By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
There are “no compelling arguments” that support eliminating the Bahamas’ exchange controls regime now, a former finance minister yesterday suggesting this nation had far more important policy priorities.
James Smith, who served as minister of state for finance under the first Christie administration, told Tribune Business that there was no economic rationale for removing something that had served the Bahamas well.
Given that the Bahamas is not a large commodities exporter, Mr Smith said elimination of exchange controls - and the one:one peg with the US dollar - would do little to boost the economy even though its products would be cheaper for overseas buyers.
And, given that the Bahamas imports virtually all it consumes, Mr Smith said the likely depreciation of the Bahamian dollar in a liberalised environment would increase living costs/inflation for all residents.
Warning that history was littered with numerous Caribbean currency devaluations that resulted from IMF and international lender pressure, the ex-Central Bank governor added: “If they did that as punishment, why would we punish ourselves?”
And the Bahamas also had more important economic policy objectives to pursue, with Mr Smith listing the restoration of “sanity” in the Government’s fiscal affairs as the main one.
He was speaking after Prime Minister Perry Christie, in concluding the mid-year Budget debate, moved to dampen any public expectations that the Government was considering abolishing the exchange control regime.
The administration was concerned that some Bahamians may have been given this impression by the House of Assembly clash between Ryan Pinder and Andre Rollins, as the two came to blows on several policy issues.
This seemingly prompted a relatively nondescript statement by the Prime Minister reaffirming the status quo, where he promised that the Government would only pursue exchange control abolition “deliberately, gradually and in a cautious manner”.
Mr Smith suggested it was necessary for Mr Christie to clarify the policy, as the fallout from the ‘Pinder versus Rollins’ battle had “got some traction, as it normally does”.
He added: “Liberalisation of the exchange control regime means different things to different people. For some people, it means you can have foreign currency accounts with no restrictions.”
The former finance minister warned that exchange control abolition would have widespread ramifications for the Bahamas and its economy, particularly as it would “unlock” the one:one peg with the US dollar.
Abolition, Mr Smith explained, meant that the Bahamian dollar would move from a fixed to ‘floating’ exchange rate regime, with its value fluctuating on the international currency markets.
The Bahamian dollar would likely depreciate against its US counterpart, increasing import costs, with this nation relinquishing the stability and certainty afforded by its long-standing currency peg.
Mr Smith said the Bahamas’ economic fundamentals would have to be strong, on both the fiscal and monetary side, to ensure its currency could “ward off any speculative attacks”.
“There are no compelling arguments for liberalisation of the exchange control regime at this point in our economic history,” Mr Smith told Tribune Business.
“I don’t think, at this point in our history, that it will be a front burner item. We want to stabilise things with the monetary system, and the fiscal system is not nailed down yet.
“The major issue in a policy sense would be: ‘Why are we doing this?’,” Mr Smith said of exchange control liberalisation.
“Are we trying to stimulate exports, are we trying to lower the cost of living, or are we trying to make it easier to join these liberalised trade regimes? Which one helps the Bahamas at this stage, because we are not producing anything?
“If the exchange rate goes down, we will be paying more to import stuff we sell to them [tourists].”
Mr Smith explained that pressure to re-implement a fixed exchange rate regime arose not from the monetary sector but the tourism industry.
He recalled that after the link to the ‘Sterling Bloc’ of countries was broken, the tourism exit surveys showed many visitors to the Bahamas felt they were “really being cheated” by the different exchange rates offered in hotels compared to retail stores.
“Those people in charge of monetary policy at the time saw it was adversely affecting the main industry, and said: ‘Let’s link one:one [with the US dollar] and be done with it’,” Mr Smith said.
“It had its genesis in the tourism sector as opposed to the monetary sector, which is something we have to consider when looking at this.
“We always want to avoid unintended affects, especially adverse consequences.”
Caribbean history was full of such negative examples and consequences when countries were forced to devalue their currencies, and Mr Smith said economic requirements should always take precedence over political desires when it came to the exchange control regime.
“It’s not a question of what policymakers want, but more what the economy demands,” he told Tribune Business.
“I would put a far higher priority on getting our fiscal house in order, reducing the debt and deficit, and bringing more sanity to our fiscal affairs, matching recurrent revenue to recurrent expenditure.”
The Bahamas’ economic system, and one:one peg, means that monetary policy’s overriding objective has focused on the balance of payments - ensuring there are strong enough foreign currency inflows to both balance the current account and maintain the external reserves at an appropriate level to support import purchases.
A shift to a floating currency regime would thus have profound implications for all Bahamians.
Comments
Economist 9 years, 1 month ago
We can adopt the US Dollar like Panama and Ecuador. Then there would be no devalue.
