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ON THE LEFT: Liquidity may be the saving grace


Professor Compton Bourne

ON THE LEFT: Liquidity may be the saving grace

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In recent years, a great deal of attention has been devoted to severe debt problems of Caribbean countries. This is a reflection of the fact that most countries have ratios of public debt to GDP in excess of 60 per cent, with a few of them in the region of 90 per cent to 130 per cent.

The focus of attention is usually external debt perhaps because of its implications for the availability and use of foreign exchange. However domestic debt, though relatively neglected, is also important for the macro-economy because of its implications for public revenues and expenditures.

There are nine countries that can be described as heavily indebted with total debt/GDP ratios between 72 per cent and 131 per cent in 2012/2013. Especially striking are the cases of Antigua and Barbuda, Barbados, Grenada, St Kitts-Nevis and Jamaica. At the low end of the debt spectrum are Suriname and Trinidad and Tobago with debt/GDP ratios of 28 per cent and 37 per cent, respectively. The ratio of external debt/GDP in many cases is a significant component of the total debt/GDP ratio. The ratio of domestic debt/GDP is no less significant a component of the total debt/GDP ratio.

Domestic debt is the liabilities of the government or public sector that is owed to individuals, enterprises and institutions within the domestic economy. The ratio was less than 20 per cent in Belize, Guyana, St Vincent and the Grenadines and Suriname; between 20 per cent and 40 per cent in Grenada, St Lucia and Trinidad and Tobago; between 41 per cent and 60 per cent in Antigua and Barbuda, The Bahamas and Dominica; and over 60 per cent in Barbados, Jamaica and St Kitts-Nevis. There is no obvious correlation between the highly indebted status of a country and its ratio of domestic debt/GDP; similarly for the ratio of external debt/GDP.

The size of domestic debt is important because debt service and amortisation constitute claims on the use of current fiscal revenues and therefore compete with other claims on government expenditures. Another implication is the future tax burden associated with repayment of debt. It is sometimes argued that this is not a major issue because government has the powers of taxation but depending on how high is the overall level of taxation and the public’s tolerance for taxes, there will be political limits on the ability of governments to meet domestic debt obligations by increasing taxes. There is also an inter-generational issue stemming from the fact that the beneficiaries of debt finance expenditures might not be part of the taxable cohort in future years because they are no longer in the la-bour force.

Domestic debt could also lead to inflationary pressures by facilitating deficit financing. For this reason in some countries there are statutory limits on the extent to which governments might engage in domestic borrowing from the Central Banks. Another point is that when governments borrow domestically, at least theoretically, they are in competition with other potential users of domestic savings. This might not be a problem if there is a lot of liquidity in the financial system.

The National Insurance funds and schemes have traditionally been substantial holders of Government domestic debt. Overexposure to government debt might also become a problem with private financial institutions.

Professor Compton Bourne is executive director of the Caribbean Centre for Money and Finance.

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