Working Paper: Two Benefits of Capital Controls for Macroeconomic Stability in The Bahamas

Published: Monday September 26th, 2022

Two Benefits of Capital Controls for Macroeconomic Stability in The Bahamas

Dmitry Titkov[1]

Harvard Kennedy School

July 2022

Abstract

This paper discusses two benefits of capital controls in the context of The Bahamas, which has pegged its currency one-for-one to the US dollar since 1973. The benefits are that: (1) controls on capital outflows have kept government debt costs lower than they would otherwise have been; and (2) controls have made it more feasible to maintain the exchange rate peg. I estimate that controls have put 1–2 ppts of downward pressure on the interest rates paid on domestic government debt in recent years, and up to 5 ppts since the onset of COVID-19. As the debt‑to‑GDP ratio of The Bahamas has risen to around 100 per cent, this represents substantial relief for the fiscal balance. Turning to the external balance, it has been estimated that extra controls imposed in response to COVID-19 prevented or delayed the depletion of $400m of The Bahamas’ foreign exchange reserves (which totalled $1.8b prior to the pandemic). Cross-country evidence suggests that existing controls may have saved an additional $500m of reserve outflows, though this estimate is rough at best. Although there can be sizeable costs associated with capital controls, my estimates of these two benefits are useful for informing the extent and timing of any further capital account liberalisation in The Bahamas.

Please view the download for further reading.