Central Bank to use $247 million IMF SDR to bolster reserves

The Central Bank of The Bahamas (CBOB) said it intends to use the approximately US$247.5 million from the International Monetary Fund’s (IMF) recent general allocation of Special Drawing Rights (SDRs) to strengthen the country’s foreign reserves.

The IMF general SDR allocation, which became effective on August 23, was equivalent to about $650 billion and made available to all 190 of its member countries to address the long-term global need for reserves and to particularly help vulnerable countries struggling to cope with the impact of the COVID-19 crisis.

The Bahamas was allocated $174.8 million in SDRs, which converts to about US$247.5 million and would attract a 0.05 percent interest rate, which is the weighted average of the short term interest rates on government debt of the countries and regions eligible for the SDRs.

The CBOB stressed that the government would not be able to borrow financing from this SDR allocation.

“The Bahamas’ SDR allocations are not being earmarked for lending to the government, and do not increase the Central Bank’s ability to lend to the government. The lending limits remain fixed by law. However, these allocations improve space for the Central Bank to relax the remaining 

foreign currency conservation measures, which suspended access to foreign exchange for external investments by Bahamian residents. The Central Bank will make a further announcement on these measures in the near term,” the bank said in a communication.

“At the macro-economic level, and as intended, the SDR allocations also strengthen The Bahamas’ foreign reserve adequacy assessments, as regard to the ease of both the public and private sectors to remit external interest and dividend payments abroad without constraints. Likewise, the buffers enhance the domestic financial sector’s capacity to provide Bahamian dollar funding to the public and private sectors, especially against any stimulated spending on imported goods and services of either a consumption or investment nature.”

The IMF last year approved a $250 million Rapid Financing Instrument (RFI), which was 100 percent of the quota allowed under the IMF’s SDR – to support the country’s fight against COVID-19.

This general SDR allocation, which was approved by the Board of Governors of the IMF and is the largest allocation in the history of the fund, was approved on August 2, to boost global liquidity.

The newly created SDRs were credited to IMF member countries in proportion to their existing quotas in the fund.

“The SDR allocations count as official international reserves of IMF member countries. If there is no further need for their use, they can be retained with the IMF in their allocated composition. Alternatively, they can be converted into other currencies that make up the composition of the respective countries’ international reserves and used directly to meet economic needs,” the Central Bank said.

“In particular, countries can decide whether policy buffers would be used to increase the flexibility of fiscal and monetary policies, including for pandemic-related deficit financing, debt management operations, promoting external debt sustainability, financial stability or balance of payments needs.”

The nation’s external reserves stood near $2.6 billion, according to the last economic development report released by the Central Bank.

The spread of COVID-19 caused a nearly eight-month border closure during the tourism sector, which provides the bulk of foreign currency earnings, and was at a virtual standstill.

As a result, government debt inched closer to $10 billion as the government borrowed to meet its fiscal obligations, and deficit grew to more than $1 billion during the last fiscal year.

To protect external reserves, the Central Bank last year introduced foreign exchange conservation measures to maintain external stability and by extension, the dollar exchange rate peg.

“These measures included the suspended dividend approvals for all foreign-owned commercial banks, and suspension of access to foreign exchange for investment currency purchases and financing of Bahamas Depository Receipts (BDRs), both being categories of external portfolio investments,” the bank said.

“For balance of payments sustainability, the Central Bank also endorsed a strategy that increased the government’s reliance on foreign currency borrowing to finance the larger deficits.”

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