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Central Bank in 100% GDP wipe-out warning

Central Bank of the Bahamas.

Central Bank of the Bahamas.

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank yesterday warned the Bahamian economy would suffer a near-100 percent wipe-out if a Dorian-strength storm scores a direct hit on both New Providence and Grand Bahama.

The regulator, unveiling its full report on the category five storm's "lessons" for preserving financial stability, argued that such a possibility cannot be ruled out given that Hurricane Matthew struck both islands as it passed through The Bahamas in October 2016.

While agreeing that the tracks taken by both Dorian and Matthew were "unusual" compared to the paths taken by most storms, the Central Bank said The Bahamas and its financial/banking system need to brace "for more frequent, more intense, and more northerly/easterly hurricanes than have been the case in the past".

It warned: "As a useful simplification: We need to be prepared for a Dorian-equivalent storm to track over New Providence, and also to track over Grand Bahama. Such a storm would impact over 85 per cent of the Bahamian population and essentially all the nation's financial system.

"As a rough estimate, such a storm could cause damage on the order of 100 per cent of Bahamian GDP. This damage level is more than sufficient to create challenges for Bahamian financial stability."

Bahamian GDP is unlikely to be completely wiped out by a Dorian-strength storm taking this track, with the Central Bank conceding that Grand Bahama and Abaco accounted for about 16 percent of total economic output prior to September 1, 2019.

Nevertheless, given that New Providence is thought to generate around 80 percent of annual economic output or gross domestic product (GDP), with Freeport and Grand Bahama accounting for a further ten percent, the threat of significant economic damage is real.

The Central Bank said the "universal use of electronic documents" was now required for the Bahamian domestic financial system to build "the levels of disaster resiliency we need", which had been further exposed by the COVID-19 pandemic.

It also called for a "20 to 30-year plan" to strengthen the ability of Bahamian households to withstand Dorian-type disasters and subsequent job/income losses, given that many currently operate on pay cheque to pay cheque basis and have little to no savings to fall back on.

"Climate change is probably going to make The Bahamas poorer over time than would otherwise be the case," the Central Bank argued. "This reduction in wealth will flow from more frequent and more intense hurricanes, increasing sea levels, increased risk of pandemics, and economic contagion from other countries suffering from similar changes."

To cope, it said households and businesses need "to become more self-reliant" - especially since the Government will be able to provide only minimal financial relief and assistance at best post-disaster due to its own financial limitations.

Urging Bahamians to "build up savings and investments", and reduce debt, the monetary regulator said purchasing "more and better insurance" - while ensuring properties complied with The Bahamas' building code and were storm-ready - were other areas where "consumption" needed to increase.

"To take a simple example, it probably makes sense for the Central Bank and the banking industry to work together to encourage more savings by Bahamian households. Too many of these households are living with a high risk of near-immediate privation, should the family wage earners lose their jobs," the Central Bank said.

"At this point, the COVID challenge precludes some of this work, but we need to consider a 20 to 30-year plan to strengthen the typical Bahamian household balance sheet. A number of countries (such as Australia, Singapore, and Chile) have successfully followed this path, and we will need to consider what lessons we can draw from international examples."

Warning against dependency on the Government, the Central Bank added: "The Bahamian government has programmes in place to minimise the loss of life in a hurricane, and also programmes to assist in the post-hurricane physical and economic recoveries.

"These programmes, in the context of a country with limited borrowing capacity, cannot be expected to cover the private sector costs of a major hurricane, particularly a hurricane tracking over New Providence.

"Similarly, the Government has put in place extensive programmes to minimise the loss of life and health from the COVID-19 outbreak, and so far these programmes are working well. The economic challenge, however, imposes a large fiscal challenge, and leaves little room for the Government to financially support families or businesses."

And, while acknowledging the costs and difficulties, the Central Bank argued that "doing nothing" was not an option for The Bahamas when it came to structuring or purchasing some type of national climate change or catastrophe insurance.

The Bahamas already participates in the Caribbean Catastrophe Risk Insurance Facility (CCRIF), and the regulator added: "In an ideal world, The Bahamas would be able to purchase climate insurance (including hurricane insurance) on a comprehensive and reasonably priced basis, and the costs of this policy would be shared equitably across Bahamian society.

"Several regions and countries (Florida, California, and New Zealand come to mind) have created programmes from which we could learn..... It should be acknowledged, however, that any national insurance or risk mitigation plan would be expensive, and there are large practical challenges to creating a satisfactory scheme.

"Given the challenges confronting The Bahamas due to climate change, however, it is not the case that the 'do nothing' option is costless. We need to start from the acknowledgement that climate change is already imposing large costs and risks on The Bahamas, and these could well rise quite a lot over time. Taking proactive and far-sighted steps to mitigate these costs and risks is an essential element in preserving Bahamian financial stability."

Comments

tribanon 2 years, 1 month ago

Did anyone really not know this?

I guess with the height of the hurricane season just around the corner the CB must have been urged to say something by the alphabet soup agencies that its now fully beholden to. Oh well, some over-paid clerk in the CB will now be able to check another box off on the checklist.

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bahamianson 2 years, 1 month ago

Dude shut the heaven up with your stupid bad news. Who the hell wants to hear your stupid news. What are you warning about. A laymen would figure out this same result. Ok, let me give everyone free information. If we get hit with another Dorian, we will be in terrible shape economically. There, how about that.

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concerned799 2 years, 1 month ago

Why is the obvious solution of not making climate change worse by building LNG import facilities and instead going straight to solar power not mentioned?

You can not "out run" climate change by buying insurance as the warming will just keep getting stronger.

Why does the Central Bank live in an imaginary world where money and economics are somehow seperated from the need to preserve a stable climate and environment to begin with? This just can't work out with more savings/insurance etc. The storms would only grow bigger with time.

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