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$500m Wto ‘Shortfall’ Pressure For Us$ Peg

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas’ one:one US dollar peg may face growing pressure from an annual $100m external reserves “shortfall” sparked by widening WTO-induced trade deficits, a study will warn today.

The Oxford Economics report commissioned by the Bahamas Chamber of Commerce and Employers Confederation (BCCEC), which is due to be released today, will say expanding trade imbalances may force this nation to reassess its fixed exchange rate regime if it becomes a full World Trade Organisation (WTO) member.

Tribune Business understands that the study, which examines the likely economic impact from The Bahamas joining the world’s trade rules setter, forecasts that imports will increase post-WTO accession as the lowering/elimination of many import tariffs makes them relatively cheaper for businesses and consumers.

With exports and foreign direct investment (FDI) inflows unable to fully compensate for the drawdown on foreign currency to purchase these items, sources revealed the Oxford Economics study finds this will widen The Bahamas’ merchandise trade deficit by a sum equivalent to 2.3 percent of GDP over the next decade.

A trade deficit means The Bahamas imports more physical goods than it exports, and the Oxford Economics study will warn this could result in a $100m shortfall between foreign currency outflows and inflows over the five years between 2020 to 2025.

Just 50 percent of the Central Bank’s external reserves are deemed to be “free” due to its existing local currency liabilities. Sources yesterday said that, based on $1.301bn in external reserves at February 20, 2019, the report suggests some $500m of the $655m in useable foreign currency holdings could be wiped out in the worst-case scenario it paints.

However, Oxford Economics will say the outcome is much more positive if The Bahamas is able to address its structural weaknesses and bottlenecks simultaneously with joining the WTO, and negotiate more favourable accession terms such as the phase-in of key tariff reductions.

Should it succeed in these areas, sources said the resulting increase in FDI and exports via a more competitive business environment would help offset the expected surge in imports, and ensure foreign currency outflows better matched inflows over the short to medium-term. Longer term, though, the trade deficit will still continue to widen.

“It is clear that the authorities would need to think carefully about strategies to handle the increase in foreign currency demand that would accompany trade liberalisation, and whether the associated costs are worth the benefits to the economy from maintaining the currency peg,” the Oxford Economics report will say.

It is understood that the report, while not explicitly recommending that The Bahamas become a full WTO member, nudges this country in that direction by finding that the likely overall impact post-accession will be positive for the economy.

The chamber has previously said Oxford Economics’ findings would determine whether it throws its, and the private sector’s, support behind the government’s drive to accede to full WTO membership by June 2020. The conclusions that Tribune Business understands it has drawn now make its backing more likely.

But Oxford Economics will also say that WTO accession must be part of a much wider economic reform and restructuring strategy, and that The Bahamas will only maximise the benefits if it addresses the internal obstacles that have helped to stifle annual GDP (gross domestic product) growth over the past decade.

Such obstacles include the cost and reliability of electricity; access to capital (especially for micro, small and medium-sized enterprises); the cost and ease of doing business; bureaucracy and red tape in dealing with government agencies; a lack of transparency and accountability in the investment approvals process; and the need to improve governance and the rule of law.

“WTO is not a silver bullet, and The Bahamas needs to address its own demons,” one source, speaking on condition of anonymity, told Tribune Business. “Whether the issue of WTO is at hand or not, we can’t advance our economy if these issues - which have been repeatedly identified - still stand in our way.”

The Oxford Economics report is understood to explore two WTO accession situations. The first involves acceding with only modest reforms to this nation’s trade processes, while the second combines joining with internal reforms that address The Bahamas’ structural weaknesses and a strategy that obtains more favourable accession terms.

Should The Bahamas adopt the latter’s more comprehensive approach, Tribune Business understands Oxford Economics has estimated it could lift the economy’s long-run average annual GDP growth rate to around 2 percent - higher than the 1.5 percent currently forecast by the International Monetary Fund (IMF).

And the Chamber’s consultants are also said to project that this would help slash The Bahamas’ national unemployment rate from its current 10 percent to 6.5 percent over the next decade, driving it to its lowest level this century.

The Government’s strategy of striving to achieve the 15 percent average import tariff rate demanded for WTO membership, while still maintaining or increasing those that protect Bahamian manufacturers from foreign competition, is understood to be broadly supported by the report.

The Oxford Economics study will say that only 250 tariff lines are critical to the survival of Bahamian farmers, agricultural producers and manufacturers, but warns that the 60-100 percent tariff rates sought by the latter are unlikely to be accepted by other WTO member countries during the accession negotiations.

Sources said the report also warns that The Bahamas will find it hard to retain the current “blanket” investment approvals regime, where all FDI projects must be approved by the National Economic Council (NEC) and Investments Board, and be valued at $500,000 or greater.

“It is unlikely that the Bahamas will be allowed to join the WTO with a horizontal economic needs test (ENT) for all investment and a requirement that all foreign investment proposals must be over $500,000,” the Oxford Economics study will say.

“In fact, the almost total control over investment in The Bahamas is more in line with a centrally planned than a market economy. Normal market signals interpreted by investors such as return on capital, market assessments, etc., seem to be overridden by the Government.... It is fair to say that there is inadequate transparency or predictability in the Bahamian investment regime.”

Sources said the study will suggest that a more flexible investment approvals regime could attract greater FDI inflows to The Bahamas.

Comments

bcitizen 9 months, 3 weeks ago

Many of the Bahamas economic woes can be solved without the WTO and joing the WTO without fixing the problems currently hindering our economic growth, many of which are mentioned above will be a disaster.

