Exchange control push is a 'devaluation hedge'

As of Friday, February 9, 2018

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A well-known businessman yesterday questioned the motives driving exchange control relaxation, arguing that many advocates support it as a 'hedge' against devaluation rather than boosting economic growth.

Sir Franklyn Wilson, the Arawak Homes chairman, told Tribune Business he "hadn't heard anyone" talk about increased exchange control liberalisation as a means for "growing the economy" and increasing job-creating investments.

Instead, he revealed that many in the private sector viewed it as "a strategy to protect against the devaluation of the Bahamian dollar" by giving them increased, cheaper access to US dollars and other foreign currencies.

Sir Franklyn added that he had overheard persons talking about the incorporation of "multiple companies" to exploit the recently-announced measure, implemented on February 1, that allows Bahamian businesses to each maintain $100,000 in foreign currency deposits to pay for imports and related international trade.

Warning Bahamians and the private sector to be 'careful what you wish for', the Arawak Homes and Sunshine Insurance chairman said it would become increasingly difficult to "put the genie back in the bottle" the deeper exchange control relaxation progressed.

He added that the long-cherished one:one US dollar currency peg would also become "increasingly challenged" as liberalisation expanded, pointing out that the existing framework had been implemented "for a purpose" and served the Bahamas well to-date.

"Sir William Allen spoke on this many times, and his views cannot be ignored," Sir Franklyn said of the former finance minister and Central Bank governor. "The more you march down this road to liberalisation, every step puts you closer to the possibility that sustaining the one:one peg with the US dollar will become increasingly challenged.

"We have to realise that more and more liberalisation, everything we do, the movement is towards that. That [the exchange rate peg] has served us very, very well for a very long time and, if ever that is no longer the case, it will become very difficult to put that genie back in the bottle."

Sir Franklyn's views provide a new twist to the exchange control liberalisation debate, which has intensified following recent moves by the Central Bank - supported by government policy - to accelerate the relaxation of controls on capital flowing both ways through the Bahamas.

John Rolle, the Central Bank's governor, has pledged that liberalisation will occur through a phased, structured approach that its closely aligned with the strength of the Bahamas' economic fundamentals.

He has repeatedly emphasised the importance of developing the necessary administrative and regulatory systems to prevent any economic shocks, while also reiterating that the Bahamas must put its 'fiscal house' in order to safeguard against speculation and the sudden withdrawal of investor capital under a liberalised regime.

Government ministers view further liberalisation as a key element in their efforts to deregulate and reposition the Bahamian economy, while many in the private sector argue that exchange controls will leave them unable to compete in the rules-based trading environment that will be ushered in if this nation becomes a full World Trade Organisation (WTO) member.

Exchange control reforms to-date have focused on administrative relaxation, reducing these costs and those associated with obtaining foreign currency for investments abroad. Businesses are able to access foreign currency for import-related purposes more easily, and an 'amnesty' has been introduced to encourage Bahamians to repatriate overseas holdings.

The Government and Central Bank have also sought to make it easier for Bahamian companies in targeted industries to access foreign currency financing, especially those sectors with exchange earning potential, but Sir Franklyn argued that liquidity - accessing overseas financing - cannot be the primary rationale for liberalisation.

"What I'm saying to all those championing liberalisation and so forth is that the present arrangements are there for some purpose," he told Tribune Business. "What this liberalisation is intended to do is improve liquidity for businesses, but the last problem this country has is liquidity."

Sir Franklyn, referring to the $1.8 billion in surplus Bahamian dollar assets within the commercial banking system, said: "We have more money than we can use.

"We're going down this road, everyone thinks it's great, and the general narrative is it's a good thing and the country seems to be reinventing itself. But there's a risk we could be moving away from the one:one peg, and the basic cause for doing this is liquidity when liquidity in the Bahamas is not a problem."

The Bahamas' fixed exchange rate regime, or 'peg', has produced relatively predictable prices for a country that imports virtually everything it consumes. And with the US its primary source market for both tourists and commodities, many observers believe this framework has served the Bahamas well.

Others, though, believe it is less well suited for the 21st century's integrated global economy. Yet an end to the one:one peg, and reduction in value of the Bahamian dollar against its US consequences, could have disastrous inflationary effects for lower and middle income Bahamians as they will have to pay more for every day food, goods and services.

"It's not quite obvious to me," Sir Franklyn told Tribune Business of the rationale for faster exchange control liberalisation. "I'm hearing it more in the context of people wanting US currency.

"This is not about growing the economy. What I'm hearing is it's more of a strategy to protect against the devaluation of the Bahamian dollar. I heard people talking about creating multiple companies to get more than the $100,000 [foreign currency deposit allowance]. The $100,000 is something, but not enough for some people."

He added: "This thing about liberalising exchange controls, I don't hear anyone say: 'Let's liberalise this thing because it will put me in position to build a factory, build a hotel or any such thing.

"I don't hear that: Liberalise so I can build a factory, liberalise so I can build a hotel; liberalise so I can build a farm, start a fishing business. I'm not hearing that as the rationale for liberalisation. If it's not about increasing foreign exchange earnings, what are we driving at?

