Presentation by Mrs. Wendy M. Craigg, Governor of The Central Bank of The Bahamas to the Rotary Club of East Nassau at the Nassau Yacht Club 24 March, 2006.
"Recent Exchange Control Liberalization Measures"
Good afternoon ladies and gentlemen.
At the outset, let me convey my appreciation to you the distinguished members of the Rotary Club of East Nassau, for affording me this opportunity to address you on the recent exchange control liberalization measures. But before I do so, I think a bit of background would be appropriate.
Let me quickly acknowledge that exchange control is a subject that continues to evoke considerable debate and controversy. These controls, which basically limit one's ability to move foreign currency freely, have been an important part of The Bahamas' economic policy, and any consideration of them cannot be divorced from the country's choice of a fixed exchange rate.
Time would not permit a comprehensive treatment of this topic, but to put it simply, for this pegged arrangement to be credible, defensible and sustainable, the Central Bank must maintain an adequate pool of external reserves to provide that confidence that residents would be able to satisfy their demands for foreign currency, and it also requires fiscal discipline and sustainable growth in domestic credit.
While this regime has served us well over the years, providing confidence, and contributing to economic and social stability, we are being challenged by the forces of globalization, which is being supported in part by increased liberalization and market opening policies.
The question then arises as to how The Bahamas could move towards achieving a meaningful liberalization of exchange controls, without jeopardizing the fixed exchange rate regime that has been the anchor of our economic policy and has served us well over the years.
It is widely accepted, that capital account liberalization must be prudently sequenced and is best taken within the context of robust and stable economic conditions and at a time when the external balance is not under pressure. And, the move should be gradual so as not to destabilize the economy.
The current environment is one in which we have experienced significant growth in external reserves, which is required, among other things, to support a relaxation of controls without jeopardizing the exchange rate peg. External reserves are currently around $630 million, and opportunities for sustained growth are encouraging, based on the number of foreign investment projects that are scheduled to come on stream, as well as the favourable outlook for tourism.
It is in this context that the Central Bank, with the approval of the Government, took steps to liberalize the exchange control regime.
You may recall that in earlier initiatives pursued in May 1993 and September 2002, the Bank delegated additional responsibility to commercial banks by providing increased limits on a broad range of current account transactions. Today, although the Central Bank has set certain limits for various types of current payments, it does not withhold approval for legitimate foreign exchange purchases. Indeed, as an Article VIII member of the International Monetary Fund, The Bahamas does not impose restrictions on current account transactions; however, restrictions are imposed on capital account transactions, which cover outward direct and equity investments and overseas loans by residents.
The new measures introduced in January of this year, focused almost exclusively on the relaxation of certain capital account restrictions. The underlying objectives were to provide enhanced opportunities for residents to participate in and finance investments overseas, and at the same time address several of the recommendations in the Bahamas Stock Exchange Committee's Report to the Government on measures to deepen domestic capital markets.
Investment Currency Market Rate
The first measure I will speak to is the Investment Currency Market, an arrangement which has been around since the early 1970's. It was devised to permit residents who wanted to make overseas investments to do so, but at very prohibitive rates so as to discourage such outflows. The recent halving of the bid and offer rates, to 12.5% and 10% respectively, signals a more accommodative posture towards outward investments, with previous investors allowed up to 31st March 2006 to liquidate their original capital investments at the old offer rate of 20%. Another way of looking at this change is that, instead of having to make a 5.0% gain on your investment to break even, the spread has been reduced to 2.5%. We will have to wait to assess the degree of interest in this enhanced opportunity; currently ICM transactions amount to some $2.8 million.
Real Estate Investments-Time Shares
In the area of real estate investments, residents may now invest up to $25,000 per family unit, once every ten years, at the official exchange rate, to purchase time shares abroad. This change was motivated by the Bank's desire to accommodate the growing interest of Bahamians in this area and at the same time to regularize the manner in which these transactions are currently taking place (credit cards are now an approved means of making payment), which will give us a better appreciation for the quantum of these investments. As these transactions are not under delegated authority to the banks, individuals will be required to register evidence of the timeshare agreement with the Central Bank, and the Bank will grant an approval that will be valid for the duration of the payment period.
Employee Stock Option/Share Purchase Plans (ESOPs/ESPPs)
Since May 1995, the Bank has permitted Bahamian employees of foreign owned institutions in The Bahamas to take advantage of investment opportunities arising from their employment-thereby allowing them to enjoy benefits equivalent to those available to their overseas counterparts. The investment limit in contributory employee stock option/share purchase plans has now been increased from $10,000 per year to $25,000-and this is through the official market.
Between 1997 and 2002, employees purchased some $2.5 million under this arrangement, and actually sold some $3.6 million-so we expect to see sustained activity in this area.
Emigration
The increase in the Emigration allowance, from $125,000 to $250,000 annually, is a response to the changing requirements and costs faced by Bahamians taking up permanent residency abroad. Here's how it would work. Applicants would complete a set of Emigration Forms available at the Central Bank, listing their assets and providing evidence of permanent residency abroad. The Central Bank would then issue an approval for the purchase of foreign currency from a commercial bank; the approval would be renewed annually until all of the assets are liquidated.
Resident Investments in Publicly Traded Foreign Securities Listed on BISX as BDRs
As noted earlier, this round of liberalization covers several measures aimed at affording residents the opportunity to participate to a greater extent in overseas investment opportunities and at the same time provides support to domestic capital markets.
One of these is the provision for resident investors (individuals, pension funds and institutions), to buy in Bahamian dollars, stocks traded on overseas exchanges.
Specifically, local broker dealers will be allowed to structure Depository Receipts (BDRs), financing the underlying foreign securities at the official rate, to the extent of 5% of the external reserves at the previous years' end, but not to exceed $25.0 million. We are in the process of concluding the arrangements for this new facility.
Broadening of Eligible List of Investors in Domestic Securities
In another effort to promote domestic capital markets, and recognizing the important nexus this group has with the domestic economy, the list of eligible investors in domestic securities has been expanded to include Temporary Residents, Permanent Resident (with restricted right to work), and certain entities designated resident for Exchange Control purposes.
More specifically, Temporary Residents and Permanent Residents (with restricted right to work) may now:
* invest in obligations of companies listed on BISX, up to an aggregate total of 10% of the issue/offering; and
* invest in public sector securities, for which the Central Bank acts as Registrar, subject to an overall limit of $100,000 per person/entity.
Further, companies that are designated resident for EC purposes, with no term restrictions on their domestic operations, and that in the normal course of their business activities invest in securities (i.e., insurance companies and other financial service providers (brokerage houses), are now permitted to invest in equities of companies listed on BISX, up to a limit of 10% of the issue/offering, per investing entity and in other private and public sector securities, without limit.
So in effect, these entities will be utilizing their Bahamian dollar earning etc, to participate in domestic investment opportunities.
Regional Cross Border Listings
Regional Cross Border Listing has been identified as an important avenue for deepening economic relationships with Caricom, providing Bahamian companies with an opportunity to embrace foreign capital markets and affording Bahamian investors with additional opportunities to diversify investment activities and to hold foreign assets. But these objectives cannot be achieved without some relaxation of exchange controls on the movement of capital.
Consistent with these objectives, the new initiatives now provide for:
* Bahamian companies listed on BISX to list equity securities on principal Caricom exchanges (i.e. Barbados, Jamaica, ECU and Trinidad & Tobago), subject to a limit of 10% of issued and outstanding voting share capital, up to a maximum of $20 million per annum. Bahamian businesses and companies which have gone public may now have access to regional capital markets, establish recognition for themselves and gradually be introduced to more competitive forces.
* foreign companies listed on principal Caricom exchanges to list issued and outstanding equity securities on BISX, so that the at cost value of net capital (purchases less sales) invested by Bahamians does not exceed $5.0 million per quarter and a maximum of $20 million per annum.
BISX is presently establishing the operational mechanisms and policies to govern cross listing and trading within these parameters, and expects to be completed within the year.
Here, I want to mention another facility that has always existed for outward investments through the official market, and that is a facility we call Special Criterion Investments. Residents are permitted to purchase up to $1.0 million per person or entity for direct-not portfolio-investments, both in The Bahamas' offshore sector as well as abroad, subject to an overall limit of $5.0 million per transaction, and may be assessed once every three years. The investment must be determined as having a direct and positive impact on the balance of payments through investment income flows. I can tell you that some $7.1 million, covering 5 transactions, were approved between 2002 and 2004.
Outward Investments by NIB
Another key feature of these new arrangements is the accommodation given to the diversification needs of the National Insurance Board.
NIB has been granted a maximum of $25 million annually for foreign investments, at the official rate of exchange. Modalities have already been structured by the Bank, in conjunction with NIB officials.
Credit Facilities for Temporary Residents
Lastly, to more realistically reflect changes in cost structures overtime, Temporary Residents may now borrow up to $50,000 for consumer loans, up from the previous $15,000 limit. Further, those who have resided and worked in The Bahamas for at least 3 years, may also borrow up to B$200,000 to finance owner occupied dwellings.
We believe that these changes will have a positive impact on the Bahamian economy. Although outflows are estimated in the region of $50 to $60 million annually, these will represent foreign assets now held by the private and public sectors instead of the Central Bank, with potentially real returns to the balance of payments.
Let me say that the Central Bank acknowledges that the administration of exchange controls entails costs-not only for the government but for those who utilize the system. And so, the Bank is continuing to examine ways to make meaningful changes in our administrative processes, to ensure that they are supportive of business being conducted in an efficient manner.
Recent initiatives in this area have included:
* inviting business enterprises who are significant users of foreign exchange for particular service categories of payments –e.g. insurance company medical claims– to provide the Bank with projections on those needs as a basis for us granting blanket authority for the purchase of foreign exchange.
* permitting temporary residents blanket approval over the life of their contract/work permit, to remit funds abroad to meet normal commitments, within prescribed limits.
* delegating to authorized dealers/commercial banks, authority to approve conversion of National Insurance benefit entitlements (e.g. old age pensions/death benefits) of former/retired employees of local companies who have been classified as non-resident for Exchange Control purposes. This has proven to be an important payment category, and the action of the Bank in this regard has been a welcomed adjustment in our arrangements, offering greater convenience to retirees who no longer have to approach the Central Bank regularly for this service.
* examining ways of more efficiently administering foreign currency loans granted to residents, so as to obviate the need for repeated recourse to the Bank for servicing the loan.
* ongoing review of existing arrangements affecting residents signing on foreign exchange accounts of non-resident individuals or entities–the aim being to encourage the highest efficiency in normal day-to-day functioning of these banking arrangements.
* extending blanket authorization to franchise holders in respect of franchise fees and royalty payments.
In closing, it is undeniable that we live in an increasingly integrated global economy, which will continue to challenge us to evaluate our controls and their effectiveness vis-?-vis the benefits to be derived from a more liberalized environment. As with any policy making process, the key issue becomes one of sequencing-defining the most appropriate order and time for undertaking reforms. The Central Bank will continue to support a gradual, phased and orderly approach to the relaxation of exchange controls, one which will minimize the downside risks associated with large capital movements and is consistent with our domestic economic realities.
Thank you for your kind attention.
The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.
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