The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government has promised to change the law to facilitate its “use” of $233m in International Monetary Fund special drawing rights (SDRs) that have for the past 16 months boosted The Bahamas’ foreign reserves.

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

Speaking after the Opposition’s leader challenged whether the Government’s SDR borrowing has any legal basis, he said the “opportunity cost” of not using the IMF-provided financing had “significantly” increased compared to when they were issued in August 2021.

Suggesting that the SDRs are no longer needed to bolster The Bahamas’ foreign currency reserves, given the strength of the country’s post-COVID tourism and wider recovery, Mr Rolle nevertheless conceded the two sides had put the proverbial cart before the horse by agreeing the transaction prior to giving it the necessary legal underpinning.

“The Central Bank worked closely with the Government in concluding these arrangements to access the SDRs,” the governor told this newspaper via an e-mailed reply. “Under the MOU there is an undertaking by the Government to amend the Central Bank Act to cover the use of the 2021 allocations.

“As explained in our public release, the assessment of the foreign reserves adequacy has continued to improve given the ongoing recovery in tourism. There is even less uncertainty around the sustainability of the reserves than in 2021. Compared to one year ago, the opportunity cost of not making any use of the SDRs is therefore significantly greater. However, it is not a need that is expressed in terms of foreign reserves adequacy.”

Michael Pintard, the Opposition’s leader, had argued that the transaction potentially breaches Section 21 of the Central Bank Act which sets limits on how much the monetary policy regulator can lend or advance to the Government. It 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.

Meanwhile, research by Tribune Business revealed that the planned use of the IMF’s SDRs has changed radically since they were first received in August 2021. The Central Bank press release, announcing their receipt, stated categorically that the financing - then valued at $247.5m - would not be used for onward lending to the Government.

“The Bahamas’ SDR allocations are not being earmarked for lending to the Government, and do not increase the Central Bank’s ability to lend to the Government. The lending limits remain fixed by law,” the release said then. “The Central Bank intends to use the SDR allocations for foreign reserve management operations, in particular holding them available for any increase in foreign exchange needs expressed through the private and public sectors.”

Mr Rolle, though, indicated that improved economic circumstances - especially strengthened foreign currency inflows post-COVID - meant that The Bahamas’ would better maximise use of the SDRs through other means. He was backed by Simon Wilson, the Ministry of Finance’s financial secretary, who said the MoU would provide the Government with access to cheap foreign currency financing that as an estimated 700 basis points below prevailing market rates.

Based on the $233m valuation presently assigned to the SDRs, 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 also aligned with the IMF’s stated reason for issuing them, which was use for “fiscal purposes”. This is partially backed by the Central Bank’s August 2021 release, which says: “Countries can decide whether policy buffers would be used to increase the flexibility of fiscal and monetary policies, including for pandemic-related deficit financing, debt management operations, promoting external debt sustainability, financial stability or balance of payments needs.”

“I think we have to remember now that when the SDRs were issued, the IMF’s viewpoint was that it was primarily for fiscal purposes,” the financial secretary said. “The Central Bank at the time said to put it in the reserves. But it’s unlikely the IMF will reduce the amount of SDRs issued. It’s a perpetual source of financing. It will be there for a long period of time.

“It makes sense, when you look at the cost of financing domestically and internationally, to use the SDRs for their intended purpose. The savings will be significant.” Compared to the international markets, Mr Wilson said the variable 2.88 percent interest rate attached to the SDRs - as measured over the Christmas week - would likely result in a “seven percentage point saving”.

Based on that saving, and the $233m value presently assigned to the SDRs, Tribune Business calculated a $16.31m annual interest bill savings for Bahamian taxpayers if the full amount is drawn down. “To me, that’s a significant savings,” Mr Wilson asserted. “Why not do it?”

The IMF SDR move thus continues the Davis administration’s strategy of finding creative ways to access low-cost foreign currency debt financing while avoiding the international capital markets. It started with the $206.5m Goldman Sachs repurchase or ‘repo’ deal last year, using funds accumulated to repay future debt maturities, and maintained this with a subsequent $385m bond - of which some $200m was guaranteed by the Inter-American Development Bank (IDB).

Mr Wilson yesterday confirmed that, following the MoU’s signing with the Central Bank, the Government had begun to draw down on the $233m SDR facility which is effectively being treated as a loan against the foreign currency reserves that must be repaid. He added that it will be drawn down in stages “as the need arises”, and the funds will not be employed to meet the Government’s “domestic obligations”.

Mr Pintard, meanwhile, told Tribune Business that both the Prime Minister, in his capacity as minister of finance, and the Central Bank’s governor needed to better explain why the proposed use of the IMF drawing rights had altered so drastically. Questioning whether the Government was otherwise struggling for foreign exchange to service its external debt obligations, he also again queried the legality of the transaction.

“I would be prepared to say on the record that it appears the Government has been exceptionally aggressive to put pressure on the Central Bank relative to assisting them out of the very difficult situation they are in,” Mr Pintard said. “We cannot confirm what are the circumstances that the Government is facing, but they are under tremendous pressure and possibly around the issue of liquidity.

“We felt this transaction may have been illegal in its execution. We need to see the MoU, and what we also need to see is the term sheet. What are the terms? Both those things are going to reveal quite a bit. The Government also has to tell us a couple of broader things. They have to tell us what is the condition of our finances that necessitated this, and what happened between last year and now that caused this result and made this an absolute necessity.”

Mr Wilson, though, said he “will challenge” any assertions that the Central Bank Act has been breached. “I will say that the Central Bank Act did not envisage this usage from the instructions by the IMF. The IMF instructions said for fiscal purposes,” he added. “To make it appear as if this was something not contemplated when the SDR was issued is unfortunate. The statement of the IMF that this was for fiscal purposes is as clear as day.”