other US destinations over much of the summer month.

Disclosing that he has no concerns over the external reserves' health in the short-term, Mr Francis said in a recent interview that he based his optimism on two factors. "One is the fact the reserves are around $2bn at the moment, which is very, very strong - surprisingly so by the way.

"If you had asked me a couple of months ago where the reserves would be at the end of September, I would have said $1.2bn - some point like that. The fact they are at $2bn is a hugely positive thing. It's possibly by the borrowings the Government has undertaken, but it shows we are comfortable and that they won't necessarily run down too quickly."

The second factor identified by Mr Francis was the fact "the bulk of the demand for foreign currency and US dollars usually comes from that middle level consuming person that buys imports quite aggressively".

However, the restrictions on foreign travel by Bahamians and residents that was re-imposed in late July, together with the economic fall-out from COVID-19, placed an immediate dampener on such consumption patterns.

Mr Francis said this was likely to have saved "a huge number already, possibly in excess of $100m" on "pure vacation" costs - airline tickets and accommodation alone - regardless of car, home and back-to-school.

"That's a lot of pressure off the foreign reserves. People don't have the Bahamian dollars in their bank account, and Bahamians are learning they don't have to spend as much money," Mr Francis added.

The Central Bank earlier this week confirmed the Government's "front loaded" foreign currency borrowing meant the expected decline in The Bahamas' external reserves will be "delayed" until 2021.

The regulator, in its monthly economic developments report for August, said the Minnis administration's borrowing to fund an anticipated $1.3bn deficit for the 2020-2021 fiscal year had increased the external reserves by $145.3m compared to July to hit $2.128bn by month's end.

Indicating that the previously projected drawdown on the reserves to $1bn by year-end 2020 will now not happen to such an extent, the Central Bank suggested there will be sufficient foreign currency to maintain the one:one US dollar peg into 2021.

"While private sector net foreign currency drawdowns are projected to continue through the end of the year, external reserves are forecasted to end the year higher than in 2019, largely supported by the front loading of Government’s external financing operations," the Central Bank said.

"As a consequence, the cumulative reduction in external balances is expected to be delayed to 2021. This continues to be in line with only gradual recovery prospects for tourism, utilisation of private sector reinsurance proceeds still committed to hurricane reconstruction, and outflows on imports of goods and services, due to the various fiscal stimuli. Nonetheless, external balances are estimated to remain more than adequate to sustain the Bahamian dollar currency peg."