It was a situation that caught the eyes of analysts with the Central Bank of The Bahamas who compile the monthly reports on economic and financial sector developments.
The Bank monitors these conditions as part of its monetary policy mandate to asses whether money and credit trends are sustainable relative to levels of external reserves required to protect the value of the Bahamian dollar and if not the degree to which credit policies ought to be adjusted.
Banks’ excess reserves contracted by $4.7 million to $180.5 million at the end of July as did excess liquid assets which were $30 million lower at $168.8 million, according to the report released yesterday for the month of July.
It added that the reduction in external reserves abated to $2.3 million from $28.7 million last year as the Central Bank’s net foreign currency sales narrowed by $4.4 million to $26.2 million.
“For the month of July domestic monetary developments featured brisk expansion in Bahamian dollar credit which exceeded growth in Bahamian dollar deposit base with a consequent narrowing in both liquidity and external reserves,” the report noted.
“Similar trends were noted for the first seven months of the year, with the increased level of domestic demand exerting a contractionary influence on excess reserves and external reserves.”
The developments were highlighted by increased Exchange Control foreign currency approvals for non-oil payments.
Additionally, Bahamian dollar credit growth was more than four times higher than the previous year’s level at $124.5 million. It reflected a reported strengthening in credit to the private sector and the government.
Expenditures continued to outstrip revenue in the month of July but on another note there was an improvement in the deficit. Fiscal performance reflected the ongoing economic expansion occasioned by sustained advances in revenue receipts, it was reported.
The deficit declined by 45.5% to $78.4 million during the first eleven months of the 2005/2006 fiscal year.
On the other hand, for the first seven months of the year heightened domestic demand appeared to have caused a fall in excess reserves by $14.8 million. It reversed a growth of $21.6 million in 2005. However, the expansion in banks’ excess liquid assets strengthened by $11.1 million to $56.4 million.
For the period, growth in external reserves slowed by $27.3 million to $48.3 million compared to the previous period. The Central Bank’s net foreign currency purchases were almost cut in half to $35.2 million as higher sales of foreign currency to the public sector overshadowed the increase in receipts from commercial banks, the report found.
Initial data for the month of July indicated continued growth in economic activity, highlighted by sustained strengthening in consumer demand, tourism investments and construction activity. However the down side was reflected in a weakness in the cruise sector which caused a contraction in overall arrivals, according to the trend detected in the first half of the year.
The outlook for the rest of the year remained relatively unchanged.
“The domestic economy’s outlook remains favourable for the remainder of the year as vibrant residential and tourism investments reinforce the momentum in construction activity and sustained growth in the US economy positively impacted the tourism sector,” the report said.
“However the direct and pass through effects of higher energy prices on the local economy remain a downside risk to near term prospects.”
The first half of the year saw a continued strengthening in several Asian economies and recovery in the European markets countered the slowdown in US economic activity.
By: Tameka Lundy, The Bahama Journal
