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Sunday, March 22, 2015

Are lower oil prices causing chaos? A Latin-American and Caribbean perspective.

As most of us already know, oil prices have fallen from their triple digit highs to now just about $50 a barrel. Of course, this is great news for most of us. But for other people that depend on high oil prices for profit, not so good news.

It's not just that oil prices slowly fell over the course of 2 or 3 years, but they fell so sharply and suddenly within the last year, oil producing countries were hit with a blind-sided shot that they were not prepared for.

As you can imagine, governments were in a scramble. Not just a scramble to make up the short fall, but as oil prices fell, budgets were slashed and that would spell panic for many oil exporting countries.

Nothing spelled panic as it did with the recent protests in Brazil over the last week.

Scores of persons in Brazil gathered in major cities in protest of the government. Over 1.5 million people gathered in the national stadium in protest and the numbers are expected to grow.

The protestors have asked for President Dilma Rousseff to resign immediately amidst a corruption scandal coming out of the state run oil company, Petrobras. This isn't the first major protest Brazil had experienced, and most recently was the protests prior to the World Cup 2014- cries of wasteful spending, lack of spending on the poor and wide spread theft were the most serious allegations about the process.

This Petrobras scandal, however, has rocked the country, leaving people wondering about the state of the country's finances and the fragility of the political peace as the scandal from Petrobras has hit a nerve amidst lower oil prices.

Of course, this author knew that social instability in oil producing and oil export dependent countries would happen as a result of lower oil prices. For the mere fact for what we mentioned earlier that budgets were slashed and spending programmes cut or just simply cut out.

When countries budgeted for a certain price for oil, in the case of Brazil, over $100 dollars a barrel for oil, and then oil prices plummeted to under $50 dollars, you can imagine the public accounting nightmare and the financial collapse that would ensue- money would not be spent on social projects, capital infrastructure projects, people start to watch the pennies a little more closely and then issues such as wastage- which would have been moderately acceptable at $100 per barrel- simply would not be tolerated and excesses, regardless of how long it's been going on, will be scrutinized and blames will be bandied about.

Thus is the case in Brazil, every penny is now being watched very, very closely and people have little to no tolerance for wastage.

Venezuela is going through similar challenges as well. In fact, there were thwarted attempts to oust the current Venezuelan president, Nicolás Maduro Moros. Thwarted attempts for the time being. Venezuela in particular had a break-even point of $115 dollars per barrel.

Since the plummet of oil prices and calls for his resignation for his inability to handle the oil crisis, president Maduro has accused several key people of plotting to overthrow his government, including a former general in the army and several key opposition supporters.

President Maduro has, for the moment, staved off the coups and has tried to do things to inject pure hard cash into the Venezuelan economy, most importantly of which is securing a $5 billion loan from China, to heap on top of the already $50 billion loaned to Venezuela from China since, 2007.

Of course, borrowing money and being more in debt to China comes with it's own problems. The most of which is the neighbour to the North, the USA. While they too have been in debt to China to the tune of trillions of dollars, it doesn't mean that they want Chinese involvement in Latin America and the Caribbean to the point where those nations are no longer counted on as American allies in America's own backyard.

What's also more important to note is that during the Cold War, a period of time and instability where most developing nations have not fully recuperated from its ravages, particularly if the public tide leaned heavily to the left of centre of the political landscape, president Maduro is not fully out of the clear yet. Particularly where, to be totally honest with you, all eventualities should have been covered, and especially scenarios planned for in the event of a collapse in the oil market. As a side note, it is as if we have not learned from the financial and economic crisis of 2008 in that any and every thing can and will happen. Any and every thing!

Take on the other hand what Trinidad has done as a result of falling oil prices. Trinidad has set out to cut its $10.2 billion budget for this year. Trinidad is reportedly the sixth largest exporter for oil in the world.

What also happened after oil prices started to fall, and probably not correlated but worth mentioning in any event, is that president of Trinidad and Tobago, Kamla Persad Bissessar, dealt very harshly and resolutely with a scandal that rocked the core of her government.

Within the space of a month, president Bissessar sacked 6 of her cabinet ministers amidst a witness tampering scandal. Ministers as high up as the Attorney General and her Minister of National security were all given pink slips. It was so bad that I often joke that president Bissessar fired herself, as she gave up her own ministerial post as Minister of the Ministry of the People and Social Development.

Of course elections in Trinidad are in 2015, this year. Of course. President Bissessar did the right thing, and that was try to make the best out of a very bad situation. What comes out of this is how the people read into it, which if you are a good political strategist you can play it both ways.

Whatever comes as a result, with less money to play around with, with a scandal that has rocked Trinidad, for president Bissessar dealing with it resolutely, which may mean fracturing her own party, in addition to the optics of her stepping down as a cabinet minister herself, particularly the ministry of the people, election time in Trinidad is shaping up to be a very, very curious one indeed.

