Foreign debt rises even as overall public debt shrinks, economist warns

A leading economist has cautioned that despite significant progress in reducing its total public debt, Barbados’ increasing external borrowing could jeopardise the country’s financial stability. 

This warning comes as the Central Bank reports a fall in the debt-to-GDP ratio, highlighting the complex nature of the island nation’s economic recovery.

The Central Bank of Barbados’ latest economic review notes that the debt-to-GDP ratio “remains sustainable on [a] downward trajectory” showing a fall to 115.5 per cent, from 120.3 per cent in 2022, “in tandem with the rise in economic activity”.

But University of the West Indies professor Don Marshall warns that despite the drop in domestic debt, external debt continues to mount, which, according to him, could limit the government’s financial flexibility.

“We need to be clear about Barbados’ debt profile ahead of the double-speak of politicians and social media influencers,” he told Barbados TODAY.

“Total public debt has declined since 2018 following a restructuring of Barbados’ public debt. It is now at 115.5 per cent of GDP (2023), down from a record high of 150.5 per cent in 2016. The country’s external public debt amounted to 43.2 per cent of GDP in 2023, up from a record low of 26.9 per cent in 2017.”

According to Professor Marshall, the numbers show that while the government has reduced what it owes locally, it has had to borrow more in foreign currency, which brings new risks.

“Next time you hear a news report or spokesperson speaking about Barbados’ debt sustainability, ask after its profile,” he said.

“Note what we owe in Barbados dollars is going down. Note what we owe in foreign dollars is going up. We are an island mainly reliant on one foreign exchange-earning sector.”

Professor Marshall stressed that not all foreign borrowing is equal, and some loans come with more severe repayment conditions than others.

“Some of the foreign loans we have undertaken feature patient, long-term repayment arrangements,” he said. “These are manageable. Then there are others with almost immediate repayment terms on the interest. The latter debt arrangements are the ones that should be of utmost concern.”

“Worse, these too come with conditionalities that put limits on how we shape our public policy.”

Professor Marshall noted that he has long argued that the conditions attached to IMF lending have tied the government’s hands when it comes to economic transformation.

“I am on record saying that the conditional lending and development relationship forged with the IMF are inimical to a determined effort to change tack in the direction of pursuing a deliberate industrial policy,” he said.

“For the deals we have made to effect fiscal discipline and ensure annual fiscal surpluses, we are constrained to engage in the kinds of state spending to oversee the growth of other economic sectors.”

He believes that Barbados’ economic policy is still shaped by its financial obligations rather than a bold vision for development, stating: “The debt-to-GDP downwards movement masks the rise in the country’s external debt position.

“The stock of foreign exchange reserves is largely borrowed. This is to be expected as ours remains a country that is import-driven and in the grips of several intra-elite fractions whose horizons and investment choices are commercially oriented and not export- or production-driven.”

The economist said that the country cannot rely on finance-sector-led growth alone and must push for a more industrial-based economy that is less reliant on external borrowing and IMF agreements.

“Where the governor [of the Central Bank] and I may differ is how we go about building resilience and inclusive, sustainable growth.

“With the effects of COVID-19 receding in the background, we ought to craft policies that push past holding the tiller firm,” Professor Marshall said, reiterating that without a shift in policy, Barbados could find itself even more dependent on foreign creditors, limiting its ability to make independent economic decisions. 

shannamoore@barbadostoday.bb