The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

A Cabinet minister yesterday said the Central Bank Act is being “cleaned up out of an abundance of caution” to ensure the Government can lawfully borrow the $232.3m IMF special drawing rights (SDRs).

Michael Halkitis, minister of economic affairs, told the Prime Minister’s Office media briefing that there were “varying opinions” as to whether the Act needed to be reformed to facilitate a transaction whose legality has repeatedly been challenged by the Opposition Free National Movement (FNM).

Explaining that the International Monetary Fund (IMF) had allocated SDRs to its member countries to assist with their financial and other responses to COVID-19, he said The Bahamas’ share was around $240m and this country drew down on some $232m.

“We viewed it as the IMF making that money available to the Government of the Bahamas,” Mr Halkitis said. “There was an opinion that the way that the Central Bank of the Bahamas Act is written, it didn’t account for the IMF making those funds available to the Government in that way, and so they had to treat it in a certain way.

“So just out of an abundance of caution, the Prime Minister introduced an amendment to enable the Central Bank to act as a pass through of those special drawing rights from the IMF to the Government of the Bahamas. It’s a clean up to allow them to pass it through, the SDR allocation, to the Government.”

Mr Halkitis said the Government received conflicting legal advice on whether the existing Central Bank Act enabled the Government to access the SDR allocation. “The way the law was written, they felt it could be done,” he said of one opinion. But another said the Act did not provide for this, and needed to be changed.

Given the “varying opinions”, Mr Halkitis said the decision was made to amend the Central Bank Act “just to avoid any doubt”, with the legislation tabled in the House of Assembly on Wednesday. However, he did not address why the Bill is being made retroactive so that it takes effect from December 1, 2022, or why the legal reforms were required as part of the Memorandum of Understanding (MoU) entered into with the Central Bank to access the SDRs.

The Bill, as tabled, contains language stating it “shall be deemed to have come into force on December 1, 2022”, thus making its implementation and legal effect retroactive to when the $232.3m was advanced to the Government. Kwasi Thompson, the FNM’s finance spokesman, argued that the Bill’s emergence was “proof” the Opposition had been correct to accuse the Government of “breaking the law” as there was previously no provision in the Central Bank Act to facilitate the SDR deal.

That will now be permitted by the new legislation, which states in its ‘objects and reasons’ section: “The Central Bank of The Bahamas (Amendment) Bill 2023 seeks to make provision.... of a new section 17A to empower the minister to access, utilise or convert special drawing rights allocated by the IMF for the purpose of reducing its foreign currency debt obligations and to manage its foreign currency debt operations.”

Significantly, the Bill says section 21 in the existing Central Bank Act will not apply to the Government’s “use or conversion” of SDRs or the proceeds. Section 21 sets limits on how much the monetary policy regulator can lend or advance to the Government. It currently can only make temporary loans that mature within 91 days and have “market-based” interest rates attached, while the amount involved is also capped.

Combined with total issued Treasury Bills, and securities issued or guaranteed by the Government and its corporations, total outstanding loans to the former by the Central Bank cannot exceed 30 percent of the Government’s “average” or “estimated” revenue - a sum around $800m-$900m.

Mr Thompson, meanwhile, queried why the Government had been in such a hurry to gain access to the SDRs without “first coming to Parliament” to make the necessary legal changes. He effectively accused the Davis administration of a backwards process, where it borrowed first and then obtained the necessary legal authority after the event.

“What was the urgent need for you to break the law without first coming to Parliament? That means there was a serious situation that the Government found itself in which caused them to disregard the law,” he argued.

John Rolle, the Central Bank’s governor, revealed to Tribune Business in early January that the Memorandum of Understanding (MoU) between the monetary policy regulator and Ministry of Finance stipulated the Davis administration must change the Central Bank Act to facilitate the SDR transaction.

Simon Wilson, the Ministry of Finance’s financial secretary, previously said the MoU would provide the Government with access to financing that was an estimated 700 basis points below prevailing market rates. He argued that this seven percentage point differential could generate close to $20m in annual interest savings for hard-pressed Bahamian taxpayers compared to the likely rates if the Government had to borrow in the international capital markets.

Mr Wilson also argued that the Government’s SDR borrowing was aligned with the IMF’s stated reason for issuing them, which was their use for “fiscal purposes”. It emerged in the Government’s December 2022 fiscal report that the full $232.3m had been drawn down by the Davis administration that month, classifying this as “bank loans” or part of some $250m in “foreign currency loans”.

The Ministry of Finance’s financial secretary confirmed that the $232.3m was used to repay $180m in foreign currency borrowings, leaving $52.3m unused. He also indicated that the SDRs were encashed and monetised.