This oil price issue has hit hard, and the ripples are still being felt. No doubt this is not the end of it. But, lucky for us, we are on this side of the world. The Western Hemisphere. If this were Africa and the Middle East, things would not be so cool, to put it mildly.

Tuesday, March 17, 2015

Coup d'état possible in Brazil?

Well, as of yesterday, scores of persons in Brazil gathered in major cities in protest of the government. Over 1.5 million people gathered in the national stadium in protest and the numbers are expected to grow.

The protestors have asked for President Dilma Rousseff to resign immediately amidst a corruption scandal coming out of the state run oil company, Petrobras. This isn't the first major protest Brazil had experiences, and most recently was the protests prior to the World Cup 2014- cries of wasteful spending, lack of spending on the poor and wide spread theft were the most serious allegations about the process.

This Petrobras scandal, however, has rocked the country, leaving people wondering about the state of the country's finances and the fragility of the political peace as the scandal from Petrobras has hit a nerve amidst lower oil prices.

Of course, this author sorta know that social instability in oil producing and oil export dependent countries would happen.

When countries budgeted for a certain price for oil, in the case of Brazil, over $100 dollars a barrel for oil, and then oil prices plummeted to under $50 dollars, you can imagine the public accounting nightmare and the financial collapse that would ensue- money would not be spent on social projects, capital infrastructure projects, people start to watch the pennies a little more closely and then issues such as wastage- which would have been moderately acceptable at $100 per barrel- simply would not be tolerated and excesses, regardless of how long it's been going on, will be scrutinized and blames will be bandied about.

Venezuela is going through similar challenges as well. In fact, there were thwarted attempts to oust the current Venezuelan president, Nicolás Maduro Moros. Venezuela in particular had a break-even point of $115 dollars per barrel.

With all that being said, the social instability will continue. Watch out for Middle Eastern countries and other countries that produce oil.

Sunday, March 15, 2015

No silence on gang violence.

Guns, drugs and murder, these things in The Bahamas used to be unheard of. But this is real life, filled with the anger and discontent of the blighted and adds to the economic and social strife. How have we gotten here? If someone told you the real truth would you want to hear? Probably not. So, real solutions to fixing this problem is put out of thought, and the people in the fight will continually fight this fight for all things naught.

But, how we got here is what you need to hear. Don't fear what you truly need to hear, because it's that knowledge which gives you the courage amidst the violence and threats of violence in the air.

Fact of the matter is, and to figure it out doesn't take a whizz, that The Bahamas doesn't make guns, the big ones and not even the small ones. We produce not one gram of cocaine, so the thought of us being a major trafficker leaves me perplexed to the point where you may think I'm insane.

It just doesn't seem right, that such a voracious narcotics appetite, from the folks up North and to the North-West, will do anything for that lady in white even though our law enforcement does their best to make any and every drug arrest.

The drug culture of the 80's was nothing to play with, communities rocked to the core with persons high off of their drug of choice you could not live one day with.

As with illicit activities, thus came the need to protect the strongholds in the inner cities. Inner cities became drug wastelands with barons roaming with pistols in their waistband, along with corrupt officials on the take, the lords of the street were looking to make their next victim freezer meat while one family sings hymns at their loved one's wake, the "Don-Dadda's" had just one offer to make: Take this, or die from this.

These offers no one dared to refuse, if one did they may have been found with the refuse. In broad-daylight they made you disappear out of sight, or while you snoozed they came for you in the late night. No stage fright, just show up at your front door to put another down for the final snore, good night.

What all of this has done has allowed many folks believe we really won't win this one. These people aren't on our run, and walking the streets like you used to just isn't fun. It's dangerous, really. Do you feel me? I'm not being silly, childish, scary or flippant, really.

Now as the drugs are said to be coming under control, or so some wants us to think, the gang boys are still on patrol, and with one false move you can be snuffed out in a blink.

They say that average folks need not worry, because as the bullets fly by in their flurry, it's the other gang boys that those gang boys want and not you, so do your do, live your life, go out and enjoy the town with your family members, husband or wife.

However, it's safe, until someone gets the wrong house, and obliterates everything in sight including the wall mouse. It's ok, they say, until the bullets start to rain on a mother in her bed, bullets that have no discretion, whether it hits her arms, chest, legs or head.

No, it's not ok! It's just not ok...Ok? Because now we have a gang culture, with young men and women under the impression that this new family is their lifeblood, this new culture, but really these new family members are nothing but vultures. For anyone that tells you "hang with us", and leave school, must really think you are a bloody fool. While you, the new fool, leave school to protect their interests, rest assured one day they will see you as their witness. Get it? You can bet on it.

