By NEIL HARTNELL
Tribune Business Editor
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.