Bethel: Govt avoided devaluation by borrowing in US currency

Insisting that the government avoided the “peril of devaluation”, Attorney General Carl Bethel yesterday defended the government’s borrowing of more than $400 million in US dollars so far this fiscal year.

The government has borrowed $2.1 billion since the start of the 2020/2021 fiscal year, which has bolstered The Central Bank of The Bahamas’ (CBOB) foreign reserves to sit at a comfortable $2.3 billion, despite a nearly 40 percent decrease in revenue collections because of the COVID-19 pandemic.

Financial experts have criticized the government for borrowing at higher rates in foreign currency, rather than raising that capital here in The Bahamas.

Bethel said had the government not borrowed US currency, the Bahamian dollar’s value would have declined.

“I read in the business section that in the absence of any meaningful activity during the pandemic lockdowns and most particularly in the absence of any foreign exchange revenue, the government ‘deliberately borrowed in US dollars’. Yes, we did. We did it because we had to do it. We had to make the tough choices. In answering this implicit criticism as it will or strong observations that I read in the business section, any government worth its salt would develop a strategy to ride out every storm that confronts it,” he said while closing debate on a 

compendium of financial bills in the Senate yesterday.

“We had a simple choice to make. We had to decide whether to borrow in US dollars in order to support the value of the Bahamian dollar and the currency peg of one to one with the US dollar and to do so in the virtual, total absence of any foreign receipts. Or should we simply allow the Bahamian dollar to devalue?”

The CBOB’s most recent Quarterly Economic Report for the final quarter of 2020 stated that budgetary financing for the second quarter of FY2020/21 was dominated by external borrowings, which totaled $886.5 million, inclusive of issues of international bonds proceeds of $825 million and $61.5 million in project and policy-based loans.

The bank noted that $307.6 million was obtained from domestic sources in the form of bonds ($191.4 million), loans and advances ($94.9 million) and net treasury bills/notes ($21.3 million).

Last August, Central Bank Governor John Rolle insisted that external reserves remain adequate to fully support the value of the Bahamian dollar fixed exchange rate.

Bethel said that would not have been the case had the government relied on what “was left” in the reserves after meeting its obligations because of the economic crisis.

“The consequences of the devaluation of the Bahamian dollar would multiply the adverse impact of the COVID-19 pandemic a thousand fold with immediate effect. The prices of everything from oil to power BPL, the price of electricity would have doubled, tripled or quadrupled depending on the extent of the fallen value. A gallon of gas would have cost you $20. The most basic food items could have doubled, tripled or quadrupled, from a can of cream to baby food, to diapers, all of which have to be imported,” he said.

“And what would have happened to The Bahamas had we not borrowed US dollars and had we only spent the existing reserves that we had – at that point $1.2 billion, over the past year? What happens when the last dollar in our foreign exchange reserve runs out? No possibility of importing anything. No possibility of importing Carnation cream, pampers, baby food, basic necessities, nothing. No gas, no light, because we don’t produce any of these things and if we don’t have a US dollar to exchange for your Bahamian dollar you cannot buy a US good.

“That is the peril of devaluation. That is the peril that the government avoided thus far by consciously deciding to borrow the preponderance of all funds needed to ride out the storm in United States dollars, so that today our foreign currency reserves stand in excess of ($2.3 billion) – more than enough to satisfy our immediate needs and sustain that peg.”

Government debt is just below $10 billion. Of that amount, approximately $4 billion is in foreign currency.

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source https://thenassauguardian.com/bethel-govt-avoided-devaluation-by-borrowing-in-us-currency/