#BTColumn – Explaining the debt management strategy of the Barbados Labour Party

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By Anthony Wood

The Prime Minister, Ministers, economic advisers and consultants, and supporters of the current administration frequently speak about the debt restructuring programme as a great achievement. While the outcome created fiscal space for the Government by reducing the quantum of short-term payment obligations and the overall debt, we need to examine the events prior to the conclusion of the “debt restructuring” exercise.

During the 2018 general election campaign the Barbados Labour Party speakers on economic matters (including myself at the time) told Barbadians repeatedly there will be a reprofiling of the national debt. This debt management strategy also figured prominently in the manifesto for the election. The terms debt repudiation and debt default were never mentioned.

Typically a policy of debt reprofiling (as a form of restructuring) means that the structure of the loans to Government would be changed to reduce the short and medium-term payment obligations of the Government. A greater proportion of the debt will have to be repaid at future dates. However, the full value of the debt is still honoured as the future value of the obligations postponed is calculated through the application of a simple future value formula. This approach is necessary to give recognition to the Time Value of Money which essentially means that the value of a dollar today is worth more than in an uncertain future. Thus, no creditors are to be deprived of monies owed by government. They are simply to be paid in full later than in accordance with the contractual agreements.

After the resounding success in the election, the Barbados Labour Party to the surprise of many persons substituted the standard definition of debt reprofiling with the practice of debt restructuring inclusive of debt repudiation/default. First, there was the unilateral decision to default on the payment of local and foreign obligations. Next was the application of a haircut which resulted in the value of the Government debt being reduced by almost 4.5 billion dollars. The Central Bank, National Insurance Scheme (NIS), local and foreign financial institutions, and private investors became innocent victims of the Government’s action.

Such unprecedented action was not told to the electorate during the campaign. The victims were therefore taken by complete surprise since the losses for some were quite substantial. For example, the Central Bank lost 1.6 billion dollars and the National Insurance Scheme 1.3 billion dollars. Defaulting on the debt to the NIS has exacerbated its financial difficulties and placed the Scheme in greater financial peril. The unhappy experience has obviously left some categories of investors very wary of providing loans to Government and investing in Government securities.

The action explained above is the primary reason why the stock of government debt was reduced from around 17.1 billion dollars in May 2018 to just under 12 billion dollars after the conclusion of the “debt restructuring” exercise in late 2018. Correspondingly,  the debt to gross domestic product (GDP) ratio declined from 171 percent to just under 120 percent over the same period.

There is absolutely no reason for policymakers and others to be heaping praise on themselves for the Government’s debt management strategy given that the reduction in payment obligations was achieved by such unprecedented and unenviable action which has brought severe, lasting pain and suffering to many investors and great mistrust in the Government.

With the administration engaging in substantial borrowing since the commencement of the Barbados Economic and Transformation (BERT) programme in late 2018, the country’s debt level currently stands at just under 14 billion dollars and debt to GDP ratio is over 140 percent. Indeed, before the slight recovery of the Tourism sector, the debt to GDP
ratio had climbed to 160 percent at March 31, 2021.

The administration needs to focus tremendous energies on stimulating activity in the productive sectors and generating substantially higher levels of foreign exchange on a sustained basis. There is an urgent need to strengthen the country’s national capacity to import. Also, there must be less reliance on the policy of foreign borrowing to prop up the foreign reserves and meet external payment obligations. Such borrowing will ultimately return the country to a similar position which existed at May 2018 and place constraints on our development prospects. Further, a strategy of debt restructuring inclusive of debt default by the same or any other administration will be much more difficult to implement in the future.

Anthony Wood is a senior economist, former lecturer in Economics, Banking and Finance at the University of the West Indies, Cave Hill Campus. He is also a former Barbados Labour Party Cabinet minister.