Exchange control push is a 'devaluation hedge'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known businessman yesterday questioned the motives driving exchange control relaxation, arguing that many advocates support it as a 'hedge' against devaluation rather than boosting economic growth.

Sir Franklyn Wilson, the Arawak Homes chairman, told Tribune Business he "hadn't heard anyone" talk about increased exchange control liberalisation as a means for "growing the economy" and increasing job-creating investments.

Instead, he revealed that many in the private sector viewed it as "a strategy to protect against the devaluation of the Bahamian dollar" by giving them increased, cheaper access to US dollars and other foreign currencies.

Sir Franklyn added that he had overheard persons talking about the incorporation of "multiple companies" to exploit the recently-announced measure, implemented on February 1, that allows Bahamian businesses to each maintain $100,000 in foreign currency deposits to pay for imports and related international trade.

Warning Bahamians and the private sector to be 'careful what you wish for', the Arawak Homes and Sunshine Insurance chairman said it would become increasingly difficult to "put the genie back in the bottle" the deeper exchange control relaxation progressed.

He added that the long-cherished one:one US dollar currency peg would also become "increasingly challenged" as liberalisation expanded, pointing out that the existing framework had been implemented "for a purpose" and served the Bahamas well to-date.

"Sir William Allen spoke on this many times, and his views cannot be ignored," Sir Franklyn said of the former finance minister and Central Bank governor. "The more you march down this road to liberalisation, every step puts you closer to the possibility that sustaining the one:one peg with the US dollar will become increasingly challenged.

"We have to realise that more and more liberalisation, everything we do, the movement is towards that. That [the exchange rate peg] has served us very, very well for a very long time and, if ever that is no longer the case, it will become very difficult to put that genie back in the bottle."

Sir Franklyn's views provide a new twist to the exchange control liberalisation debate, which has intensified following recent moves by the Central Bank - supported by government policy - to accelerate the relaxation of controls on capital flowing both ways through the Bahamas.

John Rolle, the Central Bank's governor, has pledged that liberalisation will occur through a phased, structured approach that its closely aligned with the strength of the Bahamas' economic fundamentals.

He has repeatedly emphasised the importance of developing the necessary administrative and regulatory systems to prevent any economic shocks, while also reiterating that the Bahamas must put its 'fiscal house' in order to safeguard against speculation and the sudden withdrawal of investor capital under a liberalised regime.

Government ministers view further liberalisation as a key element in their efforts to deregulate and reposition the Bahamian economy, while many in the private sector argue that exchange controls will leave them unable to compete in the rules-based trading environment that will be ushered in if this nation becomes a full World Trade Organisation (WTO) member.

Exchange control reforms to-date have focused on administrative relaxation, reducing these costs and those associated with obtaining foreign currency for investments abroad. Businesses are able to access foreign currency for import-related purposes more easily, and an 'amnesty' has been introduced to encourage Bahamians to repatriate overseas holdings.

The Government and Central Bank have also sought to make it easier for Bahamian companies in targeted industries to access foreign currency financing, especially those sectors with exchange earning potential, but Sir Franklyn argued that liquidity - accessing overseas financing - cannot be the primary rationale for liberalisation.

"What I'm saying to all those championing liberalisation and so forth is that the present arrangements are there for some purpose," he told Tribune Business. "What this liberalisation is intended to do is improve liquidity for businesses, but the last problem this country has is liquidity."

Sir Franklyn, referring to the $1.8 billion in surplus Bahamian dollar assets within the commercial banking system, said: "We have more money than we can use.

"We're going down this road, everyone thinks it's great, and the general narrative is it's a good thing and the country seems to be reinventing itself. But there's a risk we could be moving away from the one:one peg, and the basic cause for doing this is liquidity when liquidity in the Bahamas is not a problem."

The Bahamas' fixed exchange rate regime, or 'peg', has produced relatively predictable prices for a country that imports virtually everything it consumes. And with the US its primary source market for both tourists and commodities, many observers believe this framework has served the Bahamas well.

Others, though, believe it is less well suited for the 21st century's integrated global economy. Yet an end to the one:one peg, and reduction in value of the Bahamian dollar against its US consequences, could have disastrous inflationary effects for lower and middle income Bahamians as they will have to pay more for every day food, goods and services.

"It's not quite obvious to me," Sir Franklyn told Tribune Business of the rationale for faster exchange control liberalisation. "I'm hearing it more in the context of people wanting US currency.

"This is not about growing the economy. What I'm hearing is it's more of a strategy to protect against the devaluation of the Bahamian dollar. I heard people talking about creating multiple companies to get more than the $100,000 [foreign currency deposit allowance]. The $100,000 is something, but not enough for some people."

He added: "This thing about liberalising exchange controls, I don't hear anyone say: 'Let's liberalise this thing because it will put me in position to build a factory, build a hotel or any such thing.

"I don't hear that: Liberalise so I can build a factory, liberalise so I can build a hotel; liberalise so I can build a farm, start a fishing business. I'm not hearing that as the rationale for liberalisation. If it's not about increasing foreign exchange earnings, what are we driving at?

"I'm saying to the policymakers 'be careful', because the real strategy driving this may be protection against devaluation of the Bahamian dollar. I have not heard anyone say this is a good thing because now it's happening I will start a factory. I haven't heard anyone say that."