John Rolle on The Bahamas' Fixed Exchange Rate and the First Nationwide Central Bank Digital Currency

John A. Rolle · Central Bank of The Bahamas

Bahamian growth is highly exposed to US consumer sentiment because about four-fifths of tourism business is US-sourced.

Tourism is the core of the Bahamas' foreign-exchange earnings, and about four-fifths of that business is sourced from the US. Because of this, the economy is strongly influenced by US consumer sentiment and how it filters into travel demand and spending. The concentration creates vulnerabilities. Proximity to the US also makes travel easy, which partly offsets this risk. Tourism outlook drivers are fairly well understood, which lets monetary policy be adjusted in anticipation.

“think at least four fifths of our business is US sourced. It means that you are very much influenced by the consumer sentiment element of The US economy, and how that filters into travel demand and spending.”at 18:26

John A. Rolle · Central Bank of The Bahamas

Bahamas growth is running above potential as post-COVID residential tourism investment keeps flowing in.

Interest in second homes in countries like the Bahamas grew after the pandemic, partly because people wanted more spacious surroundings and places to live. Investment in residential tourism continues, which is why the Bahamian economy is still growing above medium-term potential. The post-COVID boom followed a deep 2020 contraction of roughly 20 to 25% in real activity, with a full recovery only by late 2022 or early 2023.

“we are still growing above medium term potential because there's still a lot of investment going on in residential tourism.”at 21:12

John A. Rolle · Central Bank of The Bahamas

Bahamas public debt will take over five years to fall back below 70%, toward 60% of GDP.

The Bahamas ran significant deficits as a share of GDP to stabilize the economy during the pandemic. Stabilization meant keeping expenditure relatively stable and providing basic social support rather than expansionary stimulus. Because of this fiscal damage, the recovery path to bring debt-to-GDP back below 70%, or into the 60% range, is easily more than half a decade. The pandemic also pushed back the earlier goal of getting public debt below 50% of GDP, so the timelines have shifted, though the goals remain ambitious.

“in terms of the fiscal damage, we're on a path that is easily more than half a decade in terms of the recovery and getting the fiscal debt to GDP ratios back below the 70% range, or getting it down into the 60% range.”at 23:25

John A. Rolle · Central Bank of The Bahamas

A unifying digital fiat instrument will be needed for offline payments to support payments resilience.

Central banks often have to lead investment in fast payment systems because the private sector does not respond without a clear return. The Bahamas faces the same dynamic. Wholesale CBDCs and tokenised deposits are increasingly complementary to central bank payments infrastructure. For Bahamian resilience, the instant payment system and a CBDC must work together. Offline payments, which matter in a disaster-prone archipelago, will eventually require a unifying instrument that looks like digital fiat. The Sand Dollar is intended to fill that role.

“this issue of offline payments means that you will need a unifying instrument in there that looks a lot like digital fiat.”at 38:29

John A. Rolle · Central Bank of The Bahamas

Bank stress tests must incorporate hurricane and sea-level climate risk to protect credit quality in The Bahamas.

As stress-testing methods improve, the central bank is refining how it incorporates climate risk into its models. Much of the credit exposure in a country like The Bahamas depends on where damage from hurricanes or sea-level rise could fall. The central bank expects to build capacity in this area so that credit quality does not deteriorate as climate risk escalates. Rolle also stresses financial-system resilience: how quickly financial services, payments and basic infrastructure recover after a setback, and whether banks have built-in mechanisms such as temporary reprieves for customers hit by disasters.

“as stress testing methodologies improve, we're learning how to refine the approach to incorporating climate risk into the stress testing model.”at 44:43

John A. Rolle · Central Bank of The Bahamas

Interoperable global infrastructure could let tokenised deposits and other alternatives coexist; small Bahamian banks would mostly receive them.

If a truly interoperable global payments infrastructure emerges, tokenised deposits and other new payment alternatives could coexist. The Bahamas' banking sector is very small, so domestically it is more likely to receive these innovations than lead them. In a global network, cross-border settlements might use tokenised instruments. Large global financial institutions are paying more attention to this area. For small countries, that could look like a different kind of correspondent banking relationship, in which settlement runs on tokenised rails rather than current methods.

“I think if you get a truly interoperable global payments infrastructure, lots of these alternatives could coexist. The very small size of The Bahamas' banking sector means that in our domestic case, we're probably more likely gonna be on the receiving end.”at 43:18

John A. Rolle · Central Bank of The Bahamas

Physical cash will persist for decades, and its logistical access in The Bahamas must improve as a safety net.

No one expects physical cash to disappear anytime soon, perhaps not for decades. In The Bahamas, a practical challenge is improving logistical access to cash across the archipelago. Supplying physical cash to the islands is very costly. The government itself still runs on a cash basis in some islands, because financial infrastructure there is less advanced. A CBDC or other public-goods instruments could help improve physical cash access in the near to medium term. Better cash access would give people a cash safety net, which would make them more comfortable depending on digital payments.

“in a case like The Bahamas, some of the challenges that we have to address is also improving access to physical cash logistically.”at 48:04

John A. Rolle · Central Bank of The Bahamas

Stablecoins will likely find a payments role medium to long term, but not an imminent one in The Bahamas.

Cross-border retail stablecoin returns that international backers hoped for have not yet materialised. For a services-export economy like The Bahamas, the likely route is payments: innovators will need to tap stablecoins to lift the spending tourists make. Stablecoin use beyond payments depends on whether residents want an arbitrage or safety valve against capital controls or political risk. Bahamian capital controls already let residents buy foreign-currency digital assets through regulated portfolio channels, so stablecoin use would only change once tourists or cross-border P2P flows pay locally in stablecoins. Rolle does not see this as imminent. The binding constraint is off-ramps: developing countries receiving stablecoin remittances still struggle to convert back to local currency, so the promised cost savings may not materialise. David Beckworth agreed that on- and off-ramps currently add cost and time.

“So I do think that medium and long term stablecoins will... we have to be progressive and open to how stablecoins can find their way into the payment space.”at 40:32

John A. Rolle · Central Bank of The Bahamas

Fixed pegs still matter for small economies, since adjusting the exchange rate would bring austerity-like pain.

For very small economies, central bank mandates reduce to maintaining currency stability, even where they have more formal flexibility. The usual alternative, an exchange-rate correction, is hard to use because it works against inflation control. The adjustments left, such as spending and wage cuts, look more like austerity than currency correction. In practice, a small economy that has nominally flexible policy therefore behaves much like one clinging to a peg. Rolle concludes that the rationale for pegs in small economies is sound, and that such countries must manage their capital accounts carefully to sustain them.

“in many cases, for the smaller economies, they still reduce to maintaining incredible currency stability, focusing on adjustments that look a lot more like austerity than exchange rate correction, because those then go counter to the inflation.”at 50:57