The leader of the economics fraternity has warned that the alternative to Government’s debt restructuring plan would be more painful and socially disruptive.
But don’t expect the commercial banks to venture an opinion on the matter as they form the creditors holding six billion dollars’ worth in public debt, Barbados TODAY has discovered.
Government could have avoided restructuring its massive debt of 175 percent of Gross Domestic Product (GDP) with higher taxes and spending cuts, which is usually understood to mean sending home workers, President of the Barbados Economic Society (BES) Shane Lowe has told Barbados TODAY.
“Could there have been another way? The alternative was to make further adjustments to the taxes and the expenditure. That would have avoided having to restructure the debt, but of course, the magnitude of those adjustments might have had significant effects on economic growth and also on the social fabric…and so, there needed to be a delicate balance between the two,” Lowe said this afternoon.
The BES president also noted that while the Mia Mottley administration could also have sold off state assets for a period of time, there is only so much this exercise could have achieved.
“That can only go so far. But having announced that this is the decision taken and given the size of the debt, it would be very difficult then to pull back from this decision, having made it. Like I said, the other alternative is the make even greater adjustments on the fiscal side. That has implications in terms of growth.
“And the [other] issue is, [in order] to get the IMF [International Monetary Fund] funds, the IMF has to see a credible plan for how you are going to get the debt down,” he said.
He added that the IMF may or may not be convinced that the Government or the country has the capacity to bear substantially more taxes or too much spending cuts without touching the debt.
That scenario, he said, also played a part in the whole decision to restructure the debt.
The Central Bank yesterday drew a roadmap towards restructuring the Government’s six-billion-dollar debt, offering to swap the vast majority of loans for new debt instruments, suggesting a haircut to creditors and stretching the length of time over which they will be repaid.
It’s the best the Government can do under the circumstances, the bank suggested. The alternative: the printing of money and the laying off of public servants in the short term, it said.
This is the first step by the Government towards comprehensive restructuring of debt that is almost twice the size of the entire Barbados economy since signalling its intention within a week after coming to office by freezing sovereign debt repayments.
The move triggered yet another record round of credit downgrades by international rating agencies, tipping Barbados’s sovereign debt firmly into ‘junk’ territory.
Governor Cleviston Haynes said the Central Bank has already written bondholders setting out the terms of exchange, giving them a deadline of 5 p.m. on October 5 to accept or reject the offer.
Today in his assessment of the bond offer, the economics society leader observed that the Government was trying to share the burden among the taxpayers, those who depend on social services and the creditors.
“Without the bond restructuring…the debt restructuring, it would mean that more of the burden would have to go on the other two groups, the taxpayers as well as those who use social services in order to achieve the same target, which is getting debt to 60 percent of GDP by 2033,” Lowe told Barbados TODAY.
But he cautioned that there are a number of challenges facing the bond offer.
“One challenge is that…especially those pensioners who have money upcoming within the next two to three years who might have needed those funds for whatever reason, whether it be for their own healthcare expenditures, or to fund other expenditure that they need to have…they now have to wait for a substantially longer period of time, which is of course, very unfortunate,” the economist argued.
Another challenge is that whenever a country restructured or defaulted on its debt, the reputation of any creditor would be adversely affected, Lowe said.
“And so what is important to counter that is that the Government has access to the multilateral financing, the IMF, the CDB [Caribbean Development Bank], the IDB [Inter-American Development Bank], but also that it puts itself in a position, such that it runs a large enough surplus so it doesn’t need to borrow for the next few years,” he said, adding that both local and external investors would be hesitant to lend the Government additional financing at this time.
When contacted, president of the Bankers Association of Barbados Donna Wellington declined to comment on the bond offering, explaining that as creditors, it would be improper for the banking sector to speak on the matter.
“I am not in a position to speak on that matter because we are in the middle of discussions and negotiations. It would be very difficult for me to speak on that, it would be very out of turn. We are Barbados creditor group, so we have to continue to discuss and talk through until we get to a conclusion,” Wellington told Barbados TODAY this afternoon.