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DDK 9 months, 3 weeks ago

WTO is not for The Bahamas, certainly not at this time, but it seems our leaders are not astute enough to understand all the inherent ramifications of the proposed "accession" and back away. As a nation we are too corrupt, too disorganized and too incompetent.

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Economist 9 months, 3 weeks ago

This study gives us a road map to our success. We must follow the advice and benefit from it. If we don't join we will slip further back and unemployment will increase.

It is clear that we are at a turning point in our countries future. We either change, join and do well or we don't do either and become another Haiti economically.

Focusing on WTO has made us focus on making doing business more easy. Business License renewals are a good example. It has also required us to look at Fiscal Responsibility and we now get quarterly reports from the Government.

The lack of foreign direct investment is killing us now. We won't get much FDI unless we join the WTO.

Thank you Chamber for providing us with a way to succeed.

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banker 9 months, 2 weeks ago

This is one of the very few intelligent posts on this topic. Re-read this line over again: "The Bahamas is more in line with a centrally planned than a market economy" This is why communism failed in the 1990's. In a free market world, a centrally planned economy cannot function intelligently because no one or group is smart enough to know all of the factors and have all of the information of the economic drivers. The telling tale is the $500,000 threshold for FDI for the Bahamas. Goodbye Tech Hub and startups. Cayman added $4 billion to their economy with blockchain compaines, because the threshold to join Cayman Enterprise City, is roughly $12,000. Joining the WTO is going to be hellishly painful for the Bahamas. No doubt about it. But it will be even more painful when we are forced to devalue the Bahamian dollar to 35 cents (which most external economists figure it should really be).

There are two other alarms and one is mentioned here. There is the term "usable reserves", meaning cash or other liquid instruments. I don't know how much, but a good portion of the reserves are not liquid. They are accounting tricks. Like when the govt borrows USD and gives the Central Bank a note for it, it is added to the dollar reserves, because it one day will be fungible in American dollars. But it would be illiquid in an emergency. The bomb in the economy is the unfunded $1.2 billion that is owed by the government to NIB. That is 15% of the total economy of the country for a year. At least we have half a chance with WTO by joining the market economy and taking the pain now, rather than continue on and take a huge death blow later. It really is that bad.

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Well_mudda_take_sic 9 months, 3 weeks ago

This Oxford Economics report is just another report written by a hired foreign think tank to support the pre-determined position of the commissioner of the report, namely the BCCEC. The report is nothing but a bunch of poppy cock! The very serious downside consequences of us joining the WTO in any way whatsoever are well known to most Bahamians.

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Chucky 9 months, 3 weeks ago

Let’s be honest , our dollar is not really worth the same as a usd. Essentially nobody wants our dollars, and the peg is hurting us economically. If we dropped the peg out labour rates would, or could be competitive if not justifiable compared to productivity. A Bahamian dollar at 50cent usd would make our labor rates more acceptable given production.

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realfreethinker 9 months, 2 weeks ago

The real good bold move here would be to do away with the Bahamian dollar and go strictly US. The only value of the B dollar is sentimental

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Chucky 9 months, 2 weeks ago

think we'd be better going with the EU or China, USD cant be long for this world.

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DWW 9 months, 2 weeks ago

this would be disastrous for the common man in the Bahamas. and you apparently aren't one of them and apparently could care less about Joe Bahamian.

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banker 9 months, 2 weeks ago

Joe Bahamian een doin' too well now. Middle class is rapidly shrinking. The irony is that Hubigitty wanted to diversify the monolithic economy years ago and he lost the election because of PLP perfidy.

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truetruebahamian 9 months, 2 weeks ago

The WTO is the wrong road for the Bahamas.. absolutely.

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Well_mudda_take_sic 9 months, 2 weeks ago

Red China seems to be throwing its money everywhere in our society in effort to 'bribe' The Bahamas into joining the WTO. Bahamas membership in the WTO would greatly serve Red China's interests, but not the interests of the Bahamian people. Membership in the WTO would be disastrous for our country and our way of life. We, the Bahamian people, would lose control of just about everything to do with our economy and our country's finances. It would accelerate foreign ownership and/or control of all aspects of commerce within and to and from The Bahamas. Bottom line: Bahamians would be locked in under the WTO as a low cost source of labour for foreign interests.

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banker 9 months, 2 weeks ago

FYI - Bahamas has one of the highest labour rates in the Caribbean. It is one of the problems.

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TheMadHatter 9 months, 2 weeks ago

"Such obstacles include the cost and reliability of electricity; access to capital (especially for micro, small and medium-sized enterprises); the cost and ease of doing business; bureaucracy and red tape in dealing with government agencies; a lack of transparency and accountability in the investment approvals process; and the need to improve governance and the rule of law.

“WTO is not a silver bullet, and The Bahamas needs to address its own demons,”...

Well i guess we can kiss that goodbye. We love our demons too much. We is kiss da boongie of demons day and night.

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DWW 9 months, 2 weeks ago

I call BS on the statement that IMPORTS WOULD RISE UNDER WTO. that is a completely unfounded and baseless. so we'd go from 95% importing everything to 95.5% importing everything. thanks for the laugh Oxford Think Tank. All i care about is if we get US netflix and get rid of Latin American TV channels on Cable Bahamas. and get iTunes music, Amazon prime shows and movies. haven't seen a single episode of GOT because i can stream it in the Bahamas. and i don't want to pirate music, i want to pay the artist i want to support but i can't because the Bahamas is blacklisted. if WTO gets us off that blacklist, then i'm all for it. All hte other crap is just noise in the market place from the "Old Boys" who own all the businesses in the Bahamas. As far as transparency with FDI projects and proposals, most investors i've met want to keep the project quiet, so no one else steals the show. so again, this report is BS and out of touch with reality.

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