The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Central Bank yesterday said its government debt holdings are back in compliance with its governing Act, with medium and long-term maturities equal to 12.52 per cent of its demand liabilities.

The regulator, responding to the IMF's Article IV report, confirmed that proposals to impose limits on "the total value" of government debt that it can hold will be circulated for public consultation before year-end 2017.

It added that it was "continuing to focus" on reducing its lending to the Government through selling its Bahamas Government Registered Stock (BGRS) holdings to private investors through the secondary market, which has reduced its holdings by $80 million since its creation in 2017.

And John Rolle, the Central Bank's governor, last night confirmed that "at least" $150 million of $200 million in 'bridge financing' - extended to the Government in June 2017 via Treasury Bills - will be repaid "in the short term".

The Central Bank was responding after the IMF's Article IV full report disclosed that it breached its legal limits when it increased its government debt holdings in the wake of Hurricane Matthew.

"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," the Fund said.

"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."

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.

The Central Bank, moving quickly to respond to Tribune Business's article, yesterday said its own Act limited government debt holdings with maturity terms of five years or more to 20 per cent of demand liabilities. These are "the stock of Bahamian currency issued" by the Central Bank, plus deposits placed with it.

The regulator admitted that its holdings had "trended very close" to this ceiling for several years, but it acted in 2016 to achieve "a permanent reduction" in government debt holdings regardless of maturity.

However, these plans were temporarily thrown off course by Hurricane Matthew, with the Central Bank's $20 million bond investment - part of the $150 million in emergency financing raised by the Christie administration - taking it "marginally" beyond the 20 per cent limit for several months earlier this year.

Emphasising that it was now back in compliance with the Central Bank of the Bahamas Act, the regulator said in a statement: "In light of the Bank's ongoing efforts to reduce its exposure to Government debt by, inter alia, selling certain tranches of its medium and long-term securities' holdings to the public, the statutory ratio has been gradually reduced to 12.52 per cent at the end of September 2017."

Mr Rolle confirmed last night that the 12.52 per cent referred to the Central Bank's medium to long-term bond holdings, with maturities of five years-plus, and did not include short-term government paper.

The Central Bank, though, added that it was not unusual to provide the Government with financing given that it was one of its bankers. "The Central Bank continues to focus on reducing total lending to the Bahamas Government in a comprehensive fashion, both in co-ordination with the Ministry of Finance and through direct engagement with the investor community," it added.

"This addresses the legal constraint on holdings of medium and longer term debt issued by the Government, which is stipulated in the current Central Bank Act. It also addresses holdings of other debt of a shorter-term nature."

Referring to the 20 per cent ratio 'cap' on medium and long-term government debt holdings, the Central Bank conceded: "This ratio has trended very close to the ceiling for a number of years, before the Bank took action in 2016 to begin the process of achieving a permanent reduction in the measure and in total holdings of debt over time, irrespective of maturity.

"Indeed, an initial restructuring of the Central Bank's balance sheet resulted in a reduction in longer-term bond holdings in June 2016. This transaction, with institutional investors, swapped $25 million of long bonds for shorter-term instruments.

"Afterwards, the programme of secondary sales was launched in August 2016, resulting so far in total sales of $80 million off the Central Bank's balance sheet. At least another $150 million is destined to be repaid by the Government in the short-term under the terms of the bridge financing that was provided during 2017."

Explaining how its plans were blown off course temporarily, the Central Bank said: "This goal notwithstanding, it is important to note that following the passage of Hurricane Matthew in October 2016, the Bank participated in the Government's subsequent $150 million hurricane relief facility, investing in a $20 million Bahamas Government Registered Stock (BGRS) issue, while the commercial banks provided $130 million in financing via a long-term loan.

"This transaction, when added to the Bank's prior holdings of Government securities, contributed to the ratio of Government securities to demand liabilities rising marginally above the 20 per cent ceiling for a few months during 2017."

The Central Bank said consultations with the IMF had resulted in the development of a tougher legal framework, which would impose limits on the total value of government debt that it can hold.

"The present limits on holdings of government debt, referenced by the IMF, are less comprehensive than those which a new governance framework for the Central Bank would introduce," it added. "The current operations targets for Central Bank are also more comprehensive, and are geared towards strengthening the overall backing for the Bahamian dollar."