The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister is warning that The Bahamas' $400m foreign currency deficit could be the start of "a quite worrisome trend", and added: "We're running out of options."

James Smith, also an ex-Central Bank governor, told Tribune Business that the disclosures by the present incumbent, John Rolle, suggested that it was "not looking good at all over the medium term" for the Bahamian economy given the deepening uncertainty over the timing and strength of the tourism rebound in this nation's major source markets.

"I think any shortfall of that size is concerning," he said, "but the degree of concern depends on whether it's kind of a blip or whether it's part of a trend, which I suggest it is. In our context we can reduce expenditure to zero, but we have an insatiable appetite for imports, so we need foreign exchange and also need it to service the debt we've incurred during the pandemic.

"It's quite worrisome. In the short-term there's no immediate return of tourism inflows and US dollars in particular. Even if you eliminated COVID-19 today there's a time lag before confidence is back to travel and people feel comfortable enough to come to The Bahamas; that it's not a risk. Our handling of the pandemic has not been stellar.

"All these feed into the equation of which the $400m is probably the beginning of an unsettling and unsustainable trend. It's not looking too good at all over the medium term..... We've got to keep our fingers crossed because we're running out of options."

Mr Smith urged the Government to establish "a COVID-19 free corridor" between the US and The Bahamas to facilitate some tourism business, and also suggested that the country might have to join its CARICOM neighbours in seeking debt forgiveness and grant financing sources.

He spoke out after Mr Rolle last week revealed that 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 governor told the Bahamas Business Outlook conference 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."