The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government must not allow its borrowing of $233m in IMF Special Drawing Rights (SDRs) from the Central Bank to be perceived as “a panic exercise”, a Bahamian commercial banker has warned.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the Government cannot afford to conduct its financing activities “in a vacuum” as he queried why the Central Bank Act was not reformed to facilitate the transaction prior to the two sides agreeing to it.

Suggesting that the situation again highlighted the need for a comprehensive debt management strategy that the Government sticks to, he added that the administration’s move to access the International Monetary Fund (IMF) SDRs could “cause concern in some quarters if it is seen to be reactionary” and not part of an overall plan.’

Pointing out that the SDRs are typically a short-term financing facility that the Central Bank has to repay to the IMF, Mr Bowe pointed out that the monetary policy regulator is now reliant on the Government to repay it first. And the borrowing also seemed to run contrary to the Central Bank Act itself, which was drawn up and enacted at least partially to limit its exposure and lending to the Government.

This exposure has been declining since the Act was passed, and the Fidelity chief said the SDR transaction should be part of a properly articulated, wider debt management initiative and borrowing plan. He indicated there were similarities with the $206.5m Goldman Sachs repurchase or ‘repo’ deal last year, where the Government used funds accumulated to repay future debt maturities as collateral for a foreign currency advance from the investment bank

“The reality is very much like the repo this should not be done in a vacuum,” Mr Bowe said of the $233m SDR borrowing. “It should be very clear that the Government is using this as a bridge facility. It’s not a long-term facility.

“The issue that presents itself is if there is a proper dent management strategy it means all the evaluation associated with it has been done, and the Government has enacted the legislation and the framework around it is in place to facilitate the transaction. We have to be careful this does not seem, if you like, a panic exercise.

“While the facility is certainly one to be taken advantage of, is this one that came about and was quickly accessed and they didn’t do the necessary amendments to the legislation to ready the legal environment to actually facilitate the transaction?... If this is seen to be reactionary it will cause concern in certain quarters.”

John Rolle, the Central Bank’s governor, last week 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.

Suggesting that the “opportunity cost” of not using the IMF-provided financing had “significantly” increased compared to when the SDRs were issued in August 2021, he said they 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.”

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’, and maintained this with a subsequent $385m bond - of which some $200m was guaranteed by the Inter-American Development Bank (IDB).

Simon Wilson, the Ministry of Finance’s financial secretary, previously said the MoU would provide the Government with access to cheap foreign currency financing that was 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.”