Central Bank: External reserves to decline during the year

Although sitting healthily at $2.25 billion in April, external reserves are expected to deplete in the coming months as tourism remains below capacity and spending on imports for reconstruction work increases, The Central Bank of The Bahamas (CBOB) states in its just released monthly economic report.

During April, the external reserves grew by $3.1 million, an improvement from the $15 million lost during April 2020 at the start of the COVID-19 pandemic.

That $3 million added to the reserves was due in part to the resumption of stopover visitors injecting some foreign currency into the economy.

Despite the dwindling reserves and sluggish return of the tourism industry, the CBOB maintained that The Bahamas dollar currency peg is not under threat.

“Monetary sector developments will continue to feature elevated liquidity levels, due to commercial banks sustaining their conservative lending stance,” the bank said in its Monthly Economic and Financial Developments (MEFD) report for the month of April.

“External reserve balances are forecasted to decline during the year, owing to reduced net foreign currency inflows, as tourism remains below capacity and spending on imports for reconstruction work increases. Nonetheless, the external balances are anticipated to remain more than adequate to maintain the Bahamian dollar currency peg.”

Government borrowing – to the tune of $2.4 billion – this fiscal year has contributed primarily to the stable footing of the external reserves as the economy remained cut off from significant foreign inflows over the past year.

The CBOB stated that with taxable economic activity remaining below capacity in 2021, projected revenue shortfalls should continue in the near term, only 

improving as tourism does.

“Therefore, the resulting budgetary gap is estimated to be financed largely from external credit, but with a likely increased ratio of the total funding from domestic sources,” the bank stated.

On the banking side, commercial lenders purchased slightly more than $45 million net from the Central Bank in April, a turnaround from the net sale of $41.2 million to the monetary regulator in April 2020.

“In addition, commercial banks recorded a net intake of $44.8 million from their customers, a switch from a net sale of $47.4 million in 2020. Providing some offset, the Central Bank’s transactions with the public sector registered a net sale of $42.4 million, following a net purchase of $25.9 million a year earlier,” CBOB stated.

There was also moderate growth in excess reserves by $74.3 million to settle at $1.44 billion. Excess liquid assets grew by $90.2 million to $2.27 billion.

“Initial data on foreign currency sales for current account transactions showed that outflows grew by $116.3 million to $398.6 million during the month of April, relative to the same period last year,” the bank stated.

“Underpinning this outcome, notable increases were recorded for payments related to factor income and non-oil imports, by $48.3 million and by $42.9 million, respectively. Further, ‘other’ current items – mainly services and credit card-financed imports – rose by $26.7 million; for travel-related transactions, by $7.1 million and for transfers, by $3.9 million. In a partial offset, oil import payments decreased by $12.5 million.”

On the consumer spending front, there was a $5.3 million decline in consumer credit and $12.8 million decline in commercial credit, which both contributed to a reduction in private sector credit of $18.8 million.

“During the review period, total Bahamian dollar credit expanded by $68.1 million, extending the $56.4 million build-up in the same period last year. Underlying this outturn, net claims on the government advanced by $82 million, notably higher than the $27.3 million accumulation registered a year earlier. Likewise, credit to public corporations increased by $4.9 million, exceeding the $1.9 million uptick in 2020,” the Central Bank stated.

“Conversely, credit to the private sector contracted by $18.8 million, a turnaround from growth of $27.2 million a year earlier. Specifically, commercial credit lessened by $12.8 million, contrasting with a $10.2 million gain in the preceding year. Similarly, consumer credit and mortgages reduced by $5.3 million and by $0.8 million, (in comparison with) respective increases of $12.3 million and $4.7 million, a year earlier.”

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