Government’s approach to debt restructuring flawed, says Arthur

Government’s decision to restructure some aspects of its debt has come in for scathing criticism from former Prime Minister Professor Owen Arthur.

Questioning Government’s choice to restructure the debt held by the National Insurance Scheme (NIS) Arthur, a former minister of finance, said this move was nothing but “reckless endangerment”.

Government’s debt restructuring forms a major plank of the Barbados Economic Recovery and Transformation (BERT) plan, which is aimed at breathing new life into the ailing economy.

“The debt relief to be afforded to the government by discounting government securities held by Central Bank, external creditors and the NIS, is intended to provide the government with financial relief amounting to 33 per cent of GDP (gross domestic product) and $3 billion in relief during the first three years of the programme. And it is supposed to be done without impairing the viability of the entities concerned. That will be a very tall order,” said Arthur, as he gave a presentation at the SALISES Policy Forum on Wednesday night, under the theme Barbados and the First Phase of the IMF/BERT Plan: of Recovery and Precarity.

Pointing out that the NIS funds did not belong to Government or the National Insurance Board, Arthur said the money belonged to the people of Barbados and was only being managed by the fund “on the basis of a trustee relationship”.

He therefore expressed concern that the fund could take a major haircut of close to $1 billion as a result of the debt restructuring.

“I really do not understand the process in which a board of directors of the national insurance, with the government owing the national insurance $400 million in arrears, and they are going to write off another billion, just to make the government finances look good. And I think that somebody has to remind the national insurance directors that they are managing funds . . . on the basis of a trustee relationship, and that as a trustee you have a duty of care,” said Arthur.

“They are now going to write off another $1 billion to make the government books look good. I believe that is a case of reckless endangerment,” he said.

Government owed the NIS $460 million in arrears up to July last year. As at September last year the NIS held just over $3.2 billion in government paper, which means that the fund will bear the brunt of the debt restructuring.

The NIS will see write-offs of Government debt of about 17.5 per cent per annum for the next four years, while the Central Bank’s Government debt will be written off to the amount of around $1.6 billion or 16 per cent of GDP.

This is expected to give Government some short-term fiscal space, but pundits say both institutions would eventually need to be recapitalized.

When contacted, Chairman of the National Insurance Board Ian Gooding-Edghill declined to comment on the matter.

During his presentation, however, Arthur also took issue with the decision of the Mia Mottley-led administration to include Treasury Notes and the external debt in the restructuring, saying this was “highly unusual”. Treasury Notes are short-term investment instruments, usually issued for periods between one and ten years.

“Of particular interest is that Barbados’ debt restructuring programme provides for the restructuring of $4.3 billion of treasury bills, by their conversions, into 15-year bonds and a significant reduction of the interest payments of such treasury bills with a view to reducing government’s gross financing needs,” Arthur told his audience.

“It is not normal for countries restructuring their debt to restructure treasury bills . . . it is highly unusual for a country to restructure that financial instrument. Indeed, the only precedence that can be found for such development is in restructuring programmes in the government of Russia and Ukraine,” he added.

Accusing government of “trying to do too much too fast”, the economist argued that with the commercial banks also taking a major haircut, they have already started to “charge” customers to make up for that shortage.

Commercial banks have a total of $180.7 million in government debt.

Under the domestic debt restructuring bondholders will get reduced interest, longer maturities and in some cases, a reduction in principal.

Government is expecting external creditors to accept a similar plan by the end of March this year.