Thursday, March 16, 2023
By NEIL HARTNELL
Tribune Business Editor
The Government’s controversial borrowing of IMF special drawing rights (SDRs) reversed five years of decline by causing its net debt to the Central Bank to soar by 85.4 percent to $805.6m.
The Central Bank, unveiling its quarterly economic review for the three months to end-December 2022, provided further details on the impact of the Davis administration’s decision to access low-cost foreign currency financing by borrowing $232.3m in SDRs advanced to The Bahamas by the International Monetary Fund (IMF).
Besides causing the Central Bank’s net claims on the Government to near-double, growing by $371m during that quarter, the report revealed that the increase “contrasted” with a five-year “average quarterly decline” of $47m in what was owed to the monetary policy regulator.
“Reflecting lending to the Government against the IMF SDR allocations, the Central Bank’s net claims on the Government expanded by $371m (85.4 percent) to $805.6m in the fourth quarter as compared to the year earlier expansion of $222.1m (94.2 percent). The outcome contrasted with an average quarterly decline of $47.2m (1.7 percent) over the preceding five years,” the Central Bank said.
The transaction’s implications for the external (foreign currency) reserves and credit growth were also unveiled in the Central Bank’s report. “External reserves contracted by $615.8m (19.2 percent) to $2.584bn during the review quarter, exceeding the $277.1m (10.2 percent) reduction in the corresponding period of 2021, partly on account of the drawdown in SDRs from the IMF......
“At end-December, the total stock of external reserves stood at an estimated 33.6 weeks of the current year’s total merchandise imports (including oil purchases), as compared to 36.1 weeks in the same period last year. After adjusting for the 50 percent statutory requirement on the [Central] Bank’s demand liabilities, “useable” reserves reduced by $69.2m (5.7 percent) to $1.147bn vis-à-vis the corresponding quarter of 2021.”
As for the credit market, the Central Bank said: “During the fourth quarter, largely attributed to the Government receipt of SDR allocations, total domestic credit growth accelerated to $550.9m (6.3 percent) from $129m (1.5 percent) in 2021....
“A disaggregation by sector showed that net credit to the Government rose by $529.2m (19.6 percent), extending the $168.5m (6.1 percent) build-up in the previous year, mostly reflecting proceeds from the IMF SDRs, though the five-year quarterly average showed a decline of 1.7 percent.”
The Opposition has seized on the SDR transaction by arguing that it goes against the intent of reforms to the Central Bank Act made under the Minnis administration in 2020, which were designed in part to reduce the sums lent by the regulator to the Government so that it was no longer always acting as a lender of last resort.
The Free National Movement (FNM) has also accused the Government of effectively undertaking an illegal transaction because there was no basis for the SDR borrowing in law under the Central Bank Act. Subsequent reforms to this law, which have been tabled in the House of Assembly but not debated or passed, are viewed by the Opposition as confirmation of their accusations.
The Bill, as tabled, contains language stating it “shall be deemed to have come into force on December 1, 2022”, thus making its implementation and legal effect retroactive to when the $232.3m was advanced to the Government.
That will now be permitted by the new legislation, which states in its ‘objects and reasons’ section: “The Central Bank of The Bahamas (Amendment) Bill 2023 seeks to make provision.... of a new section 17A to empower the minister to access, utilise or convert special drawing rights allocated by the IMF for the purpose of reducing its foreign currency debt obligations and to manage its foreign currency debt operations.”
Combined with total issued Treasury Bills, and securities issued or guaranteed by the Government and its corporations, total outstanding loans to the former by the Central Bank cannot exceed 30 percent of the Government’s “average” or “estimated” revenue. Based on forecast revenue of $2.854bn for the 2022-2023 fiscal year, the Government’s $805m debt to the Central Bank is still some way below this threshold, which would be around $950m.
Simon Wilson, the Ministry of Finance’s financial secretary, previously said the MoU would provide the Government with access to financing that was an estimated 700 basis points below prevailing market rates. He argued that this seven percentage point differential could generate close to $20m in annual interest savings for hard-pressed Bahamian taxpayers compared to the likely rates if the Government had to borrow in the international capital markets.
Mr Wilson also argued that the Government’s SDR borrowing was aligned with the IMF’s stated reason for issuing them, which was their use for “fiscal purposes”. Meanwhile, another initiative temporarily introduced last year resulted in a four-fold increase in net investment outflows from the Bahamas during the 2022 fourth quarter.
The Central Bank’s temporary elimination of the 5 percent Investment Currency Market (ICM) premium for Bahamians and residents wishing to purchase the Government’s international foreign currency bonds saw such outflows increase by more than $90m year-over-year.
“Largely reflective of residents’ purchase of Government’s external bonds in the secondary markets, net portfolio investment outflows increased markedly to $123.7m from $32.7m as outflows related to debt securities accelerated to $162.1m from $16.6m in 2021,” the Central Bank said.
“However, equity and investment fund shares reported a $38.4m net inflow vis-à-vis a $16.2m net outflow a year earlier. In contrast, net direct investment inflows expanded to $225.4m from $62.6m, mainly attributed to a more than four-fold increase in inflows related to equity and investment fund shares to $275.8m from $59.7m the year earlier.”
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