By NEIL HARTNELL
Tribune Business Editor
Widening “trade imbalances” may require The Bahamas to assess the merits of the fixed exchange rate that underpins the one:one US dollar peg post-WTO, a study suggested yesterday.
Oxford Economics, in a Bahamas Chamber of Commerce-commissioned study on full World Trade Organisation’s (WTO) potential impact on the Bahamian economy, 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, the Oxford Economics study said this could widen The Bahamas’ merchandise trade deficit by up to 2.3 percent of GDP over the next decade and represent a significant drain on the external reserves.
Lloyd Barton, Oxford Economics’ head of global trade, downplayed this aspect of the report in an interview with Tribune Business by emphasising that it had not concluded US dollar parity - and the fixed exchange rate peg - were unsustainable.
He said The Bahamas’ foreign currency reserve levels “depend on a number of factors”, not just the impact of WTO accession, and it was “too simple an analysis to say the reserves will be used up” as a result of increased import demand.
“In reality there are a lot of other factors that go into assessing whether the currency peg is sustainable,” Mr Barton added. “That’s beyond the remit of this study. It’s an issue that was brought up.... It’s not the main thrust of this report. The focus should be elsewhere; the finding of WTO’s impact on the economy, and the recommendation for structural reform.”
Assessing a scenario where The Bahamas became a full WTO member without undertaking broad-based policy reforms to improve the business climate, Oxford Economics estimated that import volumes would increase by 9 percent over the four years from 2020.
With exports rising by 3 percent over the same period, the study found: “In light of the relative scale of the estimated impacts on merchandise imports relative to exports, the trade deficit in goods would widen significantly as a result of WTO. Our results show the deficit widening by around 2.3 percent of GDP relative to baseline levels, where it remains over the medium term.”
While this would be partially offset by trade in services, Oxford Economics forecast that the current account deficit would still be larger by a sum equivalent to 2 percent of GDP come 2029.
“While we expect that additional FDI inflows would fund over half of the gap that is expected to open in the current account, the remaining shortfall could still have negative repercussions on the foreign exchange situation. Over the period 2020-2025, the implied shortfall in funding averages around $100m a year,” the report said.
“There are no universally applicable measures for assessing the adequacy of reserves, but it is clear that this scale of shortfall would have the potential to deplete all of the Central Bank’s estimated ‘useable’ external reserves of $522m over this timescale. That said, the Central Bank has been successful in increasing the stock of reserves in recent years through proceeds from external bond issues and other sources.
“Still, 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.”
However, in a scenario where The Bahamas undertook fundamental economic reforms to accompany WTO accession, Oxford Economics said the current and merchandise trade deficits would be lower due to stronger foreign direct investment (FDI) inflows and foreign currency export earnings.
“The impact on the current account is more muted, with the deficit levelling off at around 1.3 percent of GDP above baseline levels over the medium term (compared to 2.1 percent of GDP in the [other] scenario),” Oxford Economics said.
“This reflects both the larger size of the economy (which boosts GDP in the denominator) and an additional boost to exports of services, reflecting increased domestic investment in the sector.
“The more muted impact on the current account means that associated repercussions on the foreign exchange situation would be less acute than in the [other] scenario, at least initially. Our estimates indicate that increased FDI inflows broadly counterbalance the widening of the current account in the years 2020-2025,” the report added.
“However, the continued widening of the current account in subsequent years would eventually outpace these FDI inflows, implying that foreign exchange policies may still need to be reviewed later on.”