By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government had maxed out its legal ability to borrow from the Central Bank as at October 2024, the IMF has revealed, due to increased reliance on this funding source with private capital deployed elsewhere.

The International Monetary Fund (IMF), in its just-released 2024 Article IV report on the Bahamian economy, said there had been an “upswing” in the Government’s reliance on Central Bank advances during the 2024-2025 fiscal year’s first quarter because the private investors that typically fund the bulk of its deficit were instead directing capital to alternative investments with higher returns.

In particular, the Fund said these higher-yielding investments included the $130m in financing solicited by Bahamas Grid Company, the special purpose vehicle (SPV) that was formed to transform New Providence’s electricity grid. This entity, which is 40 percent owned by the Government via Bahamas Power & Light (BPL), raised $30m in equity capital and placed an over-subscribed $100m bond issue last summer.

With private investors tapped out, the Government was thus forced to turn to the Central Bank to meet its deficit financing needs for the period between July and September 2024. According to the IMF, this took the Government’s total borrowings from the banking regulator to the equivalent of 2 percent of gross domestic product (GDP) by October 2024 - a sum likely close to $300m.

This, the Fund added, also brought the Government’s Central Bank borrowings to their legal statutory limit of around 15.5 percent of the former’s average or estimated ordinary revenue. This has occurred despite a general policy thrust to reduce the Government’s dependence on credit from the Central Bank.

“Since June, there has been an upswing in the reliance on Central Bank advances - reaching 2 percent of GDP in October - as financial sector liquidity has been increasingly deployed to lend to the private sector, including through domestic issuances of higher-yielding corporate securities associated with the electricity sector reform,” the IMF’s Article IV report revealed.

“As of October, advances from the Central Bank were at the legal ceiling set by the Central Bank Act, which is higher than that of regional peers. The planned fiscal consolidation would allow the Central Bank to reduce its existing holdings of government securities and facilitate a reduction in the ceiling on advances.

“Even then, and considering the small size of new domestic currency financing sought by the central government in fiscal year 2024-2025 ($368.5m), systemic liquidity is expected to remain high with cash and cash reserves held by domestic banks $2bn above the minimum reserve requirement as of September.”

It is unclear whether the Davis administration subsequently reduced its Central Bank reliance after October as no fiscal reports have been released beyond September and the 2024-2025 first quarter. It is now unlikely to release any further fiscal-related information until the mid-year Budget which is typically presented towards the end of February.

However, the IMF’s revelations are likely to provoke renewed fiscal scrutiny by the Opposition, which last year said it had written to John Rolle, the Central Bank’s governor, seeking confirmation of whether the Government was compliant with legal limits on borrowings from the Central Bank. Mr Rolle confirmed to this newspaper that it was within its restrictions.   

Tribune Business last year revealed a sharp $158.9m in net government borrowings from the Central Bank during the 2024-2025 first quarter, based on a Ministry of Finance report. The report said that “among domestic creditors, liabilities to the Central Bank advanced by $118.6m (13.6 percent) for a dominant 1.4 percentage point boost in share to 15.3 percent” of total outstanding domestic or Bahamian dollar debt owed by the Government.

The IMF, meanwhile, suggested that The Bahamas introduce what it described as a “a well-defined ‘escape clause’ to “allow a temporary increase in the limit on Central Bank advances in exceptional, emergency circumstances”.

Noting what it described as previous monetary and fiscal policy recommendations made to the Government, it said these included reducing “the limit on Central Bank financing of the Government to help strengthen the credibility of the exchange rate regime, perhaps with the introduction of a well-designed ‘escape clause’ that would be triggered in exceptional circumstances”.

When it came to progress towards achieving this goal, the IMF added: “The legal limit on Central Bank financing of the Government was reduced by the amendments to the Central Bank Act in 2023, but it is still higher than the ones in regional peers. A well-designed ‘escape clause’ has not been introduced yet.”

The Government, in response to the IMF assessment, agreed that reducing Central Bank advances to the Government would reduce the $2bn excess liquidity in the Bahamian banking system but added that this would take time to achieve.

“The authorities concur that reducing the stock of outstanding Central Bank credit to the Government would reduce domestic liquidity. However, this must be managed over the medium-term. They agreed with the need to introduce an ‘escape clause’ to allow for a temporary increase in the limit on Central Bank advances in exceptional, emergency circumstances,” the Fund added.

“High domestic liquidity would limit the usefulness of inter-bank repos (repurchase agreements) and other liquidity management tools in the near-term, but increased private sector credit would reduce systemic liquidity over the medium-term. Further, better co-ordination between private and public sector borrowers on the timing of debt issuance would permit greater access to available liquidity for both.”