Rolle suggests use of unspent reinsurance payments to help bolster economy

A significant portion of funds remain in the external reserves from reinsurance payments following Hurricane Dorian, according to Central Bank Governor John Rolle, who said they are better off being spent than sitting in the external reserves, which in mid-July stood at $2.6 billion.

During a quarterly economic briefing, Rolle said there is at least $200 million in reinsurance receipts that remain unspent, that could help bolster the economy much faster as it emerges from the COVID-19 pandemic.

“The general trend of turnaround in the economy is a good thing. What we are saying though is that we still have funds carried over in the accumulated balances that relate to reinsurance payments for the hurricane. There is no intention or desire for those funds to just sit unused. We would like to see the economy benefit from a faster pace of rebuilding, which would mean that those resources get used up,” he said.

“So to the extent that there are still a considerable of amount of funds within The Bahamas that are from reinsurance payments and that are expected to be put into the rebuilding of damaged properties following the hurricane, we’re better off seeing those funds used up in rebuilding and better off seeing those funds not in the reserves, but in payments for the goods and services that contribute to the rebuilding.

“Just to give you an example, after the hurricane it is estimated that the reinsurance receipts were well in excess of half a billion. Today from what we have seen we estimate that there is at least $200 million or so in funds that came into The Bahamas that have not been used. So we would be better off seeing those funds spent on rebuilding.”

Rolle pointed to what he called a complete turnaround of commercial banks during the first half of the year, where on a net basis they actually took in more foreign exchange from their customers than they sold to their customers.

He said there is a net differential of more than $100 million in foreign currency purchases from the public over sales when comparing the first half of 2021 to the first half of 2020.

“Already we’re seeing some of the balancing out to the extent that as income is returned we’re seeing the spending pick up, that is why we see that there is more foreign exchange being purchased from the banks to make payments abroad. What we did see during the first half of the year is a complete turnaround in the situation within commercial banks, meaning that on a net basis they actually took in more foreign exchange from their customers than they sold to their customers,” the Central Bank governor said.

“And that really is an indication of the fact that the businesses were selling more foreign currency to the banks. So on a net basis this year the commercial banks purchased foreign currency from the public. Last year between January and June there was a small net sale of foreign exchange to the commercial banks’ customers, as opposed to an intake.

“The differential from this year compared to last year is in excess of $100 million, so that’s an indication of the extent to which the situation for banks has reversed relative to their intake from the customers. The government is still present as was the case last year, but if you compare the amount of inflows on a net basis that we have seen from the government between January and June with the same period last year, it is not drastically different. So the added difference this year in terms of the outcome has been that the private sector is now making a net contribution to the accumulation of the reserves.”

Rolle added that the seasonal trend of decreased balances is expected over the remainder of 2021, but not to any level that would cause concern.

“When we get into the second half of the year there’s always a seasonality, in the sense that we spend more on outflows than we do in terms of intake because of the seasonality of tourism. So we expect that will continue to be a factor in terms of the net drawdown in the foreign reserves between the middle of the year and the end of the year, but it will not be at the levels that would be of concern,” he said.

“That’s the normal seasonality. What is missing from the picture right now is that credit expansion is often the added source of financing for spending abroad, and to the extent that that is not creating any pressures on use of foreign exchange, the economy is operating largely on income to some extent. And therefore on a net basis we’re not seeing the heavy pressures for drawdown in the reserves.”

Rolle said the Central Bank also expects that the foreign reserves are at a level to allow the economy to support more private sector capital raising in Bahamian dollars.

With the majority of conservation measures implemented in 2020 to safeguard against the reduction of reserves, Rolle said the remaining measures relate to capital market investments, principally through the local broker dealers or securities market firms, and the investment currency market.

“These restrictions are under review for timing, that would see them removed before the end of 2021. However, it must be emphasized that in the very near term, risks to the economy have increased, even if in the months further out they continue to subside,” he said.

“It is our capacity to maintain control over the COVID-19 risks, that will help to define the economy’s near-term trajectory; that is, around sustainability of foreign exchange market conditions, arresting further deterioration in public finances and keeping financial stability risks in check.”

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