So instead of producing that new scholar, we have lost ones looking to protect someone else's dollar, with their A.K. as their a.k.a, forget the abc's, please, they want to make their competition d.o.a.. Yes, they will kill this city. That's right, we will feel the pity.

As the bodies pile, and the morgue puts another one on file, while we cower, the folks in power, really do understand but they have no solution for this mess on hand. If there was an easy solution, we would be using it by now and we would not feel the disillusion. If we had any short or long term solution, we would be shouting it too and fro, we would see the results and the entire world would know, from Beijing to Houston.

The problem just can't be solved simply, you see, and with this other concurrent dynamic, I want you to really understand me: Those same crack 80's, the 80's that we were reported to only traffic drugs to the USA (yay! we only trafficked drugs to the USA), we created crack men and ladies of our own and those ladies produced crack babies. Those same crack babies also had babies.

These crack babies grew up on their own, with no mother or father at home, they had to fend for themselves until they became grown, and had to live life alone where love and attention was never truly known.

They know it, and they hate it, and their actions show it, and we fail to appreciate it, but we need to debate it.

While the crack babies' baby may not use crack, maybe, they are born addicted, hungry and afflicted. They are socially, mentally and physically maladjusted, not in their right mind, from the onset of birth, for what it's truly worth, one would have to wonder if they should truly be trusted? Of course you should feel disgusted. Of course, trust my source.

It may seem harsh, but when we see the amount of drug use involved in today's violent crime, what seems very harsh is the best description of the time.  A time that may be repeating itself, but on a smaller scale, a time that's telling itself, and a time where the evidence in our social constructs and safety nets have quite clearly shown us a fail.

Who's truly to blame: Is it you, me, you over there, you right here, him or her? It seems like a blur. To some, but not me my learned one.

We should not be blaming anyone anyway, because when the accusations start to fly, the seriousness of the theatre that's these streets and the lives of our youth you see as you drive by, becomes the stage of one very sad play, all day, every day.

The big kids these days clearly aren't playing, and they don't care for anything the hypocrite in a suit appears to be saying. It's a real fight to get our young people back on track, and in the right frame of mind, we have to get it right or else this country will be put flat on it's back, we are very seriously running out of time.

This crime, drugs and gang problem already has us on our knees, with The Bahamas being now labelled as a conflict zone, and the US Embassy warning visitors that The Bahamas is a perpetual warzone, the fact is that what's done is done and there is nothing about it that can now be washed out in the spin zone, and in the vernacular: "It don't care who please!"

Sunday, March 8, 2015

Exchange controls and the Bahamian dollar- Revisited.

Since writing on the usefulness of exchange controls and through that, the virtue of keeping exchange controls and keeping the Bahamian dollar pegged to the US dollar, I had a chance to have a few private conversations, and open conversations on live radio, form persons that found that submission both fruitful on one side, and just all out dreadful on the other. Par for the course, but at least folks are talking about it in a more serious tone and not just willing to accept any position either way just because someone said so. 

But what can we build on to advance the conversation on this complex matter of exchange controls and keeping the Bahamian dollar pegged to the US dollar?

There was an article in one of the local dailies here in The Bahamas, quoting former Central Bank Governor and former Minister of State for Finance, James Smith, stating that there is no compelling reason to do away with exchange controls.

His reasons were basically rooted in the tone of argument of it isn't broken, then why try to fix it? And also on the false argument of "stability", neglecting and rejecting out of hand any possible idea of rationale on the matter, particularly to the regard that the very same stability hinges on a flexible monetary policy that speaks to greater economic growth and economic expansion.

I would give examples on both ends: For one, the very last time the Central Bank had a rate cut back in the early 00's, the banks became awash with money and were more lenient with handing out consumer loans for not just businesses, but for education and mortgages. Many persons were recipients of those market driven loans.

On the other end, and for an example of how an inflexible monetary regime, particularly with regard to stringent exchange controls that are tied too tightly to foreign reserve strength, was with regard to an issue with Cable Bahamas Ltd.. Just to jog your memory a little, Cable Bahamas Ltd. was seeking to transfer a large sum of money out of The Bahamas for an investment in Florida. An investment they eventually became very successful at.

However, their initial investment process was hampered due to the lack of timely Central Bank approval for such a large sum of money because of the drain it would have presented on foreign reserves: Essentially sucking a lot of money out of the reserve system, because the money would have had to have been changed to US dollars and hence the delay.

As you can imagine with the latter case, time is money. With the former, nothing should come in the way of Bahamians achieving their dreams and pursuits with a banking system that is bolstered by a flexible monetary regime that is progressive in nature.

