The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Opposition’s finance spokesman has branded the tightened restrictions on Central Bank lending to the Government as “smoke and mirrors” designed to distract attention from the IMF SDRs controversy.

Kwasi Thompson, former minister of state for finance in the Minnis administration, told Tribune Business in a recent interview that the Free National Movement (FNM) has not altered its view that the Government’s accessing of $232.3m in special drawing rights (SDRs) had no basis in law under the existing Central Bank of The Bahamas Act.

Speaking as the reforms to that Act were passed by both houses of Parliament last week, he reiterated that the Davis administration “put the cart before the horse” by executing the transaction prior to the amendments that would make it lawful taking effect.

The changes have also imposed tighter restrictions on the Central Bank’s ability to lend to the Government. Going forward, the latter will only be able to borrow loans or advances from the regulator, with the Central Bank now prohibited from acquiring any central government debt securities - or those it has guaranteed or have been issued by a public corporation - at their initial public offering (IPO) stage.

While the Central Bank will still be permitted to buy and sell such debt securities via secondary market trading, as part of its normal operations and to ensure there is sufficient system liquidity, its “lending limits” - when it comes to loans and advances made to the Government - have been cut to 15.5 percent of the latter’s “average” or “estimated” ordinary revenue, thereby decreasing it by almost half or 50 percent in percentage terms from the current 30 percent threshold.

Mr Thompson, though, signalled that he was unimpressed by the tighter restrictions. “I think it’s smoke and mirrors,” he told Tribune Business. “I think it’s an attempt to say that they are being fiscally responsible and to cloud the fact they may have already exceeded their borrowing limits and are now correcting it.

“I think it’s just to deflect away from their [the Government’s] behaviour. I would not put any credence in it. Again, I think it’s put in there to cloud the fact they’ve already exceeded their borrowing limits and doing what they can to correct it and clean it up.”

Prime Minister Philip Davis KC, in unveiling the reforms in the House of Assembly last week, hailed the restricted lending limits as bringing the Central Bank into line with global best practices. “Two weeks ago, we tabled an amendment to the Central Bank Act to limit the amount government can borrow from the Central Bank by approximately 50 percent - from 30 percent to 15.5 percent of asset values,” he said.

“We are also prohibiting Central Bank purchases of government debt securities related to the initial public offerings of public corporations. With these measures, we are creating more transparent processes and we are ensuring the Central Bank continues to be in line with the highest international standards.

“I applaud the Central Bank leadership, including governor John Rolle, for working with us to ensure that these steps are rolled out efficiently. There are very few institutions as important to our continued national success as the Central Bank of The Bahamas.”

Mr Thompson, though, said the November 29, 2022, memorandum of understanding (MoU) between the Central Bank and the Government to facilitate the SDR transaction “speaks for itself”. He added: “Clearly the Central Bank had their concerns and wanted the Government to make these amendments....

“There’s no question that if they wanted to access cheaper financing... there’s no question that the Opposition would not have an issue with that. Where we do have an issue is the Government putting the cart before the horse.” Mr Thompson suggested the Government was forced to access the SDRs because the fiscal deficit for the 2022-2023 second quarter, the period covered by October to December, was higher than they anticipated.

The MoU, meanwhile, showed 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 agreement 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.

“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.