By NEIL HARTNELL
Tribune Business Editor
A “$700m-plus” increase in US dollar purchases from the commercial banks during the 2022 first quarter has given the Central Bank’s governor optimism The Bahamas “can absorb” much of the pressure from high global prices.
John Rolle, speaking at the regulator’s briefing for the three months to end-March, said the year-over-year jump signalled that foreign currency inflows have risen significantly due to the tourism industry’s rebound and wider economic reflation following the COVID-19 pandemic.
Global oil prices, which last night stood at $105.3 and $107.8 per barrel on the West Texas Intermediate and Brent Crude exchanges respectively, will “take a bigger chunk” of The Bahamas’ foreign exchange earnings in 2022 but the governor said he confident these outflows will largely be offset by what the country brings in.
Noting that the annual oil/fuel import bill reached close to $1bn the last time global oil prices spiked in 2008-2009, Mr Rolle said soaring global inflation generally would inevitably mean that The Bahamas spends more foreign currency on imports because the price of most goods will rise.
“It means more foreign exchange has to be used up to sustain the level of imports, essential imports that the economy needs to keep up, energy imports,” he explained. “We know the oil component of inflation is going to take a bigger chunk of foreign exchange and help push up foreign exchange outflows....
“What I can say is that at the height of the oil prices peak in the last episode, The Bahamas came very close in some ways to spending $1bn on the oil component of imports. Last year we were a few hundred million dollars below the level of expenditure we spent on oil just a few years ago.”
Should current global prices “persist”, Mr Rolle said Bahamians “should not be surprised if the oil bill goes up $100m or a few hundred million dollars. But that doesn’t immediately translate into a reduction of foreign exchange because it’s happening in a period with all the inflows and also happening amid the level of recovery that is taking place when there is a significant bump up in foreign exchange coming into the country.
“We saw for January to March, compared to last year, $700m-plus more in US dollar purchases at the banks,” the Central Bank governor continued. “So it’s a sign that the volume of foreign exchange inflows is up, and that is going to absorb a lot of these additional pressures” from soaring global oil prices.
With increased foreign sector transactions indicating a strengthening economy still trying to recover all output lost during COVID-19, Mr Rolle said: “During the first quarter, the foreign currency inflows through commercial banks were almost two-thirds higher than were experienced in the same period of 2021. Similarly, there was a healthy resumption in domestic demand, reflected in a one-third boost in commercial bank sales of foreign exchange to the private sector.....
“Returning to the near-term risks in the economy, these are varied. One is the projected impact of rising interest rates in the US and other major economies which are intended to slow inflation, and could particularly dampen the medium-term post-recovery prospects for tourism.
“In the meantime, the inflation on imported fuel and other goods and services is expected to add to the leakage rate of foreign exchange from the economy. So far as oil prices are concerned, inflation could also make international travel less affordable - a potential drag on tourism. There are also lingering gaps in health system infrastructures at home and abroad that could lead to frustration from additional waves of COVID-19 infections,” Mr Rolle continued.
“While there, therefore, remains a net positive outlook for near-term growth and the potential for accumulation of external reserves, efforts must continue to strengthen the economy’s resilience. For its part, the Central Bank expects to maintain a cautious, but balanced, approach to managing foreign exchange risks and to safeguarding the stability of the financial sector.”
Responding to questions from Tribune Business, Mr Rolle said higher interest rates in the US and elsewhere as central banks worldwide seek to combat inflation may “impinge on persons’ ability to afford to travel” in the medium to longer-term once the post-COVID pent-up demand has been released.
“We have to be very attentive to how we move beyond that period,” he explained. “It means the environment has to be characterised by a reasonable amount of caution, and a continued focus on how we get the economy stronger and more resilient over the medium and long-term.”
Mr Rolle said the increased foreign exchange inflows will improve “the capacity of the Government to raise more of its financing needs in local currency” as this will offset the external leakages that inevitably occur when the public sector starts spending borrowed Bahamian dollars.
Noting that all government spending “contains elements of foreign exchange outflows and leakages”, the governor added: “The economy is in a stronger position to fund these outflows through inflows coming through the private sector”.
Assessing the implications of all this, the Central Bank said: “The domestic economy is projected to maintain its growth momentum in 2022 supported by robust, ongoing recovery in both stopover and cruise activities. Nonetheless, risks to the sector remain heightened as the emergence of new strains of COVID-19 could potentially derail the progress made on the international health front and disrupt the travel sector.
“Likewise, the rise in fuel costs could erode the travel industry competitiveness, while counter-inflation policies could constrain the travel spending capacity of key source market consumers. However, new and ongoing foreign investment-led projects, combined with post-hurricane rebuilding works, are expected to provide impetus to the construction sector.
“In terms of the labour market, the unemployment rate is expected to remain above pre-pandemic levels, but with further workforce engagement concentrated primarily in the construction sector and full re-employment of tourism sector employees.”