6. Financial Sector
Capital Markets and Portfolio Investment
The Bahamian government encourages the free flow of capital to markets, and the Central Bank of The Bahamas supports this flow through its functions. The Bahamas is an Article VIII member of the IMF and has agreed not to place restrictions on currency transactions, such as payments for imports. The Bahamas Securities Commission regulates the activities of investment funds, securities, and capital markets ( ). The fledgling local stock market excludes foreign investors but is effectively regulated by the Securities Commission.
There are no legal limitations on foreigners’ access to the domestic credit market, and commercial banks make credit available on market terms. The government encourages Bahamian-foreign joint venture businesses, which are eligible for financing through both commercial banks and the Bahamas Development Bank ( ).
Customarily the government does not prohibit its citizens from investing internationally. However, all outward direct investments by residents, including foreign portfolio investments, require the prior approval of the Exchange Control Department of the Central Bank of The Bahamas ( – controls). Applications are assessed considering the probable impact the investments may have on The Bahamas’ balance of payments, specifically business activities that promote the receipt of foreign currency.
During the COVID-19 pandemic, in an effort to maintain adequate foreign reserves to support the Bahamian dollar fixed exchange rate and preserve access to foreign exchange for priority international transactions, on May 4, 2020, the Central Bank announced the suspension of approvals of applications to purchase foreign currency for transactions via the Investment Currency Market (ICM) and the Bahamas Depositary/Depository Receipt (“BDR”) program. Both programs fund foreign portfolio investments, the latter also promoting deepening of domestic capital markets. The Central Bank announced foreign exchange access through the channels would resume once market uncertainties around the COVID-19 pandemic subsided. Meanwhile, the ICM was expected to continue to facilitate the repatriation of foreign currency income, capital gains, and liquidated capital at the appropriate premium.
Money and Banking System
The financial sector of The Bahamas is highly developed and dynamic and consists of savings banks, trust companies, offshore banks, insurance companies, a development bank, a publicly controlled pension fund, a housing corporation, a public savings bank, private pension funds, cooperative societies, credit unions, commercial banks, and the majority state-owned Bank of The Bahamas. These institutions provide a wide array of services via several types of financial intermediaries. The Central Bank of The Bahamas, the Securities Commission, Insurance Commission, the Inspector of Financial and Corporate Service Providers, and the Compliance Commission regulate the financial sector.
According to the Central Bank’s Quarterly Economic Review ending December 2019, bolstered by the receipt of re-insurance proceeds, both bank liquidity and external reserves expanded during the fourth quarter, with the growth in the deposit base outpacing the rise in domestic credit. However, the latest indicators for the third quarter of 2019 indicated a decline in overall bank profitability, largely reflecting a rise in bad debt provisioning. Banks maintained robust capital levels during the fourth quarter, although the average ratio of capital to risk-weighted assets moved lower by 90 basis points, to 30.4 percent; remaining well in excess of the Bank’s regulatory prescribed target and trigger ratios of 17 percent and 14 percent, respectively. The ratios of provisions to both non-performing loans and total arrears, firmed by 6.0 percentage points each, to 94.4 percent and 62.5 percent, respectively. Further, banks also wrote-off an estimated $29.3 million in delinquent loans and recovered approximately $6.2 million, during the review quarter.
In the domestic banking sector, four of the eight commercial banks are subsidiaries of Canadian banks, three are locally owned, and one is a branch of a U.S.-based institution. Continued reorganization by the Canadian banks has severely limited banking services on some of the less populated islands.
The Central Bank’s strategic goals include responding to the loss of brick-and-mortar banks, particularly in the Family Islands, by implementing electronic funds transfer across the country and providing access for individuals to basic financial services through digital media. To this end, the Bank introduced a digital currency called the Sand Dollar in December 2019, with a pilot phase in the Exuma islands, extending to the Abaco islands during the first quarter of 2020. This initiative, known as Project Sand Dollar, targets improved outcomes for financial inclusion and access, making the domestic payments system more efficient and non-discriminatory in access to financial services. The project has the support of the domestic financial community, which welcomes the opportunity for financial inclusion of unbanked and underbanked residents. Authorized financial institutions participating in the pilot include clearing banks, money transfer services, and payment service providers. Additional information on the Sand Dollar can be accessed via .
Foreign Exchange and Remittances
Foreign Exchange Policies
The Bahamas maintains a fixed exchange rate policy, which pegs the Bahamian dollar one-to-one with the U.S. dollar. The legal basis for the policy is the Exchange Control Act of 1974 and Exchange Control Regulations. The controls ensure adequate foreign exchange flows are always available to support the fixed parity of the Bahamian dollar against the U.S. dollar. For the tourism-dependent economy, the peg removes issues of rate conversions and allows for unified pricing of goods and services for tourists and residents. To maintain this structure, individuals and corporations resident in The Bahamas are subject to capital or exchange controls.
Exchange controls are not an impediment to foreign investment in the country. The government requires all non-resident investors in The Bahamas to register with the Central Bank, and the government allows non-resident investors who finance their projects substantially from foreign currency transferred into The Bahamas to convert and repatriate profits and capital gains freely. They do this with minimal bureaucratic formalities and without limitations on the inflows or outflows of funds.
