DPM to former CBOB chief: decision on $750m loan sound
Deputy Prime Minister and Minister of Finance Peter Turnquest explained in a statement issued yesterday that government made the most prudent move when it borrowed $750 million in U.S. dollars in a bond issue last year.
Turnquest was responding to comments made in the media by former Central Bank of The Bahamas (CBOB) Governor James Smith, who suggested that government should have used the excess liquidity in the commercial banking system to satisfy local payables.
Smith’s comments suggested that government made the wrong decision when it decided on the $750 million bond issue. However, Turnquest contended in his statement that, if CBOB thought it best for government to dip into the system’s excess bank liquidity, it likely would have suggested this route for the payment of government’s Bahamian dollar bills.
“Contrary to former minister James Smith’s comments, when it comes to decisions on the timing, size and currency composition of the government’s borrowings, the government routinely confers with key market participants and, most certainly, the Central Bank,” Turnquest said in his statement.
“It would be reckless for the government not to do so. Given the Central Bank’s role as manager of the government’s domestic bond issues, the government is careful to be guided by their advice — not only on excess liquidity levels, but on market soundings regarding the appetite of the key players — such as the banks and institutional investors, to increase their holdings.”
Turnquest explained in his statement that his government urgently needed to settle unbudgeted payment arrears of $400 million when they took office in May of 2017. He said a substantial part of that funding was met through $200 million in treasury bills taken up by the Central Bank, as well as $100 million through a short-term bank loan.
“Beyond the $400 million in arrears, however, the government also had new budgetary requirements of another $922 million, which consisted of debt repayments of some $600 million and funding for the FY2017/18 deficit of $322 million,” Turnquest said.
“Having assessed the market, at the time, it would not have been possible for the government to borrow this amount of funding in Bahamian dollars. Consequently, the government sought a further $450 million in short-term foreign currency loans, until a long-term facility could be negotiated to replace these short-term facilities.
“As a former Central Bank governor, Mr. Smith would be quite aware of the considerations that inform government’s budgetary financing decisions and, therefore, should be less inclined to call into question the role of the Central Bank in these matters.
“Further, as a former governor and former minister, Mr. Smith would know better than to seek to critique the advice of the Central Bank, when he would not know the particulars of the situation. As is practice, the appropriate consultations took place, and policy decisions and choices were made, with due consideration to market liquidity, cost and risk factors.”
Smith, in his remarks, echoed concerns of CBOB, that, if the commercial banks started to open those liquidity reserves to lenders, they could begin to draw down too quickly if not properly regulated. He said government’s use of those funds would have added some balance to the high liquidity in the system, which would have acted as a primary control.