#BTColumn – A response without foundation

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

By Anthony Wood

In an article entitled Ridiculous Remedy, in Barbados TODAY, Wednesday, August 16, Mr. Avinash Persaud,  Special Envoy to Prime Minister Mia Mottley on Investment and Financial Services, dismisses calls for the Mottley administration to repay the National Insurance Scheme (NIS) $1.3 billion written off in the debt restructuring exercise undertaken in 2018. He advances that repaying the money would be like reversing the debt restructuring and placing the value of the Barbados dollar at risk.  Mr Persaud also contends that the move will put the national debt back at 178 per cent of gross domestic product. Further, he warns that the move will threaten the living standards of Barbadians and place the social security assets in a much worse position.

Such assertions by Mr Persaud are without foundation and can be challenged on a number of grounds. First, he seems to be making the implicit suggestion that persons are calling for the funds to be repaid via a single payment. No one suggests that should be the case. Indeed, what is required is a realistic repayment plan. This was acknowledged by economist Carlos Forte who suggested that the funds could be repaid over a 30 to 40-year period.

Repaying the principal of the NIS debt over a thirty-five period using the straight-line method would require an annual payment of $37.14 million. With sustained growth in the economy led by the foreign exchange-generating sectors, moderation in the appetite for borrowing to maintain future debt service obligations at manageable levels, and efficiency in the use of public funds, the annual payment to the NIS will be within the reach of future governments.

Second, bringing the liability of $1.3 billion back onto the books of the Government will not return the debt to gross domestic product (GDP) ratio to 178 per cent as claimed by Mr Persaud. The International Monetary Fund estimate for Barbados’ national debt, based on information attributed to the Ministry of Finance, was $14.6 billion at the end of March 2023. The figure increased by $122.9 million during the subsequent three months, reaching $14.72 billion on June 30th. The addition of $1.3 billion will take the national debt to $16.02 billion. With the size of the economy in nominal terms around $12. 2 billion, the debt to GDP ratio with the $1.3 billion included will be 132 per cent, well below the figure of 178 per cent mentioned by Mr Persaud. Indeed, given the size of the economy, the debt will have to reach $21.72 billion, an increase of $7 billion over its current level, to yield a debt-to-GDP ratio of 178 per cent.

 Third, the assertion that if the government commits to repaying the NIS $1.3 billion will put the value of the Barbados dollar at risk is unfortunate and should be considered a “red herring”. Persons expounding on the state of the Barbados economy, including the Governor of the Central Bank, Dr Kevin Greenidge and Mr Persaud himself, promote the news that the economy is experiencing strong growth (in nominal terms) which is expected to continue, the stock of foreign reserves is extremely healthy at BDS$3.1 billion, the capacity to service both internal and external debt is solid, there is fiscal discipline imposed by the second International Monetary Fund-supported Barbados Economic Recovery and Transformation (BERT) programme, there is relatively easy access to foreign loans, and the domestic financial system is strong. With such optimism about the health of the economy, the contention that repaying the NIS $1.3 billion will put the Barbadian dollar at risk of a devaluation is flattering. International Finance 101 is explicit that the economic conditions driving currency devaluation include low levels of foreign reserves,  limited foreign exchange-generating capacity, difficulty in meeting foreign debt payment obligations (economy in a debt trap situation), sluggish economic performance with weak export competitiveness, and fiscal indiscipline exemplified by unsustainable fiscal deficits.

Given that established theory and practical evidence about the state of the Barbadian economy indicate that there is no threat to the value of the Barbadian dollar, Mr Persaud’s assertion that repaying the money will erode the living standards of Barbadians and place the social security assets in a much worse position should be dismissed. To the contrary, recapitalizing the NIS will be beneficial in important ways. First, it gives the NIS a source of investment funds. Once these funds are placed in good-performing investment vehicles, the assets of the NIS will be enhanced. Second, the repayment of the NIS debt expands the pool of funds from which timely payments can be made to eligible beneficiaries. Third, repayment of the NIS debt reduces the need for the government to implement reform measures that can have deleterious effects on the workers, society, and economy.

Those persons calling on the government to restore better health to the balance sheet of the NIS through the repayment of $1.3 billion via a realistic payment plan are on solid ground. Indeed, I am of the view that other receivables of the NIS written off, including arrears in contributions owed by private and public institutions and the loan to the ill-fated Four Seasons project, should also be repaid.

Anthony Wood is a senior economist, former Cabinet minister in the Owen Arthur administration and former lecturer in economics, banking and finance at the University of the West Indies at Cave Hill.