The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday defended itself from Opposition accusations of “pure arrogance” after it confirmed the law will be changed retroactively to facilitate its borrowing of $233m in IMF special drawing rights (SDRs).

The Ministry of Finance, in a statement, pledged that the necessary reforms to the Central Bank Act will be brought before Parliament for its approval “shortly” as Free National Movement (FNM) leaders demanded that someone be held responsible and punished for a transaction they asserted has no lawful basis at present.

The ministry, effectively confirming the allegations, said: “While the use of the SDRs creates a liability to the Central Bank, it is only because the Central Bank Act in its current form does not accommodate the use of the SDRs in the manner prescribed by the IMF (International Monetary Fund).....

“The prospective amendments to the Central Bank Act, which will be brought to Parliament shortly, will codify the terms established in the governing Memorandum of Understanding (MOU). It will also modernise the Act and facilitate the proper classification of this transaction as contemplated by the IMF.” The MoU was signed with the Central Bank to facilitate the $233m borrowing.

The Ministry of Finance reiterated that the SDR transaction was a prudent move to source low-cost foreign currency financing and thus save Bahamian taxpayers millions of dollars in associated debt servicing costs at a time when the Government would otherwise have to pay close to double digit interest rates on the international capital markets.

However, Michael Pintard, the Opposition’s leader, yesterday argued that the real issue was whether the borrowing was legal as opposed to being low-cost financing. “There have to be consequences,” he told Tribune Business. ‘We keep highlighting where they are breaking the law. We want it on the record that this cannot be the Government continues to admit to a litany of breaches of the law with no consequences, no one held responsible, no policymaker, no civil servant.”

Accusing the Government of “acting with impunity”, he added: “These are decisions involving hundreds of millions of dollars they are making that can have an adverse impact on our fiscal position. They continue to make mistakes with no consequences at all. It’s not a question of borrowing from the Central Bank at low-cost. The issue is whether it’s lawful for them to do so. The law guards against them behaving in that manner.”

Mr Pintard urged the Prime Minister to confirm “whether or not he signed off on this” in his capacity as minister of finance. The FNM had previously argued the IMF SDR 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.

However, the party yesterday asserted that it also violates Section 68 (1) of the Debt Management Act, which stipulates that any public official found to have borrowed money from the Central Bank outside of what is allowed in the Central Bank Act commits an offence of financial misconduct.

Kwasi Thompson, the Opposition’s finance spokesman, yesterday described the Ministry of Finance statement as a “non-response” that further confirmed the FNM’s charges that the Government had entered into a financial borrowing arrangement that is not supported by law.

“There is no legal basis on which they can get this loan from the Central Bank,” the former minister of state for finance told Tribune Business. “It was confirmed in the MoU that there is a commitment to change the law, which is an admission that in order to proceed with this transaction the law must been changed but they have not yet done so.”

Mr Thompson went further in a release, accusing the Government of “pure arrogance” in its approach to the IMF SDR loan. “There is no excuse for the Davis administration to have broken the law with a promise to fix the willful breach after the fact,” he said. “The primary responsibility of any government is to uphold the law of the land.... The Opposition is dismayed that the Government would so brazenly break the law

“We also question why the Government would draw down on this facility with only a Memorandum of Understanding, which in most cases is not legally binding. Is this how the Government of the Bahamas functions? Where is the loan agreement and what are the terms of the facility? There is absolutely no legal basis for the Government to have agreed to this loan or to receive the money. It is against the law to do so.”

Simon Wilson, the Ministry of Finance’s financial secretary, previously told this newspaper 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).