Investment currency outflows nearly 50% due to COVID-19 restrictions

The restrictions placed on foreign exchange outflows by The Central Bank of The Bahamas (CBOB) at the onset of the COVID-19 economic crisis resulted in resident investments through the Investment Currency Market (ICM) being slashed by more than 40 percent.

In May 2020, the bank suspended residents’ access to foreign exchange for portfolio purchases in the ICM and the Bahamas Depository Receipts (BDR) Programme. Approvals for commercial banks’ remittance of dividend payments abroad were suspended.

According to the just released CBOB Annual Report and Statement of Accounts for 2020, these measures saved up to an estimated $400 million in claims on the reserves.

“While the moratorium on dividend remittances was lifted in March 2021, the suspension on portfolio outflows was not scheduled for reassessment until the second half of 2021. As to portfolio investment outflows, during 2020 there was no activity by broker dealers, while resident investments via the ICM totaled $28.4 million compared to $49.5 million in 2019,” the annual report states.

“The premium bid and offer rates for investment currency remained at 5 percent and 2.5 percent, respectively.”

As an additional safeguard to protect foreign reserves, the National Insurance Board was also requested to repatriate portions of its foreign currency investments back onshore.

Additionally, the ceiling on the Bahamian open position on short sales of foreign exchange by commercial banks was relaxed from the maximum of $5 million to the binding gap that obtained at up to five percent of each entity’s Tier I capital.

The CBOB stated this had the one-time effect of delaying recourse to the Central Bank for foreign currency purchases against the external reserves.

The CBOB noted its external financing strategy advice to the government on public sector external debt transactions contributed to net inflows of $1.0 billion.

During a press briefing with the media earlier this week, CBOB Governor John Rolle said the impact of these measures on reserves was real.

“The collective measures in our estimation would have provided a cushion in the reserves of between $350 million to $500 million, depending on how you estimate it. So the impact was real in terms of providing a cushion,” he said.

“Since then you’ve had the government with its financing activities occasionally adding some replenishment in the reserves. When you add that up you see the kinds of levels that are presently in the reserves. But certainly without those measures the reserves would be a few hundred million dollars below the $2 billion mark at this point.”

The Central Bank directly approved $3 billion in foreign currency purchases last year, which included transactions delegated directly to commercial banks.

However overall, there was a 10.5 percent decrease in reported foreign currency sales by the Central Bank, commercial banks and money transmission businesses, which totaled $5.7 billion.

“Of significance, sales contracted for oil and non-oil merchandise payments and external services, but firmed for interest payments given increased public sector obligations. Meanwhile, capital transactions also rose significantly due to public sector refinancing operations,” the annual report states.

“At end-2020, there remained eight authorized dealers (commercial banks) and 14 authorized agents (resident designated trust companies) active in providing foreign currency services to residents. A continued five money transmission business are also permitted to buy and sell foreign exchange for cross-border remittances, through clearing arrangements with authorized dealers.”

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