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Central Bank exceeded Govt lending limits at year-end '22

The Central Bank of the Bahamas.

The Central Bank of the Bahamas.

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank would have massively exceeded its legal lending limits to the Government had the latter's accessing of $232.3m in IMF special drawing rights (SDRs) been included in the 2022 year-end calculation.

The banking regulator's audited 2022 financial statements, released yesterday to accompany its annual report, reveal it had in any case exceeded its legal limit for "temporary" loan advances to the Government by some $2.3m as of end-December 2022 although the breach was deemed to create no concern.

However, the Central Bank's annual financial statements underline the urgency with which its governing Act had to be changed by Parliament recently to exclude the International Monetary Fund (IMF) SDRs from the calculation involving its temporary loan advances to the Government. For, if they had been included, the regulator would have exceeded its legal lending limits by some $234.6m as at year-end 2022.

Prior to the passage into law of the recent Central Bank of The Bahamas Act amendments, the banking regulator's legal lending limit on loan advances to the Government were supposed to be capped at 30 percent of either the average or "estimated ordinary" revenue of the latter - whichever is less. However, before the amendments were passed, at year-end 2022 these advances stood slightly in excess of the target at 30.12 percent of government revenues.

"The Bank may provide temporary loans to the Government where the amount of the loans which may be outstanding at any one time, taken together with the Treasury bills or securities issued or guaranteed by the Government or a public corporation, shall not exceed in aggregate 30 percent of the average ordinary revenue of the Government or 30 percent of the estimated ordinary revenue of the Government - whichever is less," the Central Bank's financials state.

"The loan should mature within 91 days, and the interest rate on the loan is based on market-related interest rates. At the year-end date, advances to the Government were 30.12 percent (2021: 28.89 percent) of the lesser of such revenues, which exceeds the Bank’s temporary loan limits to the Government by 0.12 percent or $2.3m. This was significantly impacted by the facilitation of secondary market redemptions during the year. Per the Act, there are no resulting concerns for exceeding the limit."

However, the financial statements' note 11, dealing with advances to the Government by the Central Bank, reveals just why the latter's governing Act had to be amended. "Prior to the amendment to the Central Bank Act's section 17A, the SDR loan would have been included in the calculation of the temporary loan limits," they confirm.

"The amendment to the Central Bank Act's section 17A excludes the SDR loan from the temporary loan limit calculations and, as a result, removes the SDR loan balance from this assessment." The Central Bank's financials also describe the $232.3m SDR transaction as a "loan" - a description that the Government, and Prime Minister Philip Davis KC, have furiously rejected.

Labelled "SDR loan to the Government", note 17 reveals that the interest rates attached to the transaction fluctuate between 0.05 percent and 2.92 percent. The facility is also due to be repaid "in full or in part by December 31, 2023". The notes said: "The SDRs are convertible into US dollars and, at year-end, the loan totalled $232.661m.

"The loan bears variable interest rates, which fluctuate on a monthly basis, ranging from 0.05 percent to 2.92 percent, and is anticipated to be repaid in full or part by 31 December, 2023. The interest shall be repaid at such frequency and on such dates as may be set by the IMF, which is normally on a quarterly basis.

"The Memorandum of Understanding (MOU) further stipulates all obligations related to the SDRs including all costs, charges and payment of interest will be the responsibility of the Government without a financial burden to the Bank."

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 MoU 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, meaning the Government was late again.

Comments

Sickened 1 year, 7 months ago

Phew. Thank God the PLP quickly amended the law right after they broke it. All good now. Big smiles all around. Job well done.

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