#BTColumn – Public Debt: How much is too much?

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

By Michael A. Callender

Small Island Developing States (SIDS) like Barbados are playing with a stacked deck and each of us have different challenges whether it is volatile growth that is dependent on a single source, macroeconomic instability and recurrent balance of payments shocks, or disruption of major economic activities due to no fault of our own. Therefore, the government has an obligation to protect its socially and economically disadvantaged population even though there is a shortage of resources or the lack of fiscal space to adequately address these shortcomings.

Recent world events have shown that these countries can no longer depend on the outside world to fix their problems. The industrialized countries are, for the most part, more concerned with solving their own problems. So, countries like Barbados have to find creative ways to keep the economy above ground whether it is by traditional ways of raising revenue or reaching out to the international financial markets.

Therefore, the new paradigm that developing countries must adopt is one that moves away from aid and charity and focus more on forging improved trade opportunities and building out infrastructure to bring about economic prosperity even if it means borrowing. Barbados has always spent more money than it receives as revenue with the difference being made up by borrowing.

There is a great debate that is swirling around the country recently about the size of the national debt. Some even argue that our debt is careening out of control to the point where it has become unsustainable rendering us incapable of meeting future obligations. Others believe that we are caught up in a serious debt trap while forgetting that carefully managed deficit financing will create the capacity for economic growth. We cannot depend on our tax base alone to raise the revenue needed to invest in education, healthcare and housing without imposing an undue burden on the shoulders of our people. So we have to borrow to make up that shortfall.

The rhetoric we are hearing about “debt trap” is just that, rhetoric, because there is no empirical evidence to support the assertion a debt trap is created when a country accumulates an unsustainable level of debt forcing it to surrender strategic assets or concede political leverage to the creditor. Are we there yet? No. So far there is no such evidence that such a trap has been sprung, but there is always a grain of truth in misinformation and conspiracy that will break down very easily when subjected to serious analysis.

Many countries resort to foreign borrowing to maintain financial liquidity and stimulate growth. It is not how much you borrow; it is how the loan is structured to facilitate ease of payment. To take a simplistic view of the process, let’s say there are three categories of loans that will be available to Barbados, 1) zero interest loans, 2) concessional loans, 3) commercial loans. If lenders are charging extremely low interest on their loans, in the case of Barbados, concessional loans at one per cent interest, that tells us that the creditors have confidence in the government’s ability to repay the loans. The ability to negotiate long-term low-cost capital is a plus for all of us.

The economy is in transition and at the same time there is no doubt we face serious global challenges right now with inflation first and foremost among them, and it is hitting families hard.

Solving the problems will require astute financial leadership and good governance to implement the measures that facilitate reforms, and pro-growth policies that will generate more revenue. Strong growth and lower interest rates are the way to go and because any problems with the debt will not be resolved easily and quietly. I am waiting to hear what is the alternative, who will cut what and what taxes will be raised to fill the shortfall in revenue.

We can argue that the economy is on the road to recovery with the leading foreign exchange earner, tourism, at 60 per cent of pre-pandemic levels, construction is on the rise, the debt to GDP ratio is on a downward trajectory, and an expected 10 per cent growth in 2022. If the interest rate is lower than rate of economic growth, the economy will grow faster and debt will fall relative to the size of the economy.

Solutions to the debt problems are complicated. Looking at the size of the debt from the past, or even the present is a good way to start a heated political argument, and views expressed either which way around this particular issue will depend on where you source your information, and which political shirt you are wearing on the day in question. When the dust is settled government still has to stabilize the country and the responsibility of drawing financial resources to finance economic development rests solely on the government.

Deficit financing was around for as long as Barbados was a country. Previous governments have exploited this method of financing to execute our planned economic development. If government debt grows at a faster pace than gross domestic product (GDP), the debt-to-GDP ratio will balloon, possibly indicating a destabilized economy. To the contrary, the debt is shrinking. Therefore, now is not the time to push the panic button and become a nation of nay-sayers. Pessimism more so than policy can kill an economy.

This column was offered as a Letter to the Editor.