I still maintain the notion that the usefulness of the stringent exchange controls and this wild obsession with keeping the Bahamian dollar pegged to the US dollar- while two totally separate issues, but issues that overlap to a large extent- is something that should not be held as absolutely sacrosanct and beyond scrutiny or acceptance.

Of course, one of the other arguments offered for not discussing the issue of monetary policy amendments was that there are more "pressing" matters that the government should attend to, most notably the large fiscal fire that is raging as a result of bad policy making over successive administrations. But I'm quite certain that we have enough people on hand that can chew gum and walk the same time.

What's also striking now that this part of the ongoing economic debate has sprung up, albeit from within the phantasmagorical political theatre, is that Mr. Smith's colleague, former Central Bank Governor and also a former Minister of State for Finance under the Free National Movement government, Sir. William Allen, has gone on record as being "receptive" to the idea of easing away from exchange controls and shifting away, even if slightly, from the US peg. We agree with Sir. Allen.

We are under the assumption that Sir. Allen's position still stands, until otherwise stated by him with some exposition to his rationale, both for when he had those ideas and to what it is now as the case may be.

One particular fear raised is the issue with regard to removing, or easing, exchange controls would lead to a depreciation of The Bahamian dollar and that it would lead to higher living expenses for wage earners.

Some of this is partly true, but only to a certain extent. For starters, this would only happen if wages remain stagnant due to lack of money supply and the simultaneous banning of US dollars in circulation in the economy. As we all know, Bahamian dollars are spent equally with US dollars. Removing the exchange controls and unpegging would not mean, or should not mean unless otherwise directed through policy, that US dollars would be banned form circulation in The Bahamas.

The second issue is that a depreciation of the Bahamian dollar does not exclusively have to do with regard to removing exchange controls, or an easing up off of exchange controls to allow greater liberalisation. For example, as we went to great detail to explain in the previous submission on exchange controls and the Bahamian dollar, if based on the balance of payments, the Bahamian dollar is already undervalued per dollar for dollar against the US dollar because we don't add services into the balance of payments methodology.

If we were to use the revised methodology, which adds services like tourism and financial services, the demand of the Bahamian dollar internally would appreciate if rated against the US dollar country for country. Theoretically that is.

Some would want to bring in the argument purchasing power parity as a way to explain this away, for what reason I am not quite clear?

Purchasing power parity simply only explains the relative prices of the same goods produced by both countries. Of course, one can see the pitfalls with regard to this, especially when it's very difficult to equate two countries, let alone all countries, on the merit of a similar good produced by said countries, even though journals like The Economist has tried with regard to their Big Mac Index.

For example, apples are produced and processed in the USA, but not in The Bahamas while dillies (naseberries, for my Jamaican friends) are produced and processed in The Bahamas.

Another issue with regard to using purchasing power parity as an excuse for keeping exchange controls is that it does not speak to the relative quality of said good and inputs it takes to produce a good even if it is made in two separate countries.

Not to belabour the point, but using purchasing power parity with regard to monetary policy becomes problematic and unhelpful when the overall goal should be raising the overall quality of life should be the primary focus.

My submission is that while understanding the financial mess created, I am of the opinion that not having broader discussions on how monetary policy can help this situation, from all out unpegging to crawling peg rates, would be just as disastrous as not doing anything at all. Especially when faced with the economic crisis of 2008 and how sluggish economies have been that have not tried more active monetary policies as a response to the crisis.

Saturday, February 28, 2015

CARICOM: We've got company!

Well, in case you didn't already know, the leaders of the CARICOM nation states held their 26th Inter-Sessional meeting here in Nassau, Bahamas for two days starting on Thursday, February 26th.

The Bahamas chairs the CARICOM grouping, with prime minister The Right Honourable Perry G. Christie as the chair. The outgoing chair, and current prime minister of Antigua and Barbuda, Gaston Browne, was on hand to hand over the reins (no pun intended) to the current.

Of course, these meetings are incredibly boring. As boring as watching paint dry, or watching a rock race. In fact, if you were to speak to any of the participants in this year's events, or participants from events prior, they would most likely tell you that aside from it being a chance to "get out of the house", so to speak, they would pass on these meetings just out of the sheer boredom of it all. But, these meetings are very necessary and vital to bridging the gaps of understanding between CARICOM nation states.

Fact of the matter is that through these meetings, Caribbean leaders have very little other opportunity to meet and greet one another through their busy schedule. While the events are boring, they must lead to impactful and fruitful dialogue about the problems that ails individual states and the region at large.

Also, the main discussions at these meetings are not the formal meetings for show-and-tell, but the back-room discussions and sub-committee’s between the leaders and their aides.

One of the first statements out of these meetings came from former CARICOM Chair Browne as he expressed solidarity with Venezuela amidst reports that a coup is looming. We hope too that the stability of Venezuela remains an important item on the Western Hemisphere's agenda, and not just with CARICOM.

