Economist says adding to high debt could imperil generations

Barbados’ debt position is back where it was prior to the painful debt structuring in 2018 but there is only a glimmer of hope since Government is in a better position to service its debt this time around.

This assessment from Barbadian economist Carlos Forte, who indicated that while the current debt is manageable, the position in which Government now finds itself means that no further borrowing can take place or it will put future generations in peril.

“It is time to take stock,” he said.

Forte said the 2018/2019 debt restructuring reduced the island’s debt burden “and liberated the country from a debt trap”.

“However, since 2020 Barbados has borrowed more than US$1.25 billion from multilateral lending institutions such as the IMF, World Bank, Caribbean Development Bank, and Inter-American Development Bank. That’s the equivalent of BD$2.5 billion,” he said.

“The result is that Barbados is virtually back where it started before the debt restructuring that saved the country about $2.7 billion by reducing the overall debt and the burden of servicing that debt,” said Forte.

“An important distinction is that the Government is in a better position today to service the heavy debt burden than it was in 2018. This is because, today, for every dollar the government collects in taxes and other revenue, it spends about 30 cents to repay debt and interest. That is in comparison with about 68 cents of every tax dollar in 2018,” he reasoned.

Forte’s comments came on the heels of concerns raised by other economists about Barbados’ ability to honour its close to $1 billion debt to the IMF over the next five years, now that the programme has come to an end.

Over the course of the four-year IMF-backed Barbados Economic Recovery and Transformation (BERT) programme, Government borrowed some $870 million, which must be paid back with interest by 2029.

In an effort to manage the dreaded COVID-19 pandemic, keep some social services intact and continue infrastructural development, Government  also borrowed hundreds of millions of dollars from other lending institutions.

Concerned economists have questioned Government’s ability to repay, while weighing the development against a number of exogenous shocks to the economy and the island’s inability to earn all it needed from the still struggling bread and butter tourism industry.

“What economist like me and Professor Michael Howard are saying is that Barbados has already exceeded its optimal level of debt. Any further accumulation of public debt at the pace that we have seen from this government in the past four years cannot be sustained and is dangerous. It can put future generations of Barbadians and future governments in financial peril,” warned Forte.

“We know that Barbados already has a financing problem. The country and the government simply are not earning their way. Domestic investors are still spooked by the debt restructuring and are unwilling to lend to the government. This is part of the reason that the government has become so dependent on foreign debt since 2019,” he said.

However, last evening, Prime Minister Mia Mottley dismissed critics, saying the debt was manageable, while arguing that they were speaking without perspective and context.

Forte argued that while the debt was still manageable at this stage, it was reasonable to raise questions about its sustainability.

“I must caution that debt servicing of 30 cents of every dollar of tax revenue, though manageable, is not stellar. For example, Canada’s debt servicing is about 10 cents of every dollar of tax revenue. We must also consider that Barbados’ debt servicing is also likely to increase as the recently borrowed money comes due within the next decade,” said Forte.

“The problem is not whether borrowing is good or bad. No one is saying that governments should not borrow. The issue is whether the magnitude of borrowing is sustainable. The question is if taxpayers can afford or bear any further borrowing at this magnitude and at the pace seen in the last three years. Will Barbados be able to repay the debt when it comes due without higher taxes and less public services?” he queried.

“Two point five billion dollars of borrowed money in three years is a staggering sum for a small economy like Barbados,” he added.

Forte, who also took issue with Government backbencher Marsha Caddle pointing out that more developed economies were also racking up debt to help them get through the tough COVID-19 period, noted that the borrowing in those economies led to a quick recovery from the pandemic-related economic decline and they were back at pre-pandemic levels of economic activity.

However, he questioned what measures Barbados had put in place to earn foreign exchange and experience economic growth.

“Barbados simply does not earn enough foreign exchange to repay that foreign debt and so far, it is not on a growth and development trajectory that can give Barbadians the confidence that government and taxpayers will be able to repay the $2.5 billion when it falls due over the next five to 15 years. The implication is that Barbados is in the early stages of yet another debt trap, one that is more dangerous given the huge foreign debt component,” said Forte.

(marlonmadden@barbadostoday.bb)