Barbados is considered one of the top ten most indebted countries in the world as a percentage of gross domestic product (GDP).
Up to the end of June this year, the country’s debt stock stood at just over $13 billion, or 150.3 per cent of GDP, even as economic activity was estimated to have grown 5.5 per cent.
This is close behind the $14.8 billion debt the country recorded for the entire 2017 and over $15 billion in 2018, when the economy grew by 0.6 per cent and 0.1 per cent, respectively.
Canada-based senior economist Carlos Forte believes the rise in debt over the past year was “somewhat expected” given the dramatic economic decline brought on by the coronavirus pandemic in 2020, resulting in Government spending more.
Economic activity declined by a whopping 19.8 per cent in 2020. “The debt measured as a percentage of GDP would also go up simply because the economic base – the GDP shrank. So that also contributed to pushing up the debt as measured as a percentage of GDP,” explained Forte.
“However, notwithstanding that context, it is a question of the magnitude of the increase in the debt and the composition of that debt,” he added.
Government was forced to borrow about $1.2 billion during the financial year 2020/2021, most of which (about 90 per cent) was foreign debt in the form of policy-based loans from international financial institutions.
Barbados’ debt to GDP ratio trails countries such as Japan, Sudan, Greece, Lebanon, Venezuela, Italy, and Suriname.
Forte said the amount accumulated in debt by Barbados in the last year alone was “staggering”, but recalled that a lot of the concessionary loans were more than what was needed so as to help shore up the foreign reserves.
“What I would say is that yes, the current prevailing economic circumstances somewhat justify accumulating the debt even if some of that debt is just stored to provide a buffer, not just a foreign exchange buffer but also a public financing buffer in the event that this pandemic drags on for much longer,” he said.
Nevertheless, the Barbados-born senior economist said there should be some cause for concern about the rising debt, adding that anything otherwise would be “a dereliction of duty”.
In fact, describing the past year’s borrowing by the Mia Mottley administration as a “borrowing binge”, Forte told TODAY’s Business the main concern should be about the future payment of especially the foreign debt, which must be paid back using foreign currency.
He cautioned against any further accumulation in debt, pointing out that “when this debt has to be repaid it does present some challenges going forward in terms of the availability of foreign exchange to be able to service that debt when it falls due”.
“Debt today means higher taxes tomorrow or less public services if that debt becomes too much of a financial burden,” he warned.
Though acknowledging that the new foreign debt carried a lower interest rate, Forte added: “We are almost as indebted as we were as a nation before and that has to be cause for concern. It has to be cause for concern when most of that new accumulation is foreign debt.”
It is important to note that when the current administration came to office at the end of May 2018, the island’s debt to GDP ratio was a whopping 175 per cent, making Barbados the fourth most indebted nation behind Japan, Greece, and Sudan.
By the middle of last year, the debt to GDP ratio was around 127 per cent before finishing the year at 142 per cent. The economy had declined by a whopping 19.8 per cent last year.
Forte said in addition to concerns about repayment, he also warned of the possible impact on the country’s ratings and ability to attract investment if the debt was not brought under control.
He said he believed the government’s heightened reliance on international debt in recent times was not only a result of concessionary rates but was due also to a dampened appetite for government debt locally because of the 2018 debt restructuring.
“So it does appear the debt restructuring did dent the confidence of local lenders to the Government – individual and institutional lenders,” said Forte.
Government’s balancing act in stabilising the economy and managing its debt last year when the pandemic struck became even more difficult after travel halted, unemployment rose sharply and the country was simply not earning as it should.
By September Governor General Dame Sandra Mason announced that the initial debt target would be put “on pause” until 2022. The original plan was to achieve a debt to GDP ratio of 80 per cent by the financial year 2027/2028, and 60 per cent by the financial year 2033/2034.
Government has since set a new timeline of the financial year 2035/2036 to achieving debt sustainability and a debt to GDP ratio of 60 per cent.