I should like to respond to former Minister of Finance Sir William C. Allen’s letter to this journal of April 29, 2003. It sets forth his uncompromising view with regard to credit restraint and exchange controls, which is entitled to serious consideration given his years of responsibility for managing our nation’s finances.
However, as to exchange controls, with all due deference I believe that his position is fundamentally flawed, targeted solely at maintaining a conservative external account balance with little concern for creating dynamic growth of the economy.
Sir William argues that Government must shut the door, now and forever, against any loosening of our exchange controls prohibitions on external capital movements. He notes that “curiously” the National Insurance Board and pension fund advisers have a “strong desire for outward investment” of Bahamian savings. How can he find this “curious”? Any competent local portfolio manager wants to be free of the present strait-jacket restricting him to Government debt, mortgages, and the feeble range of illiquid equities barely traded on our moribund BISX, resulting in low rates of return to our savers. But Sir William’s crystal-clear hope is “that this strong desire for outward investment is never (emphasis added) translated into public policy”.
His stand has hardened since his term as Minister of Finance, when he often said that Government was not philosophically committed to exchange control and was just waiting for the happy day when foreign exchange reserves would rise to an acceptable level. Now, Sir William appears to believe that this happy day will never arrive and that The Bahamas are forever doomed to remain a backward third-world economy without the freedom to make investments abroad.
He emphasizes that in order to maintain US-Bahamian dollar parity the Central Bank must by law hold external reserves in excess of 50% of its demand liabilities. He worries that this ratio is so fragile that it could be breached if investors were allowed to buy foreign currency from the Bank for investment purposes. There are two answers to this fear: first, at the end of 2002, this ratio showed a surplus of $135 million, which in the three previous years never dropped below $100 million and once reached $200 million – so we are not suffering a crisis of falling reserves.
Second, foreign currency assets held in responsible hands can always become available to the Central Bank in times of emergency. Sir William overlooks the fact that the many proponents of exchange control relaxation are seeking just that:- gradual relaxation, not abrupt abolition. Our financial authorities could easily permit reputable financial and investment firms to acquire foreign assets and could set standards for credit ratings, investment size, and repatriation policies, so that the outflow of funds could be monitored and reversed if necessary.
Foreign investment is not a zero-sum game where funds disappear abroad never to return. Wise portfolio management always results in a re-flow of dividends, interest, redemptions, and usually capital gains – US dollars, pounds sterling, EUROs, and Japanese yen brought back into our economy where they can contribute to our external reserves as productively as if held by the Central Bank itself. And reducing exchange control can have the positive effect of encouraging new inward investment from foreign sources, in amounts that exceed outward movements.
Sir William’s letter seems fixated on exchange control as our principal bulwark against financial instability. Years of history have shown that the success of any nation’s economy is not created by exchange controls – merely a war-time measure or a prop for the weak – but by imaginative Government and private sector-policies to build confidence and attract new investment both from abroad and at home. Consider Bermuda, an island economy even smaller than our own, that does not suffer from its step-by-step withdrawal of exchange control over the last ten years.
During Sir William’s term as Minister of Finance, Government showed little interest in growth-stimulating policies, as evidenced by the following:
Over-reaction to OECD and FATF pressures, resulting in the new regulatory structure that is criticized by the entire legal and financial community for radically shrinking our financial services sector.
Lip-service encouragement given to the creation of our stock exchange, followed by failure to support it with the policies required for its success.
Equally, the much-publicized potential of e-commerce was not backed up by enactment of any legal structure.
Failure to push forward changes in our insurance legislation that might at last enable us to compete with Bermuda and Cayman.
Three year wasted in expensive and abortive efforts to privatize BaTelCo, at substantial loss to the Treasury and to our reputation for providing modern telecommunications services.
Of course these actions (or inactions) cannot be laid solely at Sir William’s door,
as they emanated from a Cabinet led by a dominating Prime Minister. As the country’s chief financial officer, he may have been silently unhappy with the record compiled. I believe that now, as a distinguished private citizen free of political restraints, he could apply his financial expertise to giving us more imaginative economic guidance than simply defending the stale status quo of exchange control.