Former Central Bank Governor advises review of approach to borrowing

By Marlon Madden

A former central bank governor is urging the Barbados Government and others in the region to rethink their borrowing strategies, suggesting that policy-based loans should be avoided since their results over the years have been disappointing.

Economist Dr DeLisle Worrell gave the advice, while excusing such loans from the International Monetary Fund (IMF) under its Extended Fund Facility (EFF) arrangement, in which Barbados is currently engaged.

He argued that loans that were not related to infrastructure development, public utilities and public service were bad debt since it was “difficult to identify positive outcomes”.

“I believe the time is ripe for a re-evaluation of borrowing strategies by Caribbean governments. Clearly, government borrowing to provide for facilities and equipment to ensure the effective delivery of public services and public utilities is essential for economic development. On the evidence, that seems as far as governments need to go,” said Worrell.

“Government borrowing for infrastructure, public utilities and public services is good debt. All other borrowing, except for temporary accommodation under an IMF standby facility, is not,” he posited.

According to the Inter-American Development Bank (IDB), one of Barbados’ lending partners, its policy-based loans provide borrowing member countries with flexible, liquid funding to support policy reforms and/or institutional changes in a particular sector or subsector.

In addition to infrastructure and other developmental type loans over the years, Government has been able to access several policy-based loans from various lending institutions including the Caribbean Development Bank (CDB), the IMF and the IDB.

Worrell, in his February economic report, insisted that borrowing for investment in roads, ports, airports and transport infrastructure that enables economic activity for many years to come is good investment.

“So is borrowing for physical investment in educational and health facilities and equipment, and for similar investment for the maintenance of law and order,” he said.

“Borrowing to extend and upgrade water distribution, electricity and telecommunications, sewerage and waste management facilities and equipment also falls into the category of good debt,” he added.

“It is rather more difficult to justify government borrowing for investment in new hotels and export activity, even though these may also be examples of good debt. Such investment is high priority because it increases the capacity of Caribbean economies to earn the foreign currency they need for their development.

“However, in order to succeed, the projects must be carefully designed, constructed and staffed, to ensure that they offer good value for money to potential visitors and produce goods which will attract customers from abroad. Governments everywhere in the Caribbean have repeatedly proved inept in these aspects,” he explained.

Worrell argued that over the last four decades, a lot of the borrowing by Caribbean countries from multilateral institutions “has moved from the category of debt that produces lasting value to debt that does not.”

“Up until the late 1980s the World Bank, the Inter-American Development Bank, the Caribbean [Development] Bank and other lenders offered only loans for specific projects, with disbursements tied to progress with the implementation of these projects. This is still the case with much of their lending.

“However, in the early 1990s, many multilateral development institutions introduced “policy loans”, with disbursements linked, not to tangible capital expenditure, but to the implementation of new policies and strategies. The intention was laudable, but the results have been disappointing,” he said. 

At the end of last year, when the Barbados economy grew some 10 per cent, the country’s debt stock was approximately $14.1 billion or 123.8 per cent of gross domestic product (GDP), compared to $13.4 billion or 137.9 per cent of GDP at the end of 2021 when the economy declined by around 0.3 per cent.

Much of the island’s loans over the past year were policy-based, including the loans from the IMF.

Worrell indicated that “in a few cases, the conditions set down in loan agreements have not been met, and the programmes were terminated prematurely”.

He said this “turns out to have been a good thing, because in all the cases where policy loans have been fully dispersed, it is difficult to identify any improvement in economic performance that can be attributed to the use of policy loan funds”.

“These borrowings cannot be considered good debt,” he concluded. 

marlonmadden@barbadostoday.bb