Of course, the issue in Venezuela is more complex than the rumblings of a coup just for having a coup's sake. For starters, the president, Nicolás Maduro, former vice president under former president Hugo Chavez (deceased) was a former trade unionist of the ultra-left-wing kind. It's no secret that he is also a little "aggressive" with regard to internal politics, and is more of a Bolivarian idealist than his predecessor.

Furthermore, Venezuela is having challenges economically. Quite clearly with regard to low oil prices that has affected not just budgetary allocations currently, but also will affect the next fiscal year's budget and more than likely social spending programs will be either slashed in half, all out cut or just knowingly and wilfully underfunded.

As said on a previous article on oil prices falling, Venezuela is well below it's break-even point, and talks of social disruption, rumours of coups, or calls internally for the Venezuelan government to step down or at least shuffle their leadership, should be expected. Not just in Venezuela, but every single oil producing country that is feeling the sharp decreases on oil prices. May they all go with God!

A second item, as we gleaned from the end summary by the current CARICOM Chair Christie, was this issue of Marijuana decriminalization. Yes, the dutchie. Tu-Sheng Peng. Ganja. Weed. Herb. The "healings".

Without question the moves in the United States of America on the decriminalization and subsequent legalization of marijuana has prompted anyone with a brain cell left in their head from all of that inhaling to think about the issues as it relates to ending the prohibition on cannabis internally.

We hope that the move towards ending the prohibition in the Caribbean is met with all seriousness, and the criminal records of the young, and not so young, are not only expunged but these people are culturally integrated and if need be, compensated, for this clearly damaging policy inflicted upon them. A policy that has consumed most of their productive lives. Consumed all for a few ounces of weed. Not for international trafficking, not for mass local distribution, but just because a 17 or 18 year old decided that he was going to experiment like most 17 and 18 year olds do!

While I am not a fan or a staunch user of drugs of any kind, the studies and evidence on marijuana is more than telling. Especially when compared to legal, over the counter drugs and other mind and body altering substances that are legal like alcohol. We can only hope that a common sense approach is met and one of the Caribbean states would take the mantle to test out a sensible policy that strikes a keen and even social balance with regard to the decriminalization of marijuana that all other Caribbean states can follow.

The third and most important plank of this year's CARICOM meeting was with regard to regional banking. Yes! The big elephant in the room.

According to larger international bodies the region launders too much money, stashes too much money for the rich, steals from international investors and funnels terrorist money and monies for other illicit acts world-wide. Yes! It's only the Caribbean that does this through their banks. Not Switzerland, not in New York, not in Andorra, not Guernsey, not in Liechtenstein, not Qatar, Saudi Arabia or Algeria. Just Caribbean regional and offshore banks!

The hypocrisy is laughable. Laughable even more so in light of a bank leak from the HSBC in Switzerland that claims to have tens of billions of dollars in accounts. Just one bank in Switzerland.

Apparently, there are 55 passport holders from the Bahamas alone that have a reported $7 billion stashed away in HSBC. The Bahamas was the sixth largest amount of passport holders. But passport holders are what they really are, and not necessarily 55 Bahamians with a net-worth of over $7 billion dollars that have their personal money stashed with HSBC in Switzerland.

You see? In The Bahamas we have this financial instrument called "International Business Companies", or IBC's.

To cut a long story short, I can incorporate an IBC and stand as the "director" of the IBC or fund. I have a Bahamian passport and can act on behalf of the shareholders, or the people with the money, to shuffle their money around in any way, shape or form that I am directed to do so. So, when found, the transaction is done in my name, as a Bahamian citizen, but the money is certainly not mine. Even though I wish it were.

Of course, detailing exactly who are these passport holders would solve all of this instead of assuming any, none or all of them are Bahamian citizens with their own personal wealth.

Some of the people arguing for greater transparency and reforms in offshore jurisdictions may have money stashed away in an offshore jurisdiction, or a private fund that no one knows a thing about or has had personal business transacted through a private banking account. Just like the Bill Clinton Foundation received millions of dollars from donors as gathered from the information on the same HSBC leaked list most recently.

There is a case to be made on greater cohesion on banking and an understanding on how some need to do business from all sides. Let's just be fair about it.  

What should be addressed with regard to greater protection for the financial services sector in The Caribbean are the overall benefits for the risks taken by and for those in the sector. To say quite frankly: It is immoral, unconscionable, disgraceful and just flat out cowardly that we transact, or facilitate, on a yearly basis, billions upon billions of dollars but the net benefit for those in the sector and their relevant economies is minimal, relatively speaking.

