By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Central Bank breached its legal limits by increasing government bond holdings to $200 million in the wake of Hurricane Matthew, the IMF has revealed.

The Fund, in its full Article IV consultation report on the Bahamas, urged the Government and Central Bank to “reverse” this position and bring the latter back into compliance with statutory restrictions. The Government and Central Bank, in response, argued that the limit was only broken in extraordinary circumstances - namely to assist the Christie administration with “emergency financing” in Matthew’s wake, so that it could provide disaster relief and infrastructure repairs.

They added that amendments to the Central Bank of the Bahamas Act will be introduced before year-end 2017, a move previously foreshadowed to Tribune Business by Central Bank governor, John Rolle, to impose “stricter limits” on the regulator’s government bond holdings. However, the IMF’s full Article IV report argued that reducing the Central Bank’s foreign currency debt holdings would “strengthen the credibility” of the Bahamas’ one:one exchange rate peg with the US dollar and boost financial stability.

“Following the passage of Hurricane Matthew, the Central Bank of the Bahamas increased its holdings of long-term government bonds to $200 million, about 2 per cent of GDP, breaching statutory limits.

“However, Central Bank’s main target - on maintaining a level of reserves of at least 50 per cent of the monetary base - continued to be met, albeit with smaller margins than in the past. [The IMF] noted that increases in these holdings should be reversed to ensure compliance with statutory limits.”

In response, the Minnis administration and Central Bank both promised the IMF that the latter planned to reduce its holdings of government paper.

“They argued that these holdings increased due to emergency financing needs of the Government, following the passage of Hurricane Matthew,” the Article IV report said.

“They also noted that they have prepared draft amendments to the Central Bank law to introduce stricter limits on Central Bank holdings of government securities, which they intend to submit to Parliament by end-2017.”

The IMF, meanwhile, also zeroed in on Bank of the Bahamas, with the Minnis administration confirming that its ultimate goal is to privatise the BISX-listed institution.

The Government now owns 82 per cent of the troubled bank’s equity, and the Fund urged it to restructure Bank of the Bahamas “to isolate its business decisions from political interference”.

Describing the recent transfer of $166 million worth of ‘toxic’ loans to Bahamas Resolve as “a good first step” in resolving the bank’s long-standing troubles, the IMF urged the Government to focus on developing a longer-term solution.

“The recent transfer of a large fraction of non-performing loans from the Bank of Bahamas to a special purpose vehicle (SPV) is a welcome first step,” the Article IV report said.

“However, a permanent solution is still needed to reduce fiscal contingencies, which should include pursuing a resolution of non-performing loans in the SPV [Bahamas Resolve], stepping up efforts to restructure remaining non-performing loans at the Bank of the Bahamas, strengthening the bank’s capital and liquidity, and restructuring the institution with a view to isolate its business decisions from political interference.”

The IMF said Bank of the Bahamas’ non-performing loans were equivalent to 2.5 per cent of Bahamian gross domestic product (GDP), with the bank’s loan loss reserves equal to 1.1 per cent of GDP at year-end 2016.

The latest transfer to Bahamas Resolve, it added, had removed 70 per cent of the stricken bank’s toxic loans from the balance sheet.

“A permanent solution for the Bank of the Bahamas is also necessary to reduce fiscal contingencies,” the IMF reiterated.