The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

The Bahamas would likely be forced to devalue its currency if a Hurricane Dorian-type storm made a direct hit on New Providence, an economic observer is arguing.

Dr Jonathan Rodgers, the well known eye-doctor, argued that the government and Bahamian public had a “false sense of security” over strength of the country’s fixed exchange rate regime and one:one peg with the Bahamian dollar, and said many of the conditions that would combine to cause a devaluation are in place.

Speaking on The end of exchange controls at a lecture hosted by the Nassau Institute on Wednesday evening, he said the conventional wisdom that there is no risk of devaluation for the Bahamian dollar is “absolute nonsense”.

Dr Rodgers added: “Our currency is overvalued; grossly overvalued. So when you have an overvalued currency you tend to import more than you should and export less than you could. If it’s only worth 50 cents we couldn’t import all of the stuff that we import, yet if it’s only worth 50 cents there would be more tourists coming to The Bahamas.

“That’s why our trade deficit is so big. If you have a trade deficit it is directly related to the fiscal deficit and the private sector debt. That’s why the national debt and private debt goes up every year because we consume more than we are producing, and you have to pay for it with borrowed monies. It’s all tied in.

“The government often has a false sense of security with this one:one peg, and that’s why they are having problems borrowing in US dollars. Our foreign currency debt is now is about 30 percent of our total national debt, and the problem with that is if you ever devalue then you get a balance sheet increase in the value of the principal [debt owed].”

Dr Rodgers argued that The Bahamas was “set up” for a currency devaluation if it received a major external shock. “You have massive levels of private and public debt, a very high capital account deficit when it’s more than five percent of GDP, a lot of short-term debt, a lot of foreign debt and an overvalued currency,” he said.

“So let’s say the country has a lot of debt and a Dorian comes, and that Dorian knocks the hell out of New Providence instead of Abaco. So now you’re not generating any US dollars at all. So what happens to [foreign currency] reserves?

“They go downhill, and they go down below $750m, and then you have to devalue. That’s how it works. That’s how these pre-disposing risk factors work. You have a lot of debt, you have some externality that hits you that you have no control over whatsoever and, boom, you devalue. So we need to relax exchange controls, or capital controls, and allow money to come into this country.”

Dr Rodgers said allowing large resorts such as Baha Mar and Atlantis to pay their staff in US dollars was one way to increase foreign currency inflows. A second, he added, would be to allow Bahamians to invest abroad, enabling them to generate inflows through “interest and dividends”.

He also argued that The Bahamas needs to “integrate the offshore banking sector with the domestic banking sector”, as “billions of dollars pass through the offshore banks” every year without touching the domestic economy.

“In The Bahamas today we have a liquidity trap of $1.5bn in the banking sector. It can’t get out of there because they won’t lend to anybody, and people are up to their heads in debt. So that means the flow goes down and the volume goes down,” he added.