In the administration of exchange controls, the Central Bank does not withhold or delay approval for legitimate foreign exchange purchases for currency transactions and, in the interest of facilitating international trade, it delegates this authority to major commercial banks and selected trust companies. International and local commercial banks, which are registered by the Central Bank as ‘Authorized Dealers,’ may administer and conduct foreign currency transactions with residents of The Bahamas. Similarly, private banks and trust companies which are designated as ‘Authorized Agents’ are permitted to act as depositories for foreign securities of residents and to conduct securities transactions for non-resident companies under their management.
The Central Bank directly approves foreign exchange transactions that fall outside of the delegated authority, including loans, dividends, issues and transfer of shares, travel facilities, and investment currency. The government has continued gradual liberalization of exchange controls over the years with the most recent measure implemented in April 2016. The most recent measures delegated increased authority to commercial banks for exchange control and seek to regularize nationals holding accounts in the United States by allowing nationals to open U.S. dollar denominated accounts within the jurisdiction.
As mentioned, during the COVID-19 pandemic, in an effort to maintain adequate foreign reserves to support the Bahamian dollar fixed exchange rate and preserve access to foreign exchange for priority international transactions, on May 4, 2020, the Central Bank announced the suspension of approvals of applications to purchase foreign currency for transactions via the Investment Currency Market (ICM) and the Bahamas Depositary/Depository Receipt (“BDR”) program. The Central Bank announced foreign exchange access through the channels would resume once market uncertainties around the COVID-19 pandemic subsided. Meanwhile, the ICM was expected to continue to facilitate the repatriation of foreign currency income, capital gains, and liquidated capital at the appropriate premium.
There are no restrictions on investment remittances. Foreign investors who receive a Central Bank designation as a non-resident may open foreign currency-denominated bank accounts and repatriate those funds freely. In addition, with Central Bank approval, a foreign investor may open an account denominated in Bahamian currency to pay local expenses. As mentioned, increased authority has been delegated to commercial banks and money transfer businesses.
Sovereign Wealth Funds
The Bahamian government passed omnibus legislation for the effective management of the oil and gas sector in 2017, which included the creation of a sovereign wealth fund, but has not yet promulgated supporting regulations. Discussions on a possible sovereign wealth fund have been reignited as the Bahamas Petroleum Company, an Isle of Man-registered company, received Bahamian government approval to begin drilling a test well in southern Bahamian waters off the north coast of Cuba.
7. State-Owned Enterprises
Bahamasair Holdings Ltd. (National Airline); Public Hospitals Authority; Civil Aviation Authority; Nassau Airport Development Authority; University of The Bahamas; Health Insurance Authority; Bank of The Bahamas (65 percent Bahamian government); Bahamas Power and Light (BPL); Water and Sewerage Corporation (WSC); Broadcasting Corporation of The Bahamas (ZNS); Nassau Flight Services; and the Hotel Corporation of The Bahamas.
Within the past decade, no SOE has returned profits or paid dividends. The government’s 2018-2019 budget listed $398m in subsidies allocated to SOEs and agencies for the 2018-2019 fiscal year, down slightly from the prior year’s $410m. The bulk of this sum, some $216m or more than 50 percent, was due to the Public Hospitals Authority (PHA) to cover its operational costs.
The government’s budget revealed the acquisition of, and investment in, the Grand Lucayan resort through the government’s capitalization of the special purpose vehicle, Lucayan Renewal Holdings incurring a $47m cost as at end-March 2019. The budget also disclosed transfers to non-financial SOEs rose by $29.2m to $75.8m during the first nine months of the 2018-2019 fiscal year. The government also facilitated the budgeted settlement of $7.2m in interest payment on Bahamas Resolve’s $167.7m promissory note to the Bank of The Bahamas. In April 2019, the government announced plans to introduce a State-Owned Enterprises Bill to impose proper corporate governance, accountability, and discipline and to address the risk loss-making, inefficient SOEs pose to its financial health.
The government has permitted investment in sectors where SOEs operate and has approved licenses to private suppliers of electrical and water and sewerage services. These licenses have been issued for private real estate developments or in locations in which there is limited government capacity to provide services. An exception is the city of Freeport on the island of Grand Bahama, which has its own licensing authority and maintains monopolies for the provision of electricity, water, and sanitation services.
In May 2019, the Bahamian government issued a Request for Proposal for the purchase or franchise agreement for Nassau Flight Services. Bahamian investor groups were targeted by the FNM administration, adding that only Bahamians needed to apply for the ground handling services provider’s takeover. However, in February 2019 the government announced its decision to ‘maintain the status quo’ in deciding against the privatization of Nassau Flight Services.
Privately owned domestic and foreign airlines have complained of the market distortions created by Bahamasair, claiming the national airline sells key routes below market value and benefits from not remitting licensing and other fees required by private companies. The airline has recorded annual losses for more than two decades.
The Bahamian government has not taken definitive steps to implement its proposed privatization plans but has indicated a preference for public-private partnerships as the model for privatizing SOEs. The government divested 49 percent of the Bahamas Telecommunication Company in 2011, but issued a second license for cellular services and retained 51 percent equity in the new company. In his February 2018 speech, the Deputy Prime Minister serving as Minister of Finance announced the government’s intention to divest additional equity in the Bahamian telecommunications sector. In February 2019, the Bahamian government selected UK-based Global Ports Holding’s $250 million proposal to redevelop the New Providence cruise terminal, entering a 25-year lease agreement with the company. In early 2019, the company announced a bond offering which is expected to fund $130 million of the capital for the new Port of Nassau.