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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.
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