By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

The Bahamas is not ready for any “outright removal” of exchange controls, the Central Bank’s governor said yesterday, adding that it sees “significant room” for the targeted liberalisation of capital flows.

Speaking on ‘The Evolution of Exchange Controls’ at a Rotary Club of West Nassau meeting, John Rolle said there “is still no justification path that would introduce the level of movement in short-term capital that comes to mind when some Bahamians speak about liberalisation”.

“The Bahamas is not ready for any total or outright removal of exchange controls, even though we should strive for greater liberalisation, supported by the right kinds of reforms within our financial systems, the legal and institutional frameworks around which we do business; and in national attitudes toward foreign ownership and foreign participation in the economy,” the Governor added.

“Any sign of compromise in these areas would mean  that we have to continue to adjust our views about where the Bahamas ought to end up in this process.”

Mr Rolle added that the majority of this country’s foreign trade has always been with the US, which has justified keeping the Bahamas and US currencies aligned via a fixed exchage rate regime’s peg.

And, by law, the foreign currency reserves can never fall below 50 per cent of the value of the Bahamian dollar liabilities of the Central Bank.

“The administration of the exchange control regime provides the Central Bank with the ability to manage net foreign currency flows through the economy, fully accommodate all trade or what we term current account transactions, and to restrict other flows to only accommodate certain kinds of financial and investment-related transactions though what we term the capital account,” said Mr Rolle, adding that the current regime  has become more liberal over the years.

He continued: “The area where the Bahamas sees most impact from the exchange control regime is for inward direct investments. Here, there are important caveats, however.

“The National Investment Policy has the strongest influence on how direct investments are channelled into this economy. Aside from the administrative, these policies reflect preference for investments in the foreign exchange earning sector.”

Mr Rolle suggested that “in the extreme”, a world without exchange controls would be one in which “we would have to float the Bahamian dollar; one in which the Central Bank would still have to be active trying to manage the relative stability of the currency”.

“Alternatively, it could be a world where the currency is abandoned in favour of dollarisation, and strong emphasis is placed on supervising the behaviour of financial institutions to prevent costly crisis over indiscipline or excessively risky lending practices,” he added.

“Neither scenario would diminish the need for more active oversight of financial stability or accountability to some national regulatory authority. Indeed, dollarisation would reduce the degree of monetary policy independence that a country would have, and rest more of the pressures on generating fiscal policies that are credible over the longer-term.”

Mr Rolle said that even if Bahamians had an unrestricted ability to move funds into and out of the country, the Central Bank would still have an interest in keeping the exchange rate reasonably stable.

“If for no other reason, exchange rate stability matters for price stability. And price stability or, better yet, low to moderate inflation, matters for promoting social well-being, for providing business with a less turbulent environment around long-term investments and employment,” he added.

“If a country does not have a large cushion of foreign reserves, it would lose the ability to intervene to keep the exchange rate stable. One alternative is that it could raise interest rateswithin reason, unfortunately hurting businesses that rely on credit to finance their activities.

“If neither interest rate nor other intervention options existed, then the exchange rate would have to adjust to a new equilibrium. Unfortunately, a lower value for the currency would translate into higher costs for imports, and therefore to higher inflation,” Mr Rolle said.

“The conventional view is that if a currency is worth less the value, exports become cheaper and demand for the exports would increase - which would be good for business. However, small countries like the Bahamas that lack the ability to set or vary the international price of their exports, and would normally face a price that is already established or quoted in a major foreign currency such as the US dollar.

“If the export is tourism, then recognising that most of the inputs to the industry are imported, directly or indirectly, would also mean little or no reduction in the price of the tourist product from the perspective of the outside world.

“In many countries, the large sudden outflow of capital is often also a large withdrawal of bank deposits. Banks can fail from such experiences, if the deposits they need to return are tied up in longer-term credit that will only be repaid gradually.”

Mr Rolle said there was no medium-term path for exchange control liberalisation going so far as to put the exchange rate into play.

“Hence there is still no justification path that would introduce the level of movement in short-term capital that comes to mind when some Bahamians speak about liberalisation,” he added.

“We do, however, see further significant room for purposely targeted liberalisation of capital flows, and would be prepared to formulate recommendations to the Government along those lines - in stages. At the same time there is room for more aggressive liberalisation of administrative policies, which recognises that more delegated responsibilities can be given to commercial banks, backed by a greater focus on compliance and monitoring.”

    According to Mr Rolle, the Central Bank will work to ensure continued progress on recommended, targeted easing of controls on capital, and to make significant improvements in the administrative processes.

“We will continue to build capacity to monitor foreign currency transactions and to manage the foreign reserves adequacy,” he said.

“We will continue to build capacity to monitor and manage capital transactions through less onerous processes, and are not planning any course of action that would place the stability of our currency at risk.”