The Tribune

• Law had to be changed for $232m IMF SDRs

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank was advised it could breach its legal lending limits to the Government through the latter’s use of $232.3m in IMF special drawing rights (SDRs) without reforms to its governing Act.

The Memorandum of Understanding (MoU) between the Government and Central Bank, which facilitated the transaction, shows the alarm was raised by the latter’s external legal advisers to such an extent that the Central Bank Act had to be amended “out of an abundance of caution” over the SDR deal.

The MoU, which was signed by Prime Minister Philip Davis KC in his capacity as minister of finance, and Central Bank governor, John Rolle, on November 29, 2022, makes clear that the transaction was instigated by the Government via the Ministry of Finance. However, the Central Bank seemingly felt it necessary to obtain a written agreement from the Government that it would amend its governing to ensure the regulator remained in compliance with the law.

“The Ministry has recommended, with the [Central] Bank’s endorsement, a conversion of the 2021 SDR allocation into US dollars to undertake debt management operations to repay external debt, help stabilise The Bahamas’ US dollar bond debt obligations, and to lock in significant savings on the debt, with the cost and replenishment or reconstitution obligations around use of the balances assumed by the Government,” the MoU said.

“The proposed purpose aligns with the intended uses for which the IMF allocated the special drawing rights.” The SDRs have already been fully drawn down and converted to cash by the Davis administration, although the precise purpose for which the funds were used has not been disclosed. Such a transaction was not contemplated in the Government’s previously-released annual borrowing plan for the 2022-2023 fiscal year.

The Prime Minister, addressing the House of Assembly yesterday during the debate on the Central Bank Act changes sparked by the IMF SDR deal and MoU, vehemently denied Opposition charges that the transaction represented a loan to the Government. However, the MoU itself details concerns that the deal created a liability now due from the Government to the Central Bank that could place the latter outside its legal lending limits and violate the law.

“Based on the advice of external legal counsel, the [Central] Bank is of the view that using the 2021 SDR allocation for the purpose would create a liability from the Government to the Bank notwithstanding section 4(6) of the Act, and a position could be taken that the Government would have exceeded the authorised borrowing limits set forth in section 21 of the Central Bank of The Bahamas Act 2020,” the MoU stipulates.

“Out of an abundance of caution, the [Central] Bank has requested, and the Government has agreed, to table an amendment to the Central Bank Act on the terms more specifically set forth below.” The reforms were supposed to have been “debated and gazzetted” no later than the mid-year Budget debate, which has long passed and was supposed to have taken place on February 22, 2023, more than two months ago - meaning the Government is late again.

The MoU’s contents were seized on by Kwasi Thompson, the Opposition’s finance spokesman, during his contribution to the Central Bank Act debate. Pointing out that the IMF requires countries to use the SDRs in accordance with their laws, he said: “The MoU is very telling. The Government received advice from the Central Bank’s external lawyers that this transaction was unlawful.

“It is my belief that the Central Bank would not proceed with the transaction unless this amendment was proceeded with.” The MoU agreed that the Central Bank Act could be reformed such that it came into effect retroactively to cover the Government’s previous SDR conversion, which it has now done with the amendments that passed the House of Assembly yesterday taking effect from December 1, 2022.

“The Bahamian people have yet to receive a satisfactory answer from this government on why it decided to circumvent the law and access the country’s external reserves in the SDRs held by the Central Bank. These SDRs reside on the balance sheet of the Central Bank as detailed in the bank’s most recent audited financial statements. They are not, and have never been, the property of the central government for reasons that are well known and well understood....

“Clearly, the Government was caught red- handed and is now bringing the legislation in an attempt to wipe the slate clean from their breaking the law. The fact that you are bringing this now and making it retroactive to December is only proof of your breach in the law.”

The MoU makes the Government responsible for servicing all obligations due to the IMF on the SDRs, including interest payments, “without a financial burden to the Central Bank”. The SDRs have to be “reconstituted”, or repaid, no later than when the US dollar liabilities they have financed mature. No date was given, but the MoU remains in effect until January 4, 2038.

Mr Davis, while reiterating that the SDRs are not a loan, sought to justify the transaction on the basis that The Bahamas’ post-COVID economic needs have altered from propping up the foreign currency reserves to “rebuilding and strengthening our fiscal position”.

He added: “Of course, it is not free money. The interest rate associated with the Special Drawing Rights is 0.05 percent, far below market rates. We have discretion as an IMF member state to utilise these assets for our national benefit. Today, this amendment ensures that our laws align with our national priorities and needs as a government.....

“Initially, our primary need was to maintain our levels of foreign reserves. It was in August 2021 that the Central Bank of The Bahamas gained access to the Special Drawing Rights valued at $247.5m held as international reserves. The funds served their immediate purpose. But, over time, as this administration oversaw the nation’s economic recovery, our needs as a government changed.

“You see, Madam Speaker, when tourism is at an all-time high and the economy is recovering at a record pace, money is coming into the country and foreign reserves can be maintained in a way that was not possible during the pandemic. This is why the role of the Special Drawing Rights in boosting our foreign reserves was so critical when the economy was locked down,” Mr Davis added.

“Now that the economic situation has changed, our needs have changed. The Bill before us today allows us to adapt the use of these resources to reflect our evolving national priorities. In this instance, we are specifically addressing foreign currency debts.... Ultimately, it simply makes sense to use the resources on hand to service foreign debt obligations rather than to incur additional debt.”