KINGSTON –– Minister of Finance Audley Shaw yesterday disclosed that the previous government’s PetroCaribe debt buyback will cost the country US$110 million (J$13.4 billion) annually from a six per cent increase in interest rate on the new agreement.
In addition, Shaw told the Private Sector Organisation of Jamaica (PSOJ) President’s Forum at the Jamaica Pegasus hotel that, after taking office, the new Administration found that the estimated J$9.5 billion that should have been set aside from the forward purchase of oil had been included in the consolidated fund.
The new government had said it would reallocate that J$9.5 billion to fund its election promise to abolish income tax for individuals earning up to $1.5 million annually.
After his address, Shaw told journalists that the government would now have to find the money elsewhere to fund the income tax proposal, and said he would speak further to that in the upcoming budget debate.
“The [PetroCaribe] Fund is now quite compromised in the fact that, while the buyback of the PetroCaribe debt was so celebrated, and we must acknowledge that it did bring the national debt down to a point . . . let’s not forget that in order to buy back that debt we had to now enter a new debt instrument of US$1.5 billion — not at one per cent interest rate as we were paying before, but at a seven per cent interest rate,” the minister stated.
“And the consequence of that now is that the PetroCaribe Development Fund is now being called upon to appropriate US$110 million from that point to the servicing of that US$1.5 billion,” Shaw continued.
Last July, then Minister of Finance Dr Peter Phillips signed off on an agreement to purchase US$3.2 billion in debt owed to State-owned Venezuelan oil company Petróleos de Venezuela SA (PDVSA) through the PetroCaribe Development Fund at US$0.46 on the dollar, or a discount of 54 per cent, with the remaining funds allocated for what the prospectus describes as general budgetary financing.
The purchase was made from US$2 billion raised by the then Government through the issuance of two Eurobonds on the international capital market.
Economists, along with the PSOJ, were in support of the move, while Phillips emphasised that the transaction would lower the country’s debt-to-GDP ratio by approximately ten per cent, or a J$164 billion reduction in nominal public debt stock, from J$2,147 billion to J$1,983 billion.
Phillips also confirmed that, as a result of purchasing the debt, the PetroCaribe Development Fund was now obliged to pay the central government, instead of PDVSA Petróleo SA, for the full amount of the debt, while advising that the debt buyback would not require higher taxes.
Tuesday, Minister Shaw, while emphasising that the new Government’s economic policy is based on the fundamental premise that it is possible to continue the International Monetary Fund (IMF)-approved economic reform programme while accelerating economic growth, noted that there were some immediate challenges in assessing a number of options to mitigate the fiscal impact on the reform programme.
“Many of our agencies have come to rely on the PetroCaribe Development Fund as a source for creating development support for special projects and so on . . . but for those who think that the fund is now available for all kinds of projects, it’s not there anymore,” he stated.
“US$110 million per year is now the first charge on that fund, so we might have to change the name from the PetroCaribe Development Fund to the PetroCaribe Debt Servicing Fund. All that glitters is not always gold,” he continued.
Despite the setbacks, Shaw said that the Government remains committed to enacting the ten-point plan it presented in the run-up to the February 25 general election. Chief among this is the income tax proposal, maintenance of the tax benefit on the junior stock exchange, and the continuation of the IMF tax reform programme.