Central Bank: RBC economist got it wrong
Guardian Business Editor
Published: Oct 28, 2013
The governor of The Central Bank of The Bahamas has said she is “unaware of how” a senior economist with RBC Royal Bank calculated a critical statistic and determined Bahamian external reserves are at a “critical” level.
Responding to emailed inquiries sent by Guardian Business in light of comments by Marla Dukharan, RBC group economist for the Caribbean, indicating that The Bahamas’ “import cover” levels are the lowest in the region, Central Bank of The Bahamas Governor Wendy Craigg said this is not accurate.
The governor suggested that Dukharan seemed to have failed to take into account the “significant foreign direct investment activity in The Bahamas”, which is accompanied by a boost in related imports, such as in the case of Baha Mar.
“We are unaware of how Ms. Dukharan calculated this very important statistic, which the Central Bank monitors on an ongoing basis, along with other key reserve adequacy indicators,” said Craigg. “However, one has to be very careful about the use of the import data in the balance of payments statistics to calculate this indicator of reserve adequacy.
“It cannot be ignored that whenever there is significant foreign direct investment activity in The Bahamas, this is accompanied by a corresponding boost in imports utilized in the completion of these projects.
“A current case in point is the Baha Mar project, which has sizeable imports of both goods and services, which are clearly not funded by the country’s external reserves, but by foreign resources, which are captured in the capital account.
“As such, one cannot simply take the import figure and use it to calculate the import cover ratio – a point which was acknowledged by the IMF in The Bahamas’ 2012 Article IV report.
“When imports were adjusted for these FDI-related transactions, the import reserve cover stood at approximately four months (16 weeks) at end-2012, and we know that projects such as Baha Mar continue to have a major impact on imports throughout 2013.”
In a presentation to Bahamas Chamber of Commerce and Employers Confederation (BCCEC) members on Wednesday on value-added tax (VAT), Dukharan made the case that such tax reform is critical at this juncture for The Bahamas, if the country is to avoid much more painful and possibly externally-imposed adjustments in the future.
She said The Bahamas’ level of external reserves equates to just seven weeks of import cover – the lowest in the region and behind “international prudential benchmarks” of 12 weeks. Dukharan linked this “structural current account deficit” to a “primary fiscal deficit” that sees The Bahamas borrowing to pay the interest on existing debt – a situation which she suggested has the possibility to cause Bahamian debt-to-GDP to “spiral” into the zone where it breaches the “debt sustainability” threshold and increased borrowings only cut back on growth.
In her response, Craigg said that while there has “admittedly” been very little rebuilding of Bahamian foreign reserves this year due to weak tourism performance and the impact of the Baha Mar project on reserve levels, the bank takes note of the fact that Baha Mar’s domestic benefits “are expected to come at the back-end” and proposed that reserve levels are experiencing a “normal seasonal dip as inventories are being replenished”.
“Reserves currently stand at $704.8 million or approximately 14.2 weeks of import cover, and we expect to maintain a comfortable level through the end of the year.”
The governor added: “Clearly, these continue to be very challenging times for small economies like The Bahamas, as is also the case for many large economies, where growth conditions remain tepid. Just recently, we had this outlook confirmed by the IMF, which lowered its forecast for a number of economies, The Bahamas included. Despite the dimmer prospects, however, we remain in the positive, although mild, growth zone, which compares favorably with many of our regional counterparts.”