Borrowing for reserves no mystery – Robinson

A noted economist has brushed aside concerns about Government’s continued borrowing to shore up the foreign exchange reserves, saying it should not be seen as a bad thing.

Professor Dr Justin Robinson, a senior academic at the University of the West Indies (UWI), Cave Hill Campus, said there was nothing mysterious about Government’s borrowing on favourable terms.

“In terms of the foreign exchange being borrowed, whenever we have large numbers of foreign reserves in Barbados they have always been driven by borrowing. I don’t think there is any mystery or magic there,” he said.

“It is a lot about ‘is it a problem to create that buffer by borrowing some foreign exchange under terms and conditions of let’s say 1.25 per cent interest with 30 years to pay?’ That might be the cost of your buffer. A buffer is not free. So I am not critical at all about the fact that foreign exchange reserves buffers today are to some extent borrowed,” Robinson told a recent Rotary Club of Barbados meeting.

The international reserves increased from a meagre $440 million or six weeks of import cover at the end of May 2018, to a whopping $2.8 billion or eight months of import cover by the end of October 2021 due mainly to borrowing from international financial institutions including the International Monetary Fund (IMF) and the Inter-American Development Bank (IDB).

In recent times, some pundits have raised concern about the level of borrowing by the Mia Mottley administration, which has since taken the island’s debt stock to just over 142 per cent of gross domestic product (GDP), as the country undergoes a four-year IMF funded programme.

The latest critic, economist Kemar Stuart, said he did not believe borrowed money to shore up the reserves was necessarily a good thing, especially given what he said was government’s lack of foreign exchange constraints.

“Having high reserves is important. However, borrowing reserves in an attempt to pay down foreign exchange bills doesn’t cure Barbados’ problem but makes it worse if not supported by policy to cut the deficit between foreign exchange leaving the island and foreign exchange entering,” Stuart explained in a recent interview with Barbados TODAY.

In its sixth review under the Extended Fund Facility (EFF) arrangement earlier this month, the IMF noted that the country has been making good progress in implementing its Barbados Economic Recovery and Transformation (BERT) plan to restore fiscal and debt sustainability, rebuild reserves, and increase growth.

Noting that all new external debt incurred last year were from international financial institution loans with favourable terms, the IMF said this posed “limited risk to future debt service schedule and debt sustainability”.

“Moreover, the authorities’ medium and long-term debt management strategy favours the use of domestic financing sources and puts the share of external debt on a gradual downward trajectory. This allows the authorities to maintain adequate reserve coverage while avoiding excessive reliance on expensive financing from capital markets much beyond roll-over needs,” the IMF said.

The fund noted that the debt sustainability analysis suggested that Barbados’ debt target of 60 per cent of GDP can be reached by financial year 2035/2036.

“Debt continues to be assessed as sustainable but is subject to high risks. Risks to debt sustainability are high but mitigated by Barbados’ strong track record under the EFF-supported programme and the authorities’ strong commitment to long-term fiscal adjustment, as well as the favourable debt service terms after the comprehensive debt restructuring,” said the IMF.  (MM)