the path to exchange control liberalisation : completing the journey in one piece remarks by john a rolle, governor bahamas business outlook 2018 18 january, 2018 introduction a special thanks to the counsellors for inviting me to make this presentation on exchange control liberalisation. i intend to keep the focus narrowed to issues related to capital and investment flows, as these are the areas where policies and administrative practices have the most substantive impact. rather than argue that the bahamas should resist liberalisation, i would instead like to convince you that we should make more credible preparations to do so — but in a stable fashion. i would also like to convince you that some of the roadblocks to liberalisation are matters related to our national investment policy regime, which defines the limits of property rights enforcements for those who might otherwise, already be able to circumvent the exchange control regulations. finally, there is the question of dollarization, and whether this option would allow the bahamas to speed up the process of liberalisation. purpose and scope of exchange controls the system of exchange controls, and the monetary policy tools available to the central bank are to ensure that the bahamas is able to maintain the fixed exchange rate, with b $ 1. 00 = us1. 00. the parity with the us currency provides a necessary convenience for tourism, which is mostly transacted in us dollars and mostly with us clientele. the fixed exchange rate has also provided a stable anchor for domestic inflation, which has closely mirrored the inflation rate in the united states. this is an achievement almost unrivalled in independent countries in latin america and the caribbean, or in most developing countries. 1 | page it should also not be so quickly discounted given the importance of stable inflation expectations in the medium and long - term decision making processes of the private sector - whether it is about investments, savings or wage negotiations. 1 our exchange controls have been effective, not because they are fool proof, but because they provide safeguards around very liquid and mobile financial flows, which if shifted rapidly could destabilise the exchange rate. given enough time, people do manage to evade controls but the short - term fallout from such movements is not felt. meanwhile, the national investment policy provides a check on restricted categories of inflows, because it determines the ease of forming legally binding commercial contracts with non - residents. the downside, however, is that protection can reduce the incentives for expedited structural reforms that would have longer - term benefits

. the ability of bahamians to make outward direct investments that were not assessed an investment currency premium, only started to be embraced as a policy in 2006, and is now accommodated up to a limit of $ 10 million, per investment, every three years. the approval process considers whether such investments would produce returns that would be repatriated to the bahamas. 3 in 2017, access by bahamians to financing in foreign currency for domestic ventures was also strategically relaxed, 4 with a limit of up to $ 5 million per business firm every 5 years. 5 this is available for businesses operating in sectors generating positive net foreign exchange impact or where expressed national development goals have been articulated. on portfolio or potentially liquid investments, the approach has been one - sided. inflows are still not very much embraced. however, since 2006, bahamians have been able to invest abroad without paying the investment currency premium, once they purchased instruments marketed through local broker dealers and traded on the local stock exchange ( bisx ). the this covers the ability to establish ownership in international financial institutions operating in the bahamas, which have to be capitalised in foreign currency. the relaxed measures are published in the following report on the central bank ’ s website : http : / / www. centralbankbahamas. com / download / 013616000. pdf borrowing from the private sector arms of the idb or world bank are not subject to any limit. 3 | page collective annual accommodation limit for these vehicles is now $ 35 million. other portfolio transactions still incur an investment currency premium. the premium used to be at 25 percent, but was reduced to 12. 5 percent in 2006 and will be reduced further to 5 percent in 2018. that said, the investment currency market exists primarily to limit speculative pressures that could deplete the supply of foreign exchange and render the exchange rate unsustainable. figure 1 : bahamas utilisation of investment currency and stock exchange ( bisx ) linked facilities note : cumulative capital outflows for selected vehicles area as follows : - icm : more than $ 50 million ; bisx vehicles : $ 150 million ; nib : $ 109 million. source : central bank of the bahamas another reform that has already been foreshadowed is that greater access is being opened up for residents and businesses to maintain foreign deposits accounts, but with built in protections for the exchange rate regime. in particular, business will be able to retain a portion of their foreign currency revenues