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#BTColumn – Stylised facts on dealing with debt

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Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY. 

by Anthony Wood 

The current public discussion on Barbados’ debt and the country’s ability to service its debt through to 2029 is healthy for the citizens of Barbados.

The fact that views are contending is refreshing given that the presentation of economic and financial information to the public has been largely one-sided in recent times.

It is unfortunate that the focus has been on the IMF debt of 928 million dollars to be repaid by 2029 rather than the total external (and domestic) debt.

However, with Government’s Senior Economic Adviser, Dr. Kevin Greenidge, trying resolutely to convince Barbadians that servicing the IMF loan is no problem, the government is most likely implicitly  preparing the minds of Barbadians for the administration entering a new programme with the IMF in order to access “cheap money” as Dr. Greenidge likes to say.

In relation to servicing the IMF debt, Dr. Greenidge chooses to use the very crude measure of debt service payment as a ratio of tax revenue dollar as an indicator of the country’s ability to service its external debt. This is a very simplistic and misleading measure since external debt obligations are met through internationally-traded currencies and not Barbadian dollars.

It is well known that the debt servce payment as a ratio of foreign exchange is the appropriate measure to use when assessing a country’s ability to pay its external creditors. Thus, Dr. Greenidge or another member of the
Government’s economic team should be coming clean to tell Barbadians what percentage of the external debt obligations will be met from earned foreign exchange and from other sources mainly borrowing.

To say that the country has enough foreign reserves to meet external debt obligations in a static context is another simplistic statement. The reality is that the foreign reserves in a highly open economy like Barbados are used for many different purposes (and at a rapid pace) given the country’s high dependence on imports to sustain productive and consumption activities.

The foreign reserves do not lie idle until required to meet external debt payments. For this reason foreign reserves management is a daily task for the Minister of Finance through the Central Bank Governor.

Debt management is a dynamic issue and Barbadians should be told in a fairly definitive way what are the government’s spending plans over the short and medium term, and the additional debt (from external and domestic sources) required to meet projected deficits.

It is only then that the citizens will be in a reasonable position to know the country’s ability to service its debt and through which sources over time.

Given the over  reliance on the Tourism sector with its fragility and strong international competition, there is great risk associated with looking to Tourism to generate substantial enough foreign exchange to allow the country to easily meet its anticipated increase in external debt obligations through to 2029. The spectre of heavy external borrowing continuing looms large without nimble diversification of the economy.

In an article published in Barbados TODAY on Friday, July 1st, Prime Minister Mia Mottley remarks that critics of the country’s debt situation have lost perspective and were speaking without context. Like the Senior Economic Adviser to her government, Dr. Kevin Greenidge, the Prime Minister selectively limited her remarks to the IMF loan of 870 million for which the government has to repay 928 million dollars  by 2029.

As one of the critics of the country’s debt situation, i am duty-bound to respond to the Prime Minister’s remarks.

First, i acknowledged that it was unfortunate that the discussion on the debt focused on the IMF loan which is a small percentage (6.4 per cent) of the overall 13.5 billion dollars debt.

Thus, my context is the government’s ability to service the IMF loans and those from other external creditors through to 2029.

Second, for the Prime Minister to suggest that because the IMF loan is a mere 4 per cent of revenues makes servicing the debt very manageable is unfortunate.

External debt is serviced with internationally-traded currencies and not local Barbadian dollars. Hence, linking local taxation revenues to a country’s ability to service external debt is spurious and does not help the discussion.

Third, my context also includes the reality that without appropriate economic and financial policies to facilitate the country earning substantially greater amounts of foreign exchange, the administration will have to rely heavily on more external loans to prop up the foreign reserves, pay external debt and keep the economy afloat.

Thus, the country’s debt to the IMF and other creditors will rise substantially through the period to 2029. Borrowing to retire debt (a type of Ponzi scheme) is never a sustainable strategy. Typically, persons see the merit in not borrowing to pay a mortgage. They link paying a mortgage to income from employment and other investments. A similar principle should apply to the Mottley administration.

Anthony Wood is a senior economist, former lecturer in Economics, Banking and Finance at the University of the West Indies, Cave Hill Campus. He is also a former Cabinet minister. This column was offered as two Letters to the Editor.

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