Economist urges scrutiny of debt swap risks

Barbados’ planned $1.2bn debt swap could free up about $320m for healthcare, but economist Jeremy Stephen has cautioned that the arrangement remains a loan and carries risks ranging from the misuse of funds to weak economic growth.

His comments came as Parliament approved legislation to double the special loans limit to $5bn and clear the way for a debt-for-social swap aimed at strengthening healthcare services.

The Special Loans (Amendment) Bill raises the special loans ceiling from $2.5bn specifically to support targeted swaps designed to address national priorities, including chronic non-communicable diseases and healthcare infrastructure.

While the government has emphasised the fiscal space such arrangements can create, Stephen said Barbadians should understand both the benefits and the risks associated with sovereign debt restructuring.

Addressing whether debt swaps simply replace expensive debt with cheaper debt while directing savings to development projects, Stephen said the answer was not straightforward.

“Technically or mechanically actually, the debt swap is basically a form of debt consolidation,” Stephen said. “You just have the backing of an institution that people trust, and along with that backing … you are now able to attract lenders with rates that would be better than if you went to the lenders without that form of endorsement.”

However, he stressed that debt swaps do not amount to free money.

Stephen said governments remain obligated to repay the loans and must channel any savings into approved development programmes rather than day-to-day operations or other spending priorities.

“It’s not going to go towards, say for all arguments, financing government operations … It must be developmental in terms of infrastructure primarily.”

Explaining how the arrangement works, Stephen distinguished between government operating costs and long-term capital expenditure.

Operational expenses, such as running government departments, staffing hospitals and providing services are generally financed through taxes, treasury bills and certain bonds, he said.

Large infrastructure projects and specialised social programmes, meanwhile, require significant upfront financing. Because such initiatives are typically funded through dedicated borrowing arrangements, debt swaps fall into that category and require legislative provisions such as the expansion of the special loans ceiling.

“The taxpayer doesn’t necessarily see a direct, immediate cost for capital works programmes because those are financed by either external borrowing or these huge loans that they get commercial banks to invest in,” Stephen said. “So down the line, yes, the taxpayer feels it, but not as immediately as, say, financing the operations of government.”

Despite the potential benefits of refinancing high-cost debt on more favourable terms, Stephen warned that the same economic risks associated with borrowing still apply.

“All the same risks that would apply if they borrowed the money locally for capital projects still apply,” he said. “Inflation works against you. The higher inflation goes, the harder it becomes to collect adequate tax revenue in the future and to finance or repay these loans in a timely manner.”

He also identified governance as a major concern, cautioning that funds could be redirected during unforeseen crises.

Stephen pointed to situations in which governments facing external shocks, such as disruptions to energy supplies, might be tempted to divert resources from development projects to address immediate needs.

“You wouldn’t want them to, but they might be able to then dip their hands in the kitty from these funds to do that,” Stephen warned. “Now that’s misallocation, although for a good purpose, and it comes at a larger cost because, down the line, you’re not gonna get back money from energy the way you think.

“So mismanagement of funds, misallocation, misappropriation, all of those are real short-term risks, and the real long-term risk is the underperformance of the economy and therefore the government isn’t able to collect the tax revenue needed to keep pace with paying back on the debt borrowing.”

(RR)