Kafkaexpert 9 years, 1 month ago
We cannot just adopt the dollar, like Panama, that country had sufficient dollar inflows that aren't like the Bahamas tied to high volatility while also running multiple period substantial current account surpluses as well as having the support of FDI infows to justify a dollar substitution regime. The Bahamas is running a double deficit, current and primary account. We would have to either accumulate dramatic private dollar savings or run current or primary account surplus for a long period of time before being in a financial position to support that sort of regime since we wouldn't have the Federal reserve to inject liquidity into our domestic banking system if there was an economic down turn. Idealistically, yes dollarization would be great as it would lower transaction costs but we don't have the Fed to back us up in case of bank runs, or anything sort of monetary policy insurance, and have to run a very tight fiscal ship with no room for negative economic shocks.
If you can see the Bahamas running either private savings above the current 13%, near 40-50% or public savings through a series of primary account surpluses, or a positive balance of payments....then yes. But that's not our reality.
The peg is a good constraint on our government to be fiscally responsible, We do not have the economic base to support a floating regime, or the savings for full dollarization. The peg is currently the best fit and it only serves the Bahamian tax payer the faster the government gets to grip with the underlining macroeconomics of being a pegged economy and begins pushing for long term policies to get our exports and mid size firms up and running it will be good.
The sudden shock of a devaluation is never desirable for economic policy setting.
TheMadHatter 9 years, 1 month ago
Correct.
Economist 9 years, 1 month ago
Nope, do what Argentina and many other South American countries were allowed to do in the 1980's. "Brady Bonds". The Bahamas debt is no where near what theirs was.
birdiestrachan 9 years, 1 month ago
If James Smith says so, it is so, The Bahamas is blessed to have such a brilliant man among us. and the man is not mean spirited, he is very calm and intelligent, and he has never ran for political office. He serves his Country very well. May the good Lord continue to bless you Mr: Smith.
banker 9 years, 1 month ago
I want some of what you are smoking. James Smith, with his public pronouncements has been on the wrong side of everything that he has every spoken about. And he was the junior minister of state for Finance in the previous Christie regime, that wrought wrack and ruin on the economics of this country. His favourite word is "structural", and he doesn't understand what that means, otherwise he would repair the structure of the monolithic, moribund, restrictive economy. Exchange controls hold Bahamians down, by denying them the ability to invest abroad and have access to foreign capital to drive their businesses. He and the PLP is the worst of the worst things that could have happened to the Bahamas upon independence.
Economist 9 years, 1 month ago
He says so because, if The Bahamas adopted the US Dollar, the Government would have to be fiscally responsible and he does not feel that we are capable of that. So it looks as if we will have to wait for the IMF to force that on us, as they have VAT (the reported, in early 2013, that we were going to have VAT in Mid 2014).
Then we can get sensible and adopt the US D. and then we will see our economy grow.
Well_mudda_take_sic 9 years, 1 month ago
Ding bat Smith essentially confesses here that a floating rate Bahamian dollar would indeed be worth considerably less than one U.S. dollar as a result of the gross mismanagement of our country's financial affairs by successive alternating Hubiggity and Vomit led governments. He does so because he clearly sees the writing on the wall which says there is no way in hell we can maintain our foreign currency reserves at a level sufficient to keep our existing one-for-one peg as a result of our recurring annual budget deficits financed by an ever increasing amount of national debt. Smith himself has been instrumental in the creation of the financial mess that the Bahamas finds itself in today, leaving the Bahamian dollar greatly exposed to external pressures for its devaluation against the U.S. dollar. This guy could never say no or cry foul to any Prime Minister who wanted to borrow willy-nilly to buy electoral votes when he was Governor of our Central Bank and later served as Minister of State in our Ministry of Finance. Instead of hanging his head in shame, he has the temerity and audacity to try stay in the public limelight with rumours circulating that the PM is now considering appointing him Chairman of Bank of The Bahamas (BoB) and then arranging for the sale of BoB to the holding company for the Colina group. 'From worse to worser' as most Bahamians will no doubt soon learn!
concerned799 9 years, 1 month ago
Safe to say if it was depegged, govt would spend way too much, leading to more devaluation and soon it would be a one way ticket to the Jamaican dollar. Very, very bad idea.
Now getting off of oil, and going to solar would do wonders for the fiscal position! Far, far more than anything else. Those fortunes BEC spends on fuel gotta come from somewhere!
DEDDIE 9 years, 1 month ago
Exchange control is hindering growth but their are many ways to get around it. Find a company that does a lot of business in US dollars. For instant, if Commonwealth Brewery needs 20 million in US dollars, all they have to do is call a company like Atlantis. Commonwealth would deliver a 20 million Bahamian dollar cheque to Atlantis and Atlantis(from US account) wires 20 million US dollars to Commonwealth Brewery US base account. No bank conversion fees and no Central Bank approval. Its a win/win for both companies. They both save $50,000 each. Atlantis needs Bahamian dollars to pay it staff and Commonwealth Brewery needs US dollars to buy supplies.
Economist 9 years, 1 month ago
Also important is to remember that foreigners can borrow USD to do a project in The Bahamas, at say 4% or 5%, whereas a Bahamian has to borrow B$'s at 9% or 10%.
The above means that, on a 10 million dollar loan, the foreigner has a distinct advantage over the Bahamian in his own country. That's why the foreigners own the hotels and not the Bahamians.
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