The Tribune

• Warns rapid fiscal consolidation return is ‘must’

• Even as external reserves strike $2.6bn record

• But ‘usable non-borrowed’ reserves just $369m

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday said the government’s “fiscal consolidation ambition” is critical to protecting the external reserves and currency peg, as well as enabling the country to meet its debt payments.

John Rolle told Tribune Business that huge borrowings to cover near-$1bn annual deficits were simply unsustainable given that The Bahamas will eventually “hit a point” where servicing its $10bn-plus national debt will become a challenge.

Warning that The Bahamas has to “make certain we repair our finances beyond the pandemic”, he nevertheless said the country’s foreign currency reserves - which are critical to financing imports and sustaining the one:one peg with the US dollar - remain higher than expected at some $2.6bn as of last week.

That number, though, has been inflated by the government’s massive foreign currency borrowings last year at COVID-19’s height, with another $900m-plus - including a $700m sovereign bond - already approved for this 2021-2022 fiscal year. And Mr Rolle said the Central Bank expected a further drawdown on the reserves over the remainder of 2021 due to Hurricane Dorian rebuilding.

Meanwhile Marla Dukharan, the former Royal Bank of Canada (RBC) chief regional economist, in her monthly economic report that was released yesterday described continued Bahamian government foreign currency borrowing to prop up the external reserves as “unsustainable”. She also noted that The Bahamas’ foreign currency debt had risen by 57.4 percent year-over-year to $4.16bn as at May 2021.

“Largely as a result of external borrowing, international reserves reached $2.38bn in May, up 21 percent year-over-year, with usable reserves at $1.17bn and non-borrowed usable reserves at $368.7m, which is not sustainable,” Ms Dukharan said. “A rise in national debt (up 10.5 percentage points year-over-year, which reached 96 percent of GDP in March 2021, will put further pressure on government finances.

“The Central Bank relaxed the ceiling on long positions on foreign exchange transactions for commercial banks, which was instituted in April 2020. This will afford greater flexibility on foreign exchange trading activities.

“The Central Bank took the measure as they expect foreign exchange inflows from tourism to strengthen in the remainder of 2021. Medium-scale foreign direct investment (FDI) projects boosted construction activity in the 2021 first quarter, though domestic private sector activity was weak. Hurricane reconstruction works and ongoing FDI-led projects will continue to drive activity and employment.”

Mr Rolle confirmed that the Central Bank now has “more comfort to moderate” the remaining foreign exchange restrictions it imposed in May 2020 in response to COVID-19, and is “going to be reviewing what is suitable timing” to lift the Investment Currency Market (ICM) bar that has prevented Bahamians from investing in overseas securities and real estate for some 14-15 months.

He based this on the strengthening foreign currency inflows seen in the 2021 first half as tourism recovers, adding that the private sector is “transitioning to be the net provider of foreign currency inflows” once again as the economy rebounds and opens up.

“The reserves are certainly higher than we had expected,” Mr Rolle told Tribune Business. “Last week we were around $2.6bn because we would have purchased some funds from the Government. We certainly had not counted on the reserves being this high primarily, because we’d hoped the monies received into The Bahamas following Hurricane Dorian, the private sector would have spent those in the rebuilding.

“We are anticipating that monies that have accumulated, sourced from reinsurance inflows, if we want a more positive outcome those should go back into some of the hurricane rebuilding activity.”

With Hurricane Dorian restoration anticipated to further draw down on the external reserves, Mr Rolle said he was satisfied that the Central Bank has sufficient monetary policy weapons to preserve the US dollar peg even though many observers are concerned that the huge borrowings before, during and after COVID will impose a significant drain on future foreign currency inflows to service the debt repayments.

“I think we continue to have the tools and flexibility to manage the our foreign exchange market activity, and I think we’re still in a good position to handle that servicing whenever it is presented,” Mr Rolle added. However, he quickly added that this “does not diminish the importance” of setting the public finances back on the consolidation path as soon as COVID conditions allow.

“It isn’t so much where we presently are, but do we go in the direction of increasing our public debt burden?” the Central Bank governor asked. “In that case, we could find ourselves in a position where our ability to service the debt becomes a challenge.

“For that reason, one has to keep the spotlight on the fiscal consolidation path and how ambitious we want to be around fiscal consolidation. That’s what’s important. We cannot overlook the fact we proceeded to do what we had to do because of the pandemic, but what is important is we have the appetite to do it.”

Asserting that The Bahamas has no choice but to repair its finances once the COVID emergency has passed, Mr Rolle added this was critical so that “if the need arises in the future we can rely on access to credit” in the domestic and international markets in another emergency.

“We must rebuild,” he said. “I think it is something that the country will have to be continuously focused on. Rebuilding is not immediately about seeing resolution, but you improve and strengthen the system so that when you get to the point of repaying you have a stronger infrastructure.

“I think that we have to understand that whenever we start to plan, it’s always planning with the understanding that if we do nothing the outcome is going to be considerably less favourable. The Government has to take an active approach in terms of planning and rebuilding.”

Mr Rolle said the Central Bank “will be able to make an announcement soon on the when”, referring to the timing of the removal of Investment Currency Market restrictions - the last COVID-related foreign currency measure still in place.

“We have seen in 2021 that the inflows are stronger, so from that perspective the private sector is transitioning to be the net provider of foreign currency inflows. We do see evidence that the seasonally strong amounts on the inflow side were present in the first half of the year,” he added.

“The extent to which the Central Bank has taken a conservation approach, recent developments are giving us confidence to moderate the controls. That’s not to say the economy is not in a rebuilding state, but even in a rebuilding state there’s still a comfortable supply of foreign exchange relative to the needs expressed by the private sector. We are looking at how to begin to remove any residual conservation measures we have in place.”