While the government is at risk of increasing its current account deficit, thereby running down its U.S. dollar reserves as a result of trade liberalization by joining the World Trade Organization (WTO), economic modeling done by global quantitative analysis firm Oxford Economics for the Bahamas Chamber of Commerce and Employers’ Confederation (BCCEC) does not suggest that this country would lose its peg to the U.S. dollar, but asks if “the associated costs” of liberalization “are worth the benefits to the economy from maintaining the currency peg”.
Lloyd Barton, Oxford Economics’ head of global trade, who spoke about the findings of the Oxford Economics report on The Bahamas’ accession to the WTO at the Bahamas Chamber of Commerce and Employers’ Confederation’s (BCCEC) Power Breakfast yesterday, said accession to the WTO in Oxford Economics’ first scenario shows that as the current account deficit becomes larger it could put pressure on the central bank’s U.S. reserves.
“But that doesn’t suggest that parity with the U.S. dollar needs to be lost,” he said. “The outcome modeling doesn’t suggest we are going to lose parity with the U.S. dollar, the modeling assumes that parity holds.
“Still, it is clear that the authorities would need to think carefully about strategies to handle the increase in foreign currency demand that would accompany trade liberalization,” he pointed out.
While this outcome is possible, the Oxford Economics report explains that the widening account deficit could be bolstered by increased inflows from foreign direct investment.
“Our modelling indicates that the balance of trade in services would improve over the forecast horizon, which reflects a pick-up in exports of services as increased foreign investment flows into the sector,” the report states.
“While this does go some way towards offsetting the deterioration of the trade balance in goods, the current account deficit is still around 2 percent of GDP (gross domestic product) wider than our baseline projections by the end of the forecast horizon.
“Of course, this widening of the current account deficit would in part be funded by increased inflows of FDI. While we expect that additional FDI inflows would fund over half of the gap that is expected to open in the current account, the remaining shortfall could still have negative repercussions on the foreign exchange situation. Over the period 2020-25, the implied shortfall in funding averages around B$100 million a year.”
The report’s second scenario explains: “The impact on the current account is more muted, meaning that associated repercussions on the foreign exchange situation would be less acute than in the WTO accession scenario, at least initially. Our estimates indicate that increased FDI inflows broadly counterbalance the widening of the current account in the years 2020-25. However, the continued widening of the current account in subsequent years would eventually outpace these FDI inflows, implying that foreign exchange policies may still need to be reviewed in later years.”
Ramesh Chaitoo, a trade and investment consultant with Oxford Economics who also worked on the report, said The Bahamas’ government, as well as other Caribbean governments, have to do away with the policy of giving so many concessions to foreign investors in order to reap a meaningful benefit from the investment itself.
Education: Florida International University, BS in Journalism