Last Updated on August 4, 2022 7:52 pm by Editor
The Barbados Government is looking to borrow yet more money. This is the logical implication of the Debt Conversion (Counter-Guarantee) Bill 2022 that was passed in the house on 23 June 2022. So that you can understand the issues we wish to raise and our critique of this bill, we first present you with the substantive parts of the bill.
Nature of Act
In summary, this Act is an enabling Act. This means it allows the Minister of Finance, or someone acting in this capacity, to bring another piece of legislation to parliament, at any time subsequent to the passing of this Act in question, to borrow more money and have the eventual payment of it made out of the Consolidated Fund which is the pool or kitty into which ALL government funds (revenue) are “stored”.
We use the expression “eventual payment” because this act is different in that it expressly allows the government to use a third party finance entity which we can logically call a “counter-guarantor” in the process.
In effect, what the government proposes to do is borrow money from A, ask B to guarantee its payment and in turn the government will pay it back B out of the country’s kitty (The Consolidated Fund) if we cannot pay A when the debt becomes due.
Pros
- The good thing about this Act (if there is any good thing about scheming to incur debt ) is that it does not give any real (physical) assets such as land as collateral.
- The Act allows for scrutiny of specific counter-guarantee legislation if and when it is brought to the House.
No.2 is hardly meritorious because in the absence of an official opposition, the passage of such bills is a foregone conclusion given that nobody in our Lower House ever votes conscience. We have not yet reached that level of political/ spiritual maturity to let conscience be a guide. That does not say very much for the sitting parliamentarians who profess to be Christians.
According to the records of the proceedings of parliament, not one single question or call for amendment was raised by any member of the Lower House or the Senate in relation to this piece of legislation.
In other words, 30 elected representatives and 21 senators see no problems with this bill and its intent. If this is not a reason to radically change our system of governance then nothing is. But we digress!
Cons
- The first has to do with the purpose of such borrowing. According to the Act, such borrowings are to support “environmental, economic and social development in Barbados” (page 4). With 1.215 billon already chalked up in debt in the last 18 months, for what specific purpose(s) does the government need to borrow more money? What is the 1.215 billion dollars for?
- The second has to do with the use of a counter-guarantor in the arrangement.
A counter-guarantee acts like is letter of credit which is used in commercial transactions. According to investopedia.com, “A letter of credit, or “credit letter,” (LOC) is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount”. Let’s put some flesh on this with a hypothetical case.
Suppose the Harper Industries Barbados (henceforth HIB) decided buy some steel worth USD 5 million from a USA company known as USA Steel or USI for short. It is July and payment is due 18 September.
If HIB pays upfront for the goods, then there is no risk or credit situation for USI. However, if payment is to be made after the receipt of goods, USI will be facing a degree of risk of non-payment.
Take note that the risk of non-payment may have nothing to do with the financial resources of HIB. If, for example, the Barbados government decides to restrict foreign exchange transactions with USA, USI may still not receive its payment for steel sold to HIB.
In such a case, HIB may take out a LOC, preferably with a USA bank, to guarantee USI its money on September 18. Let’s call that bank Trade Bank Inc (TBI)
So what happens when the deadline of September 18 rolls around and HIB cannot pay?
The answer is that TBI (Trade Bank Inc) in the USA will pay USI and then HIB will pay TBI according to the arrangement built into the LOC. In other words, an LOC can actually function as a payment facility.
This is basically the kind of arrangement the Mia Mottley Government has brought into being with the passing of the Debt Conversion (Counter-Guarantee) Bill 2022.
In effect, the government is simply kicking the can down the road and, at the same time, exposing every single dollar of government revenue (the Consolidated Fund) in order to facilitate the indebtedness above and beyond what it has already incurred with the IMF, IADB and China.
But, is there any alternative to this arrangement? The answer is “Yes”.
Sinking Fund Alternative
One option the government has is to create a Sinking Fund. In corporate finance, a Sinking Fund is an arrangement where a certain amount of money is invested periodically at a known interest rate to yield (generate) the principal amount of a debt to be paid back when that time comes around.
According to britannica.com, it is a “fund accumulated and set aside by a corporation or government agency for the purpose of periodically redeeming bonds, debentures, and preferred stocks”
As investopedia.com suggests, “a sinking fund helps to soften the hardship of a large outlay of revenue” when time for repayment occurs. Let’s take an example.
If the government borrows Barbados $50 million with a repayment period of 10 years, then the government can calculate and invest an amount each month that will give it the $50 million (USD 25 million) principal in 10 years. Figure 3 shows a possible Sinking Fund scenario.
The number of periods is 40 because we are assuming quarterly contributions to the Sinking Fund for 10 years (4 x 10). The starting amount is $ 1 million and the periodic deposit each period (each quarter) is under half-million dollars.
As you can see from the “Results” section on the right, this investment will yield more than the 50 million ($50,000,000) to be paid back in 10 years.
Government Use of SFs
The use of Sinking Funds by governments is not unknown. On 18 March 2020 GhanaWeb reported activities relating to the use of the government’s sinking fund for debt repayment. According to graphic.gh the parliament of Ghana had approved the setting up of a Sinking Fund in 2015 from funds above the cap on the Petroleum Revenue Management Act’s (PRMA) stabilization fund.
The Indian government set up a Consolidated Sinking Fund in 1999. It is managed by the Reserve Bank of India.
Conclusion
The Barbados Government does not appear to be exploring alternative options to deal with national indebtedness. What we see so far is an attempt to issue new bonds in 2021 and more recently what might be called BERT 2.0.
If the social media comments are anything to go by, this latest bond issue will be undersubscribed. Barbadians can still remember the reduction of the value of their investments as a result of government debt restructuring in 2018.
Once more, we have to question the financial advice being given to this government in exchange for the huge consulting fees being paid out of the taxpayers money.
We must also restate our argument that economists may not be the best choice to consult for advice in running a country.
As a case in point, just take a look at the havoc current White House Economic Adviser Brian Deese and former FED chairwoman and current US secretary of the treasury Janet Yellin have perpetrated on the USA economy.
Monetary economics / monetary policy is not the same as professional financial management. As we have argued before, it is the deficit budgeting recommendations of economists and political shortsightedness that have got us into this neo-slavery, a combination captured in the Barbados Central Bank article, “Central Bank Independence and Fiscal Conservatism“. The author, Patrick McCaskie, argues inter alia:
Monetary policy allows central banks to have a significant impact on a broad range of macroeconomic developments, including growth, employment; inflation, interest rates, exchange rates and the balance of payments. However, the fiscal policy making institutions and particularly the budget authorities also have a pervasive impact on economic developments.
It is time our government treated this country as Barbados Inc, weaned itself off the limited tool set of its expensive economic advisers and get some effective professional financial advice to turn this country around. Failing this, the government needs to nominate a temporary designated driver and call a real election.
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