"I'm saying to the policymakers 'be careful', because the real strategy driving this may be protection against devaluation of the Bahamian dollar. I have not heard anyone say this is a good thing because now it's happening I will start a factory. I haven't heard anyone say that."

DEDDIE 6 years, 2 months ago

Businessmen have for a long time gotten around exchange control. Example; The Financial Controller of Commonwealth Brewery call the Financial Controller of Atlantis. Atlantis gives him a US drawn cheque to make all his purchases. He gives Atlantis a Bahamian dollar cheque to pay their employees. Clean transaction without the need to pay the bank .005 exchange rate.

ThisIsOurs 6 years, 2 months ago

Who knew we had the Coconut Bark Coin all this time?

realitycheck242 6 years, 2 months ago

Suggest creative ways to get the Banks to use some of that pent up 1.8 billion liquidity in the banking system to help unleash the creative spirit of Bahamian young people and entrepreneur's sir snake. You have made your's big time now our young people just want a chance. . Liberalization is just being relaxed not totaly eliminated. I support the relaxation because there are Bahamian millennials and technocrats who have ideas around the world that they want to bring to fruition in this country. Some on them have limited funds and the Banks have been a dream killer to many of them..Relaxation is all about the people with small ideas that may grow big someday. Remember many of today's big name companies started in garages Relaxation goes hand in hand with the commercial enterprise Bill.

Socrates 6 years, 2 months ago

there is some merit to what he says, no doubt.. cheaper place for tourists if we devalue, but lower standard of living for most of us, since we will be unable to afford many things we have today that are all imported. so whats our choice to be? remember that some 'expert' recently opined that at most the B$ is worth 75 US cents...

happyfly 6 years, 2 months ago

This scum bag was driving the Bahamian economy over the cliff whilst him and his PLP leeches treated the public purse like their own personal ATM. That was before the Bahamian people voted them out in to the wilderness by the biggest landslide in history. Now he's talking about devaluation like he cares ? Why is this newspaper publishing this worthless garbage coming out of a traitor's face ? At least now we all know what's best for the country is the opposite of what the snake say.

observer2 6 years, 2 months ago

I am sure the both Knights have US$ bank account and access to the US capital markets which have provided greater returns than the Bahamas stock markets. These accounts have been outside of the Bahamas for decades.

I am also sure that both Knights have deep interest in monopolies (oil and gas) and cartels (banking, shipping etc) that provide them with unusually high returns in Bahamian dollars.

Us proletariat will just have to stay black and poor and fully shut out of the global markets like we have been for the last 200 years since the abolition of slavery.

I say let Bahamians do exactly what they want with their hard earned money. If they want to convert it to US dollars then let them. Why should only the rich have access to foreign capital.

Also, I say, let the damned Bahamian dollar float. Let it devalue. Most Bahamians have so little money that it wouldn't make a difference. The Knights don't want to devaluation because it acts as a natural mote to prop up the crony capitalistic endeavors.

On the other hand the Central Bank's relaxation of exchange control is laughable and will be ignored by the commercial banks (including those where the Knights have a big interest).

Essentially the Central Bank has put the burden of regulation of the new exchange control laws on the banks. The banks will now have to perform impossible fiduciary tasks. As the Knight said above, what is to prevent a business opening a US dollar account at every bank? To this I add, what happens when the balance goes above $100,000? Does the bank freeze the account because it is not in compliance with Central Bank regulations? Does it reject incoming wire transfers? What happens if a business man pays his child's school fees in Canada out of the account or runs his personal expense in Canada through the account? Is the bank suppose to regulate and inspect exactly what the payments are for? Suppose the business wires the funds out of the country to invest in the global capital markets and not use it to buy inventory? How are the banks going to police the accounts?

The answer is that the bank will not police the accounts, the banks will simply not open US dollar accounts for Bahamian businesses because during Central Bank inspections they will see that the accounts are not in compliance.

OldFort2012 6 years, 2 months ago

I have thought long and hard about this and my conclusion is that, unfortunately, the time for liberalisation has been and passed. There has never been a "currency union" in history that has not eventually failed. We have a currency union through our peg of 1:1. The time to have liberalized and let the B$ partially float was in the 90s. Then the B$ could have been allowed to slowly depreciate and it would have cushioned some of the terrible damage done to our economy in 2008.

Now is simply too late. If we floated now, the B$ would sink to 0.50 without touching the sides. The poor might not have any money, but they EARN money to buy food food. On that day, since we produce ZERO and import nearly all food, their daily breadbasket costs would double. There would be rioting and murder all around us.

Our only reasonable solution now is to abolish the B$ entirely. Let us face it, 400k people on some sandbanks, producing nearly nothing and importing nearly 100% of their needs are not a real economy and do not need a real currency. We can just retire all B$, exchange them for US$ and then all would be much simpler: we can cut the Central bank staff in 1/2, we can let the banks do their job, we can cut the interest rate premium considerably. That would unshackle creativity and bring opportunity. Lets just do it.