It has to be more than just doing it for pride, or saying that we have to protect it because it makes us feel good inside to say we have to protect it. It can't be that we are going through such lengths for this financial services sector because of emotional strings and nothing beneficial for the rest of us, or the majority of us. Has to be more than just that!

So, as we wrap up this most recent CARICOM meeting. We wrap up! See you next year, God's willing!

Saturday, February 21, 2015

Exchange controls and the Bahamian dollar!

Since the introduction of Value Added Tax (VAT) in January, 2015, there has been some turbulence. As expected, it's a new initiative, one in which it places an additional cost on goods and services, so it was expected. One can only hope that with this additional cost to Bahamians that there would be additional revenue and spending reforms placed on the government with this windfall.

The information or proof of movement towards greater fiscal responsibility has been a little dodgy, to say the very least about it. But, let's trust but verify that these reforms will be delivered as promised.

What came as a result of VAT's implementation was something very extraordinary. Something that I did not expect to be brought into the debate post-implementation. Persons began making statements pertaining to the valuation of the Bahamian dollar, claiming that the Bahamian dollar is worth 7.5% (or cents) less after VAT implementation.

Of course that's not how it works. That's not how any of that works. It didn't stop people from saying it, and most likely won't stop people from thinking or feeling that it may be the case. But, let's try to discuss the importance of the valuation of the Bahamian dollar and by extension, the fixed exchange rate's usefulness at this time.

Just coincidentally over the last week or so, discussions about the exchange rate and it's usefulness was brought up in a very heated debate in the House of Assembly during the mid-term budget debate by two back-bench parliamentarians from the governing party. On one side pro-fixed exchange rate was Ryan Pinder, MP for Elizabeth and former minister for financial services; and on the other side, Dr. Andre Rollins, MP for the Fort Charlotte constituency.

Through this I began to think, and harkened back to the notion that the Bahamian dollar would be devalued by the VAT, and at what risk will we be devalued on purpose or not, and then that almost means that a discussion on the fixed exchange rate system needs to be addressed and addressed in the proper way.

I'm more than receptive to the idea of removing the fixed exchange control. It's something that should be in serious consideration at this time in our country's development. How do we go about doing that and to the extent it happens is up for debate.

For the most part, persons in favour of keeping the fixed exchange control hinge their rationale on two main tenets:

  1. Removing the fixed exchange rate would lead to a direct devaluation of the dollar; and
  2. There really is no need to remove the fixed exchange rate.

Let's examine the first point. Removing the peg will in fact devalue the local currency against the currency it is pegged against, for example the Bahamian dollar (BSD) versus the US dollar (USD).

How does this happen? It's quite simple. The US dollar is the universal currency that is used to settle payments world wide. Aside from the Euro and to some extent the British pound, the USD is the new "gold standard".

Countries try to make payments and use the USD in international trade and exchange because the USD is strong, universally accepted and in frequent supply and demand.

However, this automatically means that all other smaller nation currencies are of lesser importance and to a significant extent of lesser value than the USD to begin with. So, before we speak about the merits of valuation and devaluation, we need to begin from that premise and understanding.

How is a nation's currency valued? Well, there are two main factors. The first of which a currency is valued is based on the macroeconomic perspective of trade and exports minus imports, or in other words the balance of trade and the differences in the current account.

When exports are higher than imports, this affects the value of a currency through the exchange rate by signalling that a country's goods and services are worth more than what they import. In The Bahamas, this is the exact opposite, or so it seems.

From the information that Trading Economics has compiled from reports from the Central Bank of The Bahamas, The Bahamas recorded a current account deficit of $533 million (USD) in the third quarter of 2014. The current account in The Bahamas averaged -$309.34 million (USD) from 2005 until 2014, reaching an all time high of -$49.20 million (USD) in the first quarter of 2010 and a record low of -$533 million (USD) in the third quarter of 2014.

The methodology of balance of payments; i.e., current account balance, is slightly outdated. Glaringly, the balance of payments neglects the impact of tourism receipts on exports. Tourism is now and should be defined as an export, as the World Centre of Excellence for Destinations (CED) in conjunction with the United Nations World Tourism Organization.

With tourism accounting for 60% of GDP in The Bahamas, which at any given year hovers around $5 billion dollars worth of value annually, with an average of $2.5 billion in actual tourism receipts since 2012, considering all of new information, The Bahamas is accounting for balance of payment surpluses year-on-year.

Be that as it may, the fundamental point for one side of a country valuating their currency is based on the balance of trade. The second fundamental determining factor for valuating a currency is with regard to capital inflows.

Capital inflows, quite directly for the Bahamian experience, almost solely, means foreign direct investment (FDI) for major projects that require land and human resources for construction and development, in addition to other receipts from sovereign bond issuances. Countries that have balance of payment deficits, but not exclusively, follow a capital inflow or a "FDI" based growth model for development, for obvious reasons.

Because of the current prevailing notion on the balance of payment deficits and as that relates to capital inflows/FDI, policy makers, most likely, feel there is no need to tinker with it if removing the exchange control carries with it the psychological damage of currency devaluation and thus the self enforcing notion of the second point with regard to persons seeing no need to tinker with exchange rate in the first place.

To further bolster the position on at least thinking along the lines of considering models and methods in which to relax the exchange control, we must take into consideration several things now:

  1. The balance of payment methodology used by the economic establishment is outdated;
  2. Rejecting, off top, for psychological reasons of currency devaluation, is meaningless considering the fact that when compared to the USA, almost all other countries currencies are meaningless because settlements are almost always denominated in USD;
  3. Not having a concerted effort with regard to bolstering foreign reserves has not worked well in the past and targeting a foreign reserve quota per quarter would be more helpful;  
  4. International payments and trade is denominated in USD, and even the Euro-Zone and the ASEAN and APEC zones, even with the prevalence of the Euro, British pound and the Chinese Yuan, still use USD predominantly and especially when they are doing business with North-American, Latin American and some European countries;
  5. The current thinking and rationale on keeping the exchange control, based on the outdated balance of payment methodology, and also based on the fact that now devaluing the currency would make production for export cheaper if we take into consideration that tourism is an export, only if in services; and
  6. While imports would be more expensive, it also means exports- including tourism- would be cheaper to produce relatively speaking and per value and that would mean more US dollars to spend with local shops and venues.

The value as determined for what we pay for imports is inconsequential because our major exports are service related and not manufacturing based and also for the fact that The Bahamas imports "inflation" and are "price takers" from the USA, primarily.

Even with regard to inflation, as The Bahamas is a price taker, increasing Bahamian dollar supply would not necessarily indicate a decrease in value once US dollars is still being brought into the country via tourism, primarily, and also by capital inflows once brought in as USD or another controvertible currency that can be held in foreign reserves as it already is the norm. An additional best case scenario would be to allow simultaneous US dollar accounts with Bahamian dollar accounts.

The operative term is "value", and not in a dollar for dollar or monetary sense, but value in terms of the quality and value of life and living in The Bahamas.

For example, while the US dollar is trading at $1 for every .88 cents in Euros, can we with certainty say that every country in Europe has a better quality of life than America? The UN's Human Development Index (HDI) states that the United States has the fifth highest HDI with Norway #1, Australia #2, Switzerland #3 and the Netherlands at #4. Conversely, for the Australian dollar, you would need $1.28 for every US dollar. Are we to say that Australia is doing more poorly qualitatively speaking in terms of their lack of equal parity with the US dollar.

As it stands now with the latter issue of imports requiring US dollars in any event, if we move away from the exchange control and it results in currency devaluation based on the old methodology for balance of payments, a devaluation that really would be normal under any circumstance when faced with the obvious fact that the USA is the dominant economy in the world would not make much difference when the quality of life is the ultimate goal and not necessarily keeping exchange controls for superficial reasons.

The considerable reliance on customs duties that have now since started along the process of being replaced by VAT would still make thinking on the possible benefits of moving away from exchange controls fruitful even at this stage.

Saturday, February 14, 2015

The mid-term budget: Let's give it justice!

On February 11th, the prime minister of The Bahamas, Perry G. Christie, who also serves as the substantive minister of finance as well, gave what we call a "mid-term budget" to advise the public and the parliament of the performance of the government on their fiscal management and their economic planning.

The provision of a mid-term budget isn't a new practice, and neither is it a very old practice. It is not constitutionally mandated, but the appreciation by the political directorate, for the last 10 years or so, towards giving the parliament and the public at large the respect and decency it deserves with regard to telling them how their money was being spent was and will always be welcomed. Outside of a freedom of information act, or a transparency in government finances act, this is the best we can do and expect at this time.

For starters, the mid-term budget, while it's not a legal or constitutional mandate, should and could be done a little earlier than the first or second week in February. Not because I feel it is just made up out of thin air and easy to do, but because the information should be right at hand since we are dealing with such serious times and producing it earlier in January would give more confidence that persons are on the ball.

However, and before we all break out into paroxysmal euphoria, let's run a little bit of the issues back just so we can appreciate what's really important here.

For starters, the mid-term budget, while it's not a legal or constitutional mandate, should and could be done a little earlier than the first or second week in February. Not because I feel it is just made up out of the air and easy to do, but because the information should be right at hand since we are dealing with such serious times and it would give more confidence that persons are on the ball.

In light of this, the performance as reported could have been a little better, but it is what we expected based on two factors: The preparation for the Value Added Tax (VAT) in terms of revenue collection enhancement in the Customs Department and subsequently all other revenue generating departments prior to the VAT being introduced, could have given the government a better boost. Secondly, The Bahamas's economy shrunk by nearly $230 million dollars as stated by the prime minister between 2007 to 2012. These two issues are very important.

With the first point, let's take for example what theoretically should have happened before January 1st of his year. Not only was there supposed to be the preparation for the VAT, but also all other revenue generating agencies were supposed to be upgraded to buttress and support the introduction of VAT as part of a package to make the transition and additional taxation easier for businesses and consumers. This has not been the case for the most part.

The Customs Department's reformation has been not as stellar as it was promised. With a loan financed by the Inter-American Development Bank, the project has not shown to have delivered the goods pre-VAT introduction and one can only hope that it would be corrected. As it stands now, the Customs Department collects less than 50% of all duties. No VAT could truly fix that if the main leakage in your main revenue generating department is not even collecting 50% of it's expected revenue.

This, of course, was acknowledged by the prime minister who stoutly stated, as well he should, that they are working on enhancing these revenue generating areas and it is something his administration is aware of. Which is a great first step in actually moving forward with the overall reformation process which is expected to take years to fully complete, if ever. What should be expected now, and requested equally, is an overall progress report of the money spent with these reformation programs, the methods used to arrest the problem and measurements provided on the efficacy of these programs, how the problems can be corrected and prove to be successful in the current term and long term.

While VAT for a large part will run simultaneously and with the Customs Department at the border, if the same "challenges" are put in with the same system, or wrought with the same systematic challenges, then revenue collection will be weak and will not be optimal where Bahamians would see the benefits of the money they spend.

The second point with regard to the shrinkage of the economic pie in The Bahamas is critical. While the IMF forecasts growth over the next two to three years for The Bahamas at a modest 2%, the fact of the matter is we are no where near out of the woods in terms of a new path for economic progress.

What has happened, and rightfully so, the government has tried to spend it's way back into growth and prosperity. The GFS deficit during the first half of this fiscal year, 2013/2014 amounted to $238 million, down from the $295 million during the 2012/2013 year.

The decrease in the deficit from the 2012/2013 year into the 2013/2014 fiscal year could be accounted for with regard to a new government, projects from the previous administration being slashed or just scrapped, as per the norm. However, for this mid-term budget report, the deficit increased to $273 million from the last year's $238 million.

However, while we see the spending increase, and we see modest gains with regard to overall GDP growth rate indicators, and projected to grow more slightly over the next 2 to 3 years by the IMF, we still have staggering unemployment that is stubbornly slated at over 15% in addition to overall business failure.

While this lends to the notion that while the government has committed itself to stimulating the economy through spending, the evidence indicates that they are not spending the money in pro-growth areas and spending the money on things that would substantially bolster the economy, boost growth, create jobs and increase the overall trajectory of The Bahamas in a more positive direction.

This too was also highlighted in the mid-term budget communication, and the prime minister flatly acknowledged that our models and methods of economic growth stimulation, economic management and interventions are outdated and in many cases, antiquated and ill suited for us to get our country back on the path to prosperity.

This is heartening to hear. One can only take the prime minister at his word that changes in the way we do business is forthcoming and that new tools and measures would be added to the basket, and in some instances, stripped away, if we want to talk about real economic empowerment for the rest of us.

As we acknowledge this along with the prime minister, one item glaringly missed in the mid-term budget communication was the overall support for small businesses and entrepreneurs. What has not happened is an embrace for entrepreneurs in this new world and new world economic order through the pronouncements of this mid-term budget.

While the introduction of a new method for obtaining government contracts has been set into effect, the Public Private Partnership model, the fact of the matter is that there is more that can be done with regard to increasing the overall business environment, the granting of licenses, government support and hand-to-hand negotiations and support for entrepreneurs particularly those geared for trade and export or new technological advancements, better support for professional services and professional services providers, in addition to the government relieving itself of most of the services it produces to the private sector and small and medium sized entrepreneurs, without special favour or harm.

These are indeed high and lofty goals. Considering the size of our government in terms of it's legal and regulatory intrusion, and not at all with regard to its human resources, the task for doing such is daunting considering also the fact that the government operates heavy handed and in some instances, in clandestine manners at times in relation to how it works with and deals with persons in the private sector.

But a start must be made. Because, we can't see growth and be better in all overall performance, regardless of the tax regime and regardless of the deficit spending for growth, if Bahamians aren't given a fair shake off of the rip and the inconsistency of our regulators and their administration of these antiquated regulations are a part of the big government problem. Big government equals small private sector.

All in all, we see signs of slight improvement. Even if only through blatant acknowledgement by the minister of finance and prime minister of the understanding of the new world order we live in, one can only look forward with optimism as we work together for a better and more progressive budget year and economy.