APPENDIX: Chronology of Monetary Policy Decisions by Instrument22
Bahamas International Stock Exchange, “Steps to be undertaken to ensure the viability of a fully operational Bahamas securities exchange,” Report of the Bahamas Stock Exchange Committee.
Central Bank of The Bahamas, “A Targeting Framework for External Reserves,” paper prepared for the MPC, December 19, 2003 (unpublished).
IMF, Monetary and Financial Systems Department, “Implementation of Monetary Policy at Different Stages of Money Market Development,” May 2004. Main paper and country cases and appendices.
Jeanne, Olivier and Romain Ranciere, “The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications,” IMF, Research Department, May 17, 2005 (unpublished).
Prepared by Eric Verreydt (WHD).
The CBB was created in 1974, and continued the longstanding policy of pegging the exchange rate pursued by its predecessor institutions, The Bahamas Monetary Authority and the Commissioner of Currency (a currency board).
The classification of objectives and instruments is taken from the CBD’s January 1991 technical assistance report, “The Bahamas: Reform of the Monetary Management System.”
Excess international reserves are so-called “usable reserves,” i.e., reserves that are in principle available to finance a balance-of-payments deficit. The MPC is the monetary policy decision-making body at the CBB. It is chaired by the governor. Members currently include the deputy governor, head of research, economic advisor, inspector of banks, and the managers of bank supervision, accounting, computers, banking, and exchange controls. The MPC ultimately assesses reserves against what is needed to maintain confidence in the exchange rate peg. Since 2003, reserves have been targeted at 100 percent of base money or more, and at least 14 percent of M2, well in excess of the statutory limit, thus sharply reducing the potential availability of excess reserves to cushion external shocks.
Real sector indicators measure the capacity of reserves to smooth domestic absorption in response to crises. Policymakers, including the MPC, often use a rule of thumb of maintaining reserves equivalent to three months of imports. By another real sector yardstick (NIR-to-GDP ratio), reserves in The Bahamas, though they are relatively low relative to other emerging market economies, reached a historical peak in 2004 (see Figures 1 and 2).
Loans and advances to the public sector were small, as banks hold mainly government bonds. Undisbursed commitments to the private sector as of September 2001 were not affected by the ceiling. The insurance sector (which directly provides mortgages), though not subject to any ceiling, did not disintermediate on a large scale.
The main capital restrictions include a 25 percent premium on outward investment through an Investment Currency Market operated by the CBB; and prohibition for nonresidents to invest in Bahamian securities, except by special approval. A detailed description of instruments, the frequency of their use, and a chronology of monetary policy decisions are given in the Appendix.
Collateral for discount loans have in practice only involved the use of government debt instruments (registered stocks and treasury bills). The amount of any loan given to banks may not exceed 85 percent of the market value of the collateral, and its maturity cannot exceed the lesser of 92 days or the remaining maturity of the collateral.
The circumstances of individual banks however were not uniform.
Nine banks operate in the domestic commercial banking sector, of which one is government owned (Bank of the Bahamas); two are locally owned private banks (Commonwealth Bank and British-American Bank); five are subsidiaries of foreign banks (Citibank; Finance Corporation of The Bahamas; First Caribbean International Bank; First Caribbean International Finance Corporation; Scotiabank Bahamas); and one is a branch of Royal Bank of Canada. Eight of these banks are members of the association of clearing banks and with the CBB are at the core of the payment system. In addition there are 11 nonbank financial institutions of smaller size.
Bank deposit and lending rates are closely linked to the prime rate; the latter has followed signals given by the CBB through changes in the discount rate. However, past experience suggests that competition for resources intensifies sharply during episodes of tight liquidity (1988–94). While there may be elements of rigidity in the financial system, bank supervision reports show onshore banks, including locally-owned banks, to be well managed from a prudential and operational standpoint.
Bank lending rates are all floating rates, including for mortgages.
See footnote 7 for a definition of the premium on investment currency.
The auction is open to the general public, but the demand is nil as the yield is below bank deposit rates.
The majority of these bonds carries a floating rate linked to the prime rate.
Commercial banks’ monetary liabilities in domestic currency amounted to close to B$4 billion, or the equivalent of about 70 percent of GDP at end-2004 (about 50 percent of GDP a decade earlier).
Free bank reserves, which are unremunerated, amounted in March 2005 to the equivalent of 37 percent of NIR, or 6 percent of M3. This is about three times the apparent desired level, which in the long run appears to be in the range of 1½–2 percent of M3.
The spread between the interbank rate and the discount rate appears to be small. The rate on fixed-term interbank deposits in March 2005 was 4.25 percent, and the discount rate was 5 percent.
The choice of auctions techniques is not linked to the choice of operational targets, though volume tenders may be preferable in shallow markets as they help stabilize interest rate expectations. See IMF, Monetary and Financial Systems Department, “Implementation of Monetary Policy at Different Stages of Money Market Development,” May 2004.
Andrea Schaechter, “Implementation of Monetary Policy and the Central Bank’s Balance Sheet,” IMF Working Paper WP/01/149.
Open-market-type operations take place on primary financial markets, while open-market operations are conducted on secondary markets.
Source: Central Bank of The Bahamas. Selected excerpts from the Chronology published on the CBB’s website, classified by type of monetary policy instrument.