The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas suffered a more than $400m foreign currency "shortfall" in 2020 that had to be covered by the Government's overseas borrowing activities, the Central Bank's governor revealed yesterday.

John Rolle, addressing the Bahamas Business Outlook conference, disclosed that proceeds from the Government's $800m-plus bond issues were required to fill "the gap" created by import demand far exceeding vital private sector foreign currency inflows due to the devastation inflicted by COVID-19.

While foreign currency inflows through the private sector dropped by 33 percent year-over-year, due to the tourism shutdown that hit The Bahamas' main foreign exchange earner, import demand slipped by only 13 percent as local businesses and consumers still had to meet essential needs such as food.

"The Government’s foreign currency borrowing has provided inflows to supplement the private sector’s need and bolster the foreign reserves," Mr Rolle said. "In 2020, total foreign currency inflows through the private sector, as measured from commercial banks’ purchases of foreign exchange, fell by almost 33 percent.

"Although expressed demand for foreign exchange to pay for imports of goods and services fell by approximately 13 percent, this left a shortfall of over $400m that had to be provided from other sources. The gap was closed by net inflows from government borrowing..."

Mr Rolle said there was "no deliberate intention" to grow The Bahamas' foreign reserves via government borrowing, but the figures revealed yesterday show a situation that cannot be sustained for long unless this nation is able to swiftly revive tourism as its main foreign exchange earner.

That is now in some doubt due to surging COVID-19 infection rates in the US and other major tourism source markets, which have also just introduced health protocols and border restrictions that will likely represent a further deterrent to travel, notwithstanding the start of vaccine roll-outs.

While acknowledging that The Bahamas' external reserves closed 2020 at their "highest end-of-year position on record", Mr Rolle said this was due to "timing" as the Government has not fully drawn down and spent all the proceeds from its foreign currency borrowing.

He conceded that this drawdown, together with the private sector's ongoing foreign currency needs and the spending of insurance inflows on Hurricane Dorian reconstruction would "reduce" the external reserves during the 2021 first half.

"It is still expected therefore that the economy will exit the pandemic with less reserves than at the start of it," Mr Rolle said. The external reserves are critical to supporting The Bahamas' fixed exchange rate regime and one:one peg with the US dollar, but despite the pressures the Central Bank governor voiced optimism that this was not under threat.

"There have been continuous attempts to infer whether the Bahamian dollar was at risk of devaluation because of the pandemic. The currency is not at such imminent risk. This is because of level of the reserves both now and where they should resume their rebuilding," Mr Rolle said.

"These balances match slightly more than 100 percent of the Central Bank’s demand liabilities compared to the legally mandated floor of 50 percent. The liabilities move in opposite direction to the reserves only when the bank lends to the government."

Mr Rolle said the new Central Bank Act had imposed increased discipline on the Government's borrowing from the regulator, as it will now not have "unlimited scope" to access this funding source. The Government was usually "reasonably close" to those limits.

The governor, meanwhile, said The Bahamas needed to achieve economic growth rates that deliver "healthier, more resilient expansion" well beyond the 1.5 percent annual average forecast once COVID-19 has melted away.

While 2022's growth is predicted to be "sharply stronger" at around 8 percent, as that will be the year when The Bahamas recovers most of the tourism activity lost to the pandemic, Mr Rolle said higher growth rates will be necessary to finance public services, slash a government debt that will break the $10bn barrier by mid-2022, and regain "headroom" to deal with future crises.

"It is not in our economic interest to tolerate the inflation, financial instability or erosion of middle class wealth that would accompany devaluation," the governor added of any fall in the Bahamian dollar's value.

"Moreover, it does not strengthen our international competitiveness, which has to come from outcomes such as increased workforce productivity, education and skills upgrades, and the familiar list of required improvements in the ease of doing business.

"The medium and long-term hedge against devaluation, which would escape an extreme fiscal austerity outcome, is still healthier public finances, and a transformed culture of increased domestic savings," Mr Rolle added.

"Both of these reveal themselves in healthier levels of foreign savings, better access to foreign borrowing when it is needed, and less panicky investors who are less likely to spark runs on supplies of foreign exchange during times of economic stress."

Mr Rolle confirmed previous Central Bank projections that the Bahamian economy shrank by at least 15 percent in 2020 due to "the toll of the pandemic", with full recovery not expected until potentially 2023.

"Although there is more clarity over when the recovery will start, considerable head winds could remain in the very near-term, as developed countries cope with the most recent wave of COVID-19 infections, and perfect their vaccination rollout strategies," he added.

"The possibility of not achieving sufficient inoculation coverage until early in 2022 places travel and tourism on a recovery path that would be strongest in the overlap between 2022 and 2023."

Tourism-dependent economies such as The Bahamas, which largely rely on just one industry that is driven by external factors, have been hardest hit by COVID-19. The International Monetary Fund (IMF) said economic growth for major countries in 2020 was 7 percent less than it would otherwise have been in 2020, but for The Bahamas it was "a reversal of nearly 15 percentage points".

That was higher than the 11 percent Caribbean average, and Mr Rolle said COVID-19 had shown the need for The Bahamas to accelerate structural economic reforms. "The question is whether, in The Bahamas’ case, we will reach far enough in our reforms to shift the economic base towards greater future contribution from other viable industries and sectors," he added.

Mr Rolle said just 10 percent of outstanding commercial bank loans to the private sector remained on deferral as at end-November 2020, compared to one-third at end-June 2020, as he forecast that lender losses were "expected to be much less" than those experienced as a result of the 2008-2009 recession.

"The fixed exchange rate, which is justified for our economic profile, takes the Central Bank out of consideration as a source of stimulus," the governor added. "Providing stimulus in a countercyclical fashion would have endangered the exchange rate by encouraging spending on imports of goods and services that diminished the foreign reserves.

"Instead, the Central Bank’s policy stance has been to conserve foreign exchange for essential uses, which has meant suspending net access for international portfolio investments and adopting